Passport's Exit From Fund Angers Investors

Passport Capital's flagship fund redeemed $37 million from a sister vehicle, Passport India Fund, angering some investors who have been waiting for withdrawals as the India-focused fund continues to lose money.

The San Francisco firm, with $2 billion under management, disclosed the withdrawal from the India fund in a quarterly letter to the fund's investors last week. As part of a rebalancing of its portfolio, Passport Global Fund redeemed the shares at yearend, the letter said.

The move didn't sit well with investors in Passport India, which fell 67% last year. (By comparison, India's benchmark stock index, the Sensex 30, fell 61%.) One investor accused the firm, led by John Burbank, of ignoring the fund's liquidity terms, which require three months' notice for withdrawals. The firm also failed to disclose the withdrawal in a timely manner, the investor said.

"It appears the mother ship could redeem in a day, while the rest of us will have to wait longer than 100 days to get our money back," the investor said.

By redeeming, the investor said, the firm further may have pushed down the net asset value of the India fund, and left the remaining investors holding a higher percentage of less-liquid assets. About 35% of the fund's assets are stakes in private companies. The firm should have notified investors as soon as it decided to redeem from the India fund, the disgruntled investor said. The fund has lost another 7% since the start of the year. Passport declined to comment.

Since its inception in 2005, Passport India has posted an average annual gain of 4.4%, including 2008. Last year was difficult for all of Passport's funds, including Passport Global, which fell 51%, and Passport Rig Strategy, down 43%, according to Hedgefund.net.

In its letter to investors, the firm said Passport India recorded nearly a third of its total 2008 loss during the final quarter, when it sold six of its long positions and one short position. Hardest hit were the fund's holdings in exchanges and the retail sector. Dipak Patel helps Burbank manage the fund's portfolio.

Market players said investors need to pay attention when one fund invests in another fund run by the same firm. "In cases where the management team or a master fund is an investor in one of the firm's other funds, we put a condition prior to investing that the manager has to inform us immediately if they make any redemption," one fund-of-funds manager said.

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