06/27/2012

Sonterra Liquidates Due to Heavy Withdrawals

In the face of withering redemptions, Tye Schlegelmilch is throwing in the towel on his Sonterra Capital.

After peaking a year ago with about $700 million of assets, the New York firm was hit by a combination of investment losses and withdrawals that left it with $287 million at the end of May. Although some investors were willing to stick by Schlegelmilch, he began liquidating his Sonterra Capital Master Fund earlier this month. He expects to return all investor capital by the middle of July, at which point he’ll focus on managing his own money.

Most of the firm’s nine-member staff will be let go, though it’s possible Schlegelmilch will retain one or two employees for his family office.

Schlegelmilch, a former Perry Capital portfolio manager who launched Sonterra during the dark days of the financial crisis, finally appeared to be hitting his stride early last year. After eking out a 0.4% gain in 2008 — when hedge funds lost 19% on average — Sonterra’s long/short equity fund gained 16.9% in 2009 and 14.4% in 2010. Suddenly, the firm was taking in investments from a variety of sources, including wealthy Asian investors, pension plans in the U.S. and Italy, and a large European fund of funds.

But Sonterra suffered losses amid the volatility that seized the market in the second half of last year. Its fund finished the year down 7.9%, in line with an 8.3% loss for the HFRI Equity Hedge (Total) Index. During the first five months of this year, the fund fell a little more than 1%, versus a 1.9% gain for the HFRI index.

It didn’t help that Sonterra offered investors relatively generous liquidity terms: monthly withdrawals with notice of 30 days. The result, said a source, was “never-ending redemptions.”

Among the fund’s original investors were vehicles run by Goldman Sachs, where Schlegelmilch worked before Perry. The Goldman vehicles invested $100 million in the Sonterra fund, which focused on companies in the basic-materials, energy, industrial and utility sectors — Schlegelmilch’s specialties at Perry.

Months before Schlegelmilch decided to shutter the vehicle, analyst Parsa Kiai, who had followed him from Perry, quit Sonterra to form his own hedge fund firm, Steamboat Capital of New York. Kiai plans to begin trading around July 1.

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