Rich Stuck as Salient Curbs Withdrawals for Investors

Salient Partners LP, whose $3.3 billion Endowment Fund mimics the strategy of sophisticated institutions like Yale University and the Ford Foundation, is limiting withdrawals after clients pulled more than $1 billion this year amid lackluster returns.
Instead of allowing investors to redeem at their discretion, the fund will return 5 percent of assets as of Dec. 31, according to a letter to clients obtained by Bloomberg News. Clients who want to keep their money in the fund may be able to reinvest the cash they receive.
“The board determined that allowing the prior pace of net outflows to continue would likely result in the illiquid asset percentage reaching a level that would disadvantage the fund’s remaining investors,” Salient said in the letter dated Oct. 26, adding that the fund has 35 percent of assets in hard-to-sell investments.
The Endowment Fund, whose slogan is “democratizing investing,” is designed to offer wealthy individuals a strategy that has historically been open only to the most sophisticated institutions, investing in assets ranging from stocks and bonds to hedge funds, private equity and real estate. Now these investors are getting the same treatment that endowments and foundations received in 2008: A manager is blocking them from getting their money out.

No ‘Emergency’

“When investors bought this fund they had no expectations that they would be restricted in pulling their money unless there was some sort of emergency,” said Geoff Bobroff, a fund consultant based in East Greenwich, Rhode Island. “I’m not sure this is an emergency.”
The fund did not say in the letter when it would allow full redemptions again. While Houston-based Salient sells the fund, it is managed by Mark Yusko’s Morgan Creek Capital Management LLC in Chapel Hill, North Carolina. Before starting Morgan Creek in July 2004, Yusko was the chief investment officer at the University of North Carolina. He also spent five years at the University of Notre Dame Investment Office.
Morgan Creek, which offers its own fund of funds, limited withdrawals in its Morgan Creek Absolute Return Fund in 2008, according to an investor, who asked not to be named because the fund is private. As of October of that year, about 18 percent of the hedge fund industry’s assets were subject to withdrawal restrictions, according to GFIA Pte, a Singapore-based hedge fund consulting firm.

Minimum Investments

While investors must have a net worth of at least $1 million to put money into the Endowment Fund, the minimum investments are much lower than other vehicles such as hedge funds, helping the fund to attract $5.5 billion as of mid-2011, according to a regulatory filing. The minimum initial investment is $100,000, and additional investments are as low as $25,000 according to a fund sales document. The fund had 17,035 investors, according to a fund letter dated Sept. 28.
The Endowment Fund is among the larger funds registered with the U.S. Securities and Exchange Commission that offer alternative investments to wealthy clients. Banks including Morgan Stanley (MS) and JPMorgan Chase & Co. also sell registered funds that invest in hedge funds.
Yusko and Chris Moon, a spokesman for Salient, declined to comment.
The Endowment Fund has been sold by brokers at Merrill Lynch & Co., now a part of Bank of America Corp. The bank has put the sale of the fund on hold, according to the Wall Street Journal, which first reported the withdrawal limits on Oct. 26.
The Endowment Fund doesn’t come cheap. The clients pay a 2 percent management fee, in addition to the underlying fees of managers that averaged 1.3 percent of assets and 16 percent of profits, according to an Endowment Fund sales document.

Merrill Clients

Clients of Merrill Lynch brokers paid a 2.5 percent sales fee for an investment up to $150,000, with fees dropping as the investment size grew. They were also charged an additional 2 percent fee if they withdrew their money before the end of the first year.
The Endowment Fund has returned an annualized 5.6 percent since its inception in April 2003, underperforming stocks and a portfolio of 60 percent stocks and 40 percent bonds, according to a September letter to clients, while beating a Hedge Fund Research Inc. index that tracks funds of hedge funds. Its goal is to return 7 percent above inflation with less volatility than stock or bond markets.