So you bought into the hype. The slick talking hedge fund manager nailed you hook, line and sinker. You put up your money and hoped that the hedge fund manager was just a tenth as good at making money as he said he was. A year down the road, you get that gut feeling that something is just not right; you cannot comprehend the vagaries of your account statement and the hedge company is slow in returning your calls and answering your questions. You decide to pull the plug and make the call to tell the company that you will be pulling your funds. At that
point, your phone starts ringing off the hook with calls from what seems like every employee of the hedge fund. You get offers to fly you out to the home office in Greenwich, with theater tickets and fine dining in the evening to boot. You wisely stick to your guns and politely repeat over and over again, “No thank you”. Six weeks later you get a check in the mail for approximately the same dollar amount you invested a little over a year earlier. You let out a big sigh of relief and proceed to forget the whole thing ever happened.
Until… Months later you tune into the Watchdog on Wall Street and learn that your former hedge fund has gone belly up, with investors losing millions. You proceed to pat yourself on the back for
getting out before the carnage.
A year goes by and your investments are doing well in fundamentally sound dividend paying securities when suddenly one evening, while opening up your mail, you find that you are now being sued. The hedge fund that you so prudently got out of before it imploded is suing you for getting out.
As ridiculous as this scenario sounds, it is actually happening and could possibly set a dangerous precedent. Following the implosion of the $450 million hedge fund, Bayou Management LLC, the
company proceeded to file lawsuits against more than 100 of its investors that were smart enough to get out.
You can call it the Hotel Hedge Fund; “You can check out anytime you like, but you can never leave.”
More recently Bayou Management has proposed in bankruptcy court that the 100 intelligent investors, that happened to get their funds out before the implosion, to return half of the money
they took out. The Wall Street Journal reports that the outcome of the case holds broad ramifications for the hedge fund business. Smart investors often pull their money out if they
happen to sniff out a problem. If they are now going to be forced to give back money after getting out, it would certainly raise the risks considerably for investing in the first place.
One of the investors that is being sued asked, “Am I supposed to give back profits from a stock too, if it goes down after I sell”?
Dugan Ianthe J. Bayou Offer to Investors: Give Back Half Wall Street Journal June 15, 2007
Bissonnette Zac Hedge Fund Sues its Investors in Wake of Collapse CBS Marketwatch June 15, 2007