Updated from 12:47 p.m. EST
After a dismal year, the Clinton Group's Trinity Fund is ready to shut down.
Less than a month after
spoke to investors who saw little chance of survival for the $330 million fund -- which shed almost $900 million last year through a 21.5% trading loss and a stampede of investor withdrawals -- a person familiar with the fund said it was probably finished.
While Trinity will cease to exist in its current form, investors still face a 5% penalty if they pull their money out. A person familiar with the $2.2 billion hedge fund operation said top management had not decided if closing Trinity would mean the fund would change its strategy to invest in other instruments, such as foreign sovereign bonds or convertible bonds, or if investors would put their money in the group's five remaining funds. "Nothing has been decided yet," he said.
Hedge funds that rack up sustained losses often close, even if they start showing positive returns, because they must reach a "hurdle rate" -- a specific rate of return -- before they can begin to collect the customary 20% of a fund's profits.
An investor in some of Clinton's hedge funds said the firm had not notified its backers of the decision, but said the firm had become less and less forthcoming as bad news about its $3.3 billion hedge fund business snowballed through last fall.
The firm had no comment on its decision, which was reported Wednesday in the
New York Sun
After two prominent portfolio managers left Clinton last summer, problems began in earnest when senior trader Anthony Barkan quit in October, sending an open letter alluding to his concerns about the valuation of some asset-backed securities. The firm remains under investigation by the
Securities and Exchange Commission
and the Commodities and Futures Trading Commission, which have not released any findings about how it values its mortgage-backed, commercial mortgage-backed and asset-backed securities.
Although Clinton executives did tell investors that a PricewaterhouseCoopers independent review of its holdings revealed no problems, the report was never released because it wasn't a formal audit.
A person familiar with the firm said Trinity's remaining investors would have the option of putting their money in the group's five remaining hedge funds, all of which differ from the Trinity Fund's strategy. Clinton's remaining funds invest in a mix of mortgage-backed, commercial mortgage-backed and asset-backed securities, while Trinity concentrated on mortgage-backed securities. At least two of the other funds -- the Global Fixed Income Fund and the Clinton Multistrategy Fund -- are up more than 2% for the year to date.
The hope is that the worst is over for Clinton, which had $3.3 billion in losses and investor withdrawals last year.
"Regulators and accountants have been giving them an extensive scrubdown," said the person familiar with Clinton. "The feeling is that they're going to be fine."
The average mortgage-backed hedge fund returned 6.88% last year, according to Chicago-based HedgeFund Research.