02/17/2010

Fast-Growing King Street Might Cap Assets

King Street Capital is on the verge of closing its flagship fund to new investments after taking in more than $3 billion of fresh capital over the past 12 months.

At a time when most hedge fund managers were struggling with a mountain of redemption requests, King Street's overall assets under management jumped from $15.8 billion in January 2009 to $19.2 billion last month. Perhaps it's no wonder, considering that the King Street Capital fund has never had a down year since launching in 1995. In 2008, when hedge funds lost an average of 18%, the King Street vehicle gained 2.5%. Last year, it returned 20.1%.

In a Feb. 5 letter to investors, the New York firm said it wants to "moderate the future growth of the fund's capital subject to developing market conditions." One investor said he was told that King Street doesn't want to see overall assets under management exceed about $20 billion - suggesting the flagship fund could close to new investments any day.

At the same time, the firm told investors it was tweaking the fund's liquidity terms. Previously, the fund permitted withdrawals of up to 25% of overall assets per quarter. Now, King Street is switching to an investor-level limit of 25% per quarter. That means investors can withdraw up to 25% of their capital every three months - regardless of the total volume of redemptions for that period.

"This is about them managing their liquidity," one investor said, "but there are probably those who got stuck in 2008 who will like the changes."

In a separate letter to investors, King Street also announced that firm co-founder Brian Higgins once again would serve as investment chief following the retirement next month of head trader Kieran Goodwin.

King Street, which specializes in distressed-debt investments, has posted phenomenal performance and growth figures since the credit crisis began. Assets under management have jumped by more than 50%, from $12.1 billion in January 2008 - catapulting the firm to the top ranks of hedge fund managers globally. Since its inception, the flagship fund has generated an average annual return of 15%.

Most other large hedge fund managers have seen their assets decline sharply in the wake of severe losses in 2008. Indeed, according to various estimates, the industry's total assets under management fell from just under $2 trillion in 2008 to around $1.5 trillion in late 2009.

Still, in the wake of strong gains last year, there are signs that other big fund managers may limit or bar new investments. In December, Tudor Investment entered talks with shareholders about returning some of their money after the firm's assets under management swelled to $9.4 billion. In a yearend report, Morgan Stanley predicted that more "blue-chip managers will once again close their funds to new capital" following a successful 2009.

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