Big hedge fund caught out and braced for $1bn repayment

One of London's leading hedge fund managers is bracing itself to repay investors around $1bn (£550m) after dreadful performances at two of its main funds.

One of London's leading hedge fund managers is bracing itself to repay investors around $1bn (£550m) after dreadful performances at two of its main funds.

GLG Partners, which only a few months ago came close to selling its business to Lehman Brothers for over $2bn, is under pressure after it was caught out by a collapse in two specialist areas of the capital markets.

The fund group saw a 14.5 per cent drop in the value of its $1bn Credit Fund and a 9 per cent fall in its $2.5bn Market Neutral fund in May. It wrote to investors in the Credit Fund apologising for the performance.

However, this has not stopped investors moving money from GLG, according to well-placed market sources. It is estimated that about $1bn has been withdrawn from its funds. While GLG would not comment, it is understood that it has sold some of its more difficult trading positions so that it has ready access to cash to pay back investors.

GLG was founded by three former Lehman traders - Noam Gottesman, a trustee of the Tate Gallery, Pierre Lagrange and Jonathan Green - in 1995, with the backing of the investment bank, which has a 20 per cent stake. Lehman was in talks to buy the rest of the business last year but the deal fell through.

Market experts said that many funds had been hit badly with the downgrade of debt in General Motors to junk status in early May. This had a big knock-on effect in the convertible debt and collateralised debt obligation (CDO) markets.

Eric Syz, the head of Banque Syz, which advises investors on hedge funds, said that the problems in those markets have scared off many investors who thought hedge funds were an easy way to make money, and will force some underperforming fund managers out of the market. "The industry will end up more solid because investors will be more solid and managers will be of a better quality," he said.

Simon Hopkins, the chief executive of hedge fund investors Fortune Group, said the credit sector was "a very volatile industry with a lot of hot money chasing performance".

Although some funds would suffer, the hedge fund industry overall would be fine because of different fund managers pursuing different investment strategies, he added.

The problems in the credit market come just as some retail funds have started offering products that allow people with relatively little money to invest in hedge funds.

Up until now, it has been the preserve of the super rich and pension funds.