Successful Hedge Funds Are Extending Lock Ups Periods To Avoid Forced Sales

While some famous activist investors have experienced hedge fund horror over the last year, and most hedge funds have sharply underperformed their investors’ expectations, forcing fee cuts to try and stave off redemptions, two of the handful of names who have been outperforming in the industry are now increasing their fees and extending the amount of time it takes for investors to redeem.

Millennium and Citadel are two funds that have managed to stand apart from the deplorable 2 and 20 herd, and performed solidly over the last couple of years. And now they are – one way or another – raising their prices for investors. Millennium, after recently telling investors they would get their profits early next year, also told investors that to reinvest these profits, they need to sign up for a new share class that would extend their redemption period from one to five years, ostensibly to avoid forced sales during the next recession and effectively giving the hedge fund a private equity-like lock up. 

The new share class at Millennium also no longer lists its founder Israel Englander as a “key man”, meaning that investors can’t take their money out if he leaves.

Citadel is also working on changes to how it charges investors for several of its hedge funds.

Unlike most of their peers, Citadel and Millennium can make this aggressive demand because they both have a backlog of investors who want to invest with them. Since inception, Citadel and Millennium have averaged 19.1% and 14% annually, respectively. For the previous decade, Citadel averaged 8.9% annually and Millennium averaged 10% annually. Before October, Citadel’s flagship fund was up 13.5% for the year and Millennium was up 8.3% for the year, according to the Wall Street Journal.

Both funds have far exceeded the 1.4% average gain by the broader hedge fund space during the same period, while the S&P was up 10.6% over the same period of time.