Whitebox Freezes Investor Redemptions

Multi-strategy shop Whitebox Advisors is suspending redemptions from the half-dozen or so hedge funds it runs - cutting off investors from some $4 billion of assets.

The Minneapolis firm, run by Andrew Redleaf, has apparently been telling shareholders of its plans over the telephone while drafting a formal letter for release later this week. The move reflects at least some expectations of withdrawals, given losses the outfit took on convertible-bond investments last month and liberal terms that allow backers to pull money monthly.

But the situation may be more closely tied to shifts in prime-brokerage terms. Word on the street was that Whitebox was in a strong position to fulfill any yearend redemption requests until this month, when Goldman Sachs ordered the firm to double the amount of collateral it puts up against margin loans used to trade convertible bonds. And sources say that Whitebox anticipates other prime brokers following suit.

The result is a funding squeeze: The firm needs more of its already-devalued holdings to put up against its margin accounts, which it would otherwise be forced to repay. That means it can't sell the investments to meet redemptions, which is something it might want to avoid anyway as such a move might magnify losses. Hence, the severe measure of blocking off shareholders from their money.

The undertaking places Whitebox among a slew of hedge fund managers that have been withholding investor capital in some fashion in recent weeks, some in last-ditch attempts to keep their businesses afloat amid tremendous losses. Many of the firms are expected to go out of business by yearend.

Any strategy that relies on leverage - and those involving convertible bonds almost always do - is likely facing the same prime-brokerage squeeze as Whitebox. Another hindrance for convertible-bond firms: Many of them hedge positions tied to financial companies through short sales of those businesses' stocks, and became unable to execute that strategy when global short-selling bans were imposed last month. The result was severe losses in September.

Whitebox Convertible Arbitrage Fund lost 18.8% last month alone, dropping its performance for the first nine months of 2008 to minus-18% - erasing a 17.9% gain for all of 2007. About one third of Whitebox's investments involve convertible bonds, but it also deals in a number of other sectors, including corporate debt and equities.

The firm's $1.7 billion Whitebox Combined Fund, which deploys capital to each of its hedge fund strategies, lost 7.2% for the first nine months of 2008, including a 9.5% drop in September. The year before, the same fund netted 28.1%. It has not had a losing year since its inception in January 2002.

Redleaf has been in the investment business since 1978. He was also a founder of Deephaven Capital, a $3.5 billion hedge fund operation in Minnetonka, Minn.

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