Carlyle is considering shutting its $4bn credit hedge fund Claren Road after investors asked to pull almost half of their money out.
The fund, founded a decade ago by four star traders from Citigroup, is down 5.6 per cent this year, in large part because of losses on its energy and mining sector investments and on Greece.
These come on the heels of a failed bet on Fannie Mae and Freddie Mac, the nationalized US mortgage firms, which led to the fund's first negative annual performance last year.
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Carlyle, which bought a 55 per cent stake in the fund for an undisclosed sum in 2010, said on Monday that it would write off up to $175m of the remaining value of Claren Road, which was on its books at $216m at the end of June. It may not now have to pay up to $41m in earn-outs and other fees under the terms of the 2010 deal.
Investors submitted redemption requests totalling $1.97bn, or 48 per cent of the fund's assets of $4.1bn at the end of July, according to a filing with the Securities and Exchange Commission.
Last September the fund was managing $8.5bn, its peak level, underscoring how quickly outside investors — and the influential consulting firms who advise them — can turn against an underperforming fund, particularly if a perception grows that managers will have to spend more time dealing with outflows than running their investments.
The four members of Citigroup's credit trading department who founded Claren Road in 2005 are Brian Riano, John Eckerson, Sean Fahey and Albert Marino. The group is planning to take soundings from exiting and continuing investors to examine options for the future of the fund, including shutting its doors, according to people familiar with the situation.
The fund will be down to $2.1bn at the end of September, when it has to honour the latest redemptions, and investors will have another chance to call for their money back in November. The main Claren Road Credit Master Fund was down more than 10 per cent in 2014 and, after a positive start to 2015, has reversed course and was down 5.6 per cent as of last Friday. A smaller Credit Opportunities Master Fund is down 6.2 per cent.
Carlyle, founded by David Rubenstein, took its stake in Claren Road as part of a push, common among private equity groups, to expand into other alternative investments including hedge funds.