01/21/2009

GoldenTree Taps Budding Secondary Market

The secondary market for shares of hedge funds is heating up.

After suspending redemptions for its main fund, GoldenTree Asset Management has hired Credit Suisse to run an auction for investors wishing to sell their shares in the vehicle.

Meanwhile, Morgan Stanley is getting ready to unveil a service that would match buyers and sellers of hedge fund stakes. Separately, an unidentified European bank is circulating a list of high-profile hedge funds for which it has lined up investors who would buy discounted stakes if they were to become available.

Investors in GoldenTree Master Fund vehicles interested in selling their stakes must submit their asking prices by Feb. 6. Bids for fund shares are also expected to be due on that date. If any bids equal or exceed any of the offers, Credit Suisse will set a single price that will enable the most possible transactions to be completed. The auction appears to be similar to the one Credit Suisse is running for Plainfield Asset Management's Plainfield Special Situations Master Fund.

In order to attract bidders, GoldenTree agreed that any shares sold at auction would be assigned a high-water mark that is above the purchase price - thus giving buyers an opportunity to avoid some performance fees.

Credit Suisse followed the Plainfield blueprint in setting terms for the GoldenTree auction. Buyers of Plainfield shares will be assigned the most attractive high-water mark that exists for any current investor in the fund. The sale price will be set based on a Feb. 13 calculation of net asset value. Buyers will have to decide whether to move their holdings into one of two tranches:

*Shares with a 2-year lockup that charge a 1% management fee and a 12.5% performance fee.

*Shares with a 3-year lockup that charge a 1% management fee and a 10% performance fee.

Credit Suisse's Anthony Carpetino, a director in the bank's private-fund group, is leading the process. His unit has also been involved in a number of sales of private equity stakes in the secondary market.

GoldenTree recently told investors who submitted redemption requests that they would be paid out with securities, derivatives contracts, private equity stakes and other financial instruments rather than cash. The action, known as a "payment in kind," could be disastrous for many of the fund's investors, who have no ability to manage, value or sell those kinds of assets. The auction may be the only way for those investors to get cash for their interests any time in the near future.

Previously, GoldenTree said it would suspend redemptions on only 12% of assets in GoldenTree Master Fund 1 and 14% of assets in GoldenTree Master Fund 2.

According to the Financial Times, GoldenTree Master Fund was down more than 30% last year, and investors have sought to redeem more than 25% of the fund's shares. The New York fund manager was overseeing assets valued at about $10 billion through its hedge funds at some point in 2008. That number would most likely have been halved if the firm honored all redemption requests on top of the stated losses.

GoldenTree Master Fund 1 serves as an umbrella vehicle for the U.S.-domiciled GoldenTree Partners fund and its GoldenTree Offshore companion. GoldenTree Master Fund 2 holds assets for GoldenTree Partners 2 and GoldenTree Offshore Fund 2.

GoldenTree was founded in 2000 by Steve Tananbaum and Leon Wagner. Last year, the firm had about $4 billion under management in vehicles other than hedge funds.

Like Credit Suisse, Morgan Stanley is also looking to establish its secondary-market business - aiming to roll out its service in about a month. Morgan Stanley hopes to distinguish itself from Hedgebay, an established exchange for hedge fund shares, by including undisclosed features that would entice managers to participate. Many managers, even amid the current crisis, are reluctant to allow investors to trade shares on a secondary market.

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