Amid a negative performance and a shift to funds with longer-term investor commitments, the distressed-investing firm Avenue Capital Group is closing its original hedge fund, Avenue Investments, and returning money to the fund's investors.
The shutdown, which a person familiar with the matter said will involve selling off Avenue Investments' positions as soon as market conditions make it practical, is already underway.
"Avenue has determined to wind down its U.S. hedge fund," said a spokesman for the company in an emailed statement. He noted that the vast majority of Avenue's capital in the distressed investment space is in long-term investment vehicles with lockup provisions ranging in duration from five to seven years, adding that "the longer-term lockup structure represents the principal direction of the firm."
With just $350 million under management, Avenue Investments now accounts for less than 3 percent of the more than $13 billion managed by Avenue overall.
But it's a symbolic event for the 20-year-old firm, a prominent player in troubled or transitional industries — otherwise known as "distressed" investing — that was founded in 1995 by Marc Lasry and Sonia Gardner. Avenue Investments opened that same year with $7 million under management; the parent company opened its first longer-lockup investment vehicle two years later.
In the time that followed, Avenue began embracing a private equity-style investment structure in which investors committed their capital for five or more years in exchange for higher potential returns. For instance, many Avenue investors in the longer-term funds are refunded their original capital, plus the annual fees they pay to defray Avenue's expenses — commonly 1.5 percent of the assets invested — and given the first 8 percent of any upside returns before Avenue's general partners receive their cut, according to someone who is familiar with the firm's fee structure.
Avenue receives its standard 20 percent performance fee after that, and any additional profits are then shared, this person added, with outside investors pocketing the majority of them.
Don Steinbrugge, managing partner of Agecroft Partners, a consultant and marketer to hedge funds, said such setups are becoming more common among money managers focused on longer-term, less easily traded investments, like distressed bonds or direct lending to private companies. "I see a significant increase in interest in longer lockup hedge fund strategies that are focused on less-liquid investments," he said. Seasoned investors, he said, don't want to see "a mismatch in liquidity."
For example, said Steinbrugge, allowing outside investors to pull their capital on a monthly or quarterly basis — the second of which is typical of mainstream long-short hedge funds — could mean that the money manager is forced to dump out of positions at unattractive prices, before his or her investments have borne fruit.
A recent lawsuit filed by Canada's Public Sector Pension Investment Board against the hedge fund Saba Capital, in which the plaintiff has argued that Saba shortchanged it by low-balling certain bond prices in order to return less money to the pension fund, highlights that issue.
Under time pressure from the Canadian pension fund, Saba "arbitrarily recorded a material markdown of the value of certain corporate bonds," the pension argued in the suit, only to mark the prices up later. Saba counters that it employed an "industry-standard auction process" to price the bonds, obtaining the best prices that were available at that time. The price of those bonds improved later.
It's also been a tough period for many hedge funds to perform well. Although Avenue Investments' performance numbers aren't widely circulated, people with knowledge of them said that they were down this year. And the average hedge fund is being bested by the market by a big margin, according to monthly data from HFR; In October, a month where the Standard & Poor's rose more than 8 percent to market its best monthly run in four years, the average hedge fund climbed a mere 1.7 percent.
— CNBC's Kayla Tausche contributed to this report.