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The sales pitch for the fund was simple: a chance for individual investors to get in on the same high-octane private equity and hedge funds that have fueled successful returns for large university endowments for years.
But now investors in the fund, the nine-year-old, $3.3 billion Endowment Fund, are finding it was much easier to get in than it is to get out.
The fund, run by Mark Yusko, the charismatic former chief of the endowment for the University of North Carolina at Chapel Hill, sent letters on Friday to investors saying it was limiting the amount of money that could be taken out each quarter. Investors withdrew more than $1 billion, or about a quarter of the fund’s assets, this year through September, according to a filing with the Securities and Exchange Commission.
Investors generally have been disappointed with hedge fund returns for the last couple of years because many have lagged the gains made in the stock market. Investors have pulled about $13.2 billion, or 2 percent of total assets, from hedge funds for the year through August, according to estimates by BarclayHedge and TrimTabs Investment Research. The firms estimate that in the 3,000 hedge funds that they track, assets have fallen 28.7 percent from their peak of $2.4 trillion in 2008 through a combination of weak performance and withdrawals.
But hedge fund investors and lawyers said the move by the Endowment Fund was one of the first forms of gating, or reducing the ability of investors to take out their money, since the financial crisis. Then, several large hedge funds gated, angering their investors who could not get access to their money.
The troubles at the Endowment Fund are a black eye for Mr. Yusko, a frequent speaker at investment conferences who, after leaving the University of North Carolina in 2004, built a substantial hedge fund empire that at its peak in 2008 controlled $22 billion in assets. Today, he oversees $14 billion.
Mr. Yusko declined to comment on Monday.
He started the Endowment Fund in 2003 with Salient Partners, a Houston firm that managed money for wealthy individuals. It is a fund that invests in dozens of other funds, including some run by prominent managers who have stumbled in recent years, like John A. Paulson, Philip A. Falcone and Eric Mindich.
Several experts were quick to say they saw the gating at the Endowment Fund as a reflection of what that fund had invested in, not as a general trend among funds. About 35 percent of the fund’s assets are invested in real estate, energy and private equity assets — investments that the fund simply could not exit quickly if investors were to demand their cash.
The substantial redemptions in the Endowment Fund follow several years of weak returns. For the 12 months ending late August, the fund was down 2.5 percent, compared with an 18 percent gain in the Standard & Poor’s 500-stock index and a 0.9 percent decline in the average hedge fund. Over the last five years, the Endowment Fund returned 5.7 percent annually, lagging the 7.7 percent gain by the S.&. P. 500 and the 7.3 percent annual gain by the average hedge fund.
“Hedge funds, as an asset class, have underperformed the stock market and there are definitely some investors out there who feel like they haven’t been invited to the party,” said Stewart Massey, a partner at Massey Quick in Morristown, N.J., which invests money for individuals and institutions.
But the fees investors have paid the Endowment Fund for its lukewarm performance have been considerable, up to about 3.5 percent a year. Additionally, the underlying funds can receive as much as 25 percent of any profits they make.
On top of that, some of the fund’s investors who came in through Merrill Lynch financial advisers may have paid as much as a 2.5 percent upfront fee, similar to what is charged for other funds, according to internal Merrill Lynch documents.
A spokesman for Bank of America, which acquired Merrill Lynch in 2009, declined to answer specific questions about the Endowment Fund. But he did confirm that the wealth management arm of Bank of America on Friday changed the Endowment Fund’s status from “open,” to “on hold,” meaning that wealthy investors could not put any new or additional money into the fund.
Over his career, Mr. Yusko has advocated for ways to make available to a broader audience more sophisticated long-term investment products, like real estate, private equity and hedge funds. He embraced them starting in the late 1990s when he arrived at the University of North Carolina to oversee its endowment.
In a few years, he had moved more than 80 percent of the endowment’s money from stocks and bonds into a wide array of hedge funds and private equity investments, according to Institutional Investor. Those bets paid off for the endowment as it easily outpaced the S.& P. 500.
After leaving North Carolina, Mr. Yusko started Morgan Creek Capital Management in Chapel Hill as a way to spread that endowment model to other investors. He started the Endowment Fund separately with Salient Partners.
A spokeswoman for Salient declined to comment.
For as little as a $100,000 initial investment, wealthy individuals could invest in the Endowment Fund. It was one of the first hedge funds to register with the Securities and Exchange Commission using the Registered Investment Company structure that allowed an unlimited number of investors.
At one point, the Endowment Fund accumulated some 20,000 investors, with a big boost from Merrill Lynch’s army of financial advisers, who earned lucrative commissions by selling the fund. The fund grew even after steep losses in the financial crisis, soaring 42 percent in 2008 to $4.7 billion.
At his peak in 2008, Mr. Yusko oversaw nearly $22 billion in assets at Morgan Creek and other funds. In 2009, he made a $35 million pledge to his alma mater, the University of Notre Dame, to create a merit scholarship program. It was one of the largest gifts to the university.
But the Endowment Fund began to struggle in 2011, suffering losses of about 4.1 percent, after fees, compared with a gain of 2.5 percent by the S.& P. 500.
Earlier this year, outflows from the fund began to significantly outpace inflows. In the quarter ending in March, investors pulled $316 million from the fund, and another $440 million in the next quarter. In the quarter ending in September, investors withdrew nearly $488 million.
“What this fund was counting on was continued inflows from Merrill’s distribution system in order to maintain its liquidity,” said a former Merrill Lynch adviser, who did not want to be identified.
“This is a big deal because now what’s going to happen is that the line out the door is going to become permanent but there will be no more sales,” the former adviser added.
In its letter to investors, the Endowment Fund said it was temporarily reducing the amount investors could take out to a 5 percent distribution in a given quarter, from what one document suggests was 10 percent.
The letter added that the fund’s adviser and board “have determined that further significant repurchases at this time would be incompatible with managing the fund in accordance with its stated objectives.”
http://www.nytimes.com/2012/10/31/bu...l?ref=business