07/15/2009

Drake Succumbs to Losses in Credit Market

It's the end of the line for Drake Management, an operator of hedge funds and long-only accounts that had more than $11 billion under management at the start of last year.

The fixed-income specialist suspended redemptions from its hedge funds in late 2007, as the credit crisis deepened, and by the following March decided to get out of the hedge fund business altogether. Now, the firm's founders - chief executive Anthony Faillace and chief operating officer Steve Lutrell - are throwing in the towel on their long-only business as well.

The New York firm, which was set up in 2001, did not return phone calls. One sign that Drake is winding down is that its head of client management, Inna Koehler, recently left to join Passport Capital, a San Francisco fund operator run by John Burbank.

Like many of its credit-focused peers, Drake's hedge funds suffered huge losses beginning in 2007. From its high-water mark in September 2007, Drake Global Opportunities Fund fell 56.7% through March 2009. The fund was down 4.6% for the first five months of this year. Another vehicle, Drake Absolute Return Fund, has experienced similar losses.

Between its hedge funds and long-only accounts, Drake was managing $11.5 billion in early 2008. By the end of the year, assets under management had fallen to $5 billion, including $1.9 billion in its long-only bond business.

Earlier this year, hedge fund investors began complaining that Drake was moving too slowly to liquidate the funds and return their capital. The firm was reluctant to sell holdings at fire-sale prices, especially since Faillace contributed a sizable portion of the equity in the funds.

In a letter to investors July 7, Drake said it would soon return 20-30% of the capital in the Global Opportunities Fund. It's unclear how much remains in the vehicle, but the promised distribution would be the largest since it began unwinding - at least in percentage terms.

Drake warned investors, however, that the distribution was subject to agreements with its trading counterparties, which can demand more collateral as the funds' net asset value declines.

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