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John Paulson has some forthright words for fellow hedge fund managers refusing to distribute capital back to clients. (Don’t confuse him with our sweaty Treasury Secretary, Hank Paulson — John has positively nailed this bear market, earning triple digit returns for clients in 2007 and double digits in 2008):

We think it’s a mistake for managers to use gates and other tools to limit investor access to their funds.  While we recognize the difficulties of the current environment, we think it is a manager’s responsibility to raise liquidity to meet the redemption needs of their investors.

I could not agree more.

You may have heard of some large hedge funds “freezing” withdrawals from their investors.  Since we manage separate accounts and not a hedge fund per se, I have no idea how that is even legal.  Since I’ve heard of no lawsuits, their private placement memorandums obviously had some kind of obscure language that said “we can limit withdrawals for basically any reason.”  That is of course a ridiculous business practice.

It seems to me that these managers are really pushing the envelope on retaining client business that they’d otherwise lose by free will.  The worst part is clients are initially held to a lockup period of 1 to 3 years on their funds upon initial investment.  These actions turn the flow of funds into an extremely unacceptable one-way street.

Teewinot clients have full access to their funds, at will, since the accounts are custodied in their name.  Even if we were operating as a hedge funds, I can promise we would certainly never take the actions that these managers are taking.  It’s not right.

Please read the piece, and tell me what you think.  I absolutely think they are not holding such illiquid securities that they just can’t get out — they just can’t get out at the prices they want to !  And of course want to retain their asset base.  I think this “change of terms” will backfire on them, as it would on anyone in any industry.