The judge in the Chrysler bankruptcy case has now forced the hedge funds forming the "Chrysler non TARP lenders" to identify themselves as they pursue their case.
According to Bloomberg, the funds involved (down from 20 late last week) are:
"The Chrysler Non-TARP Lenders are as follows, according to the filing: Schultze Master Fund Ltd. of Purchase, New York; Arrow Distressed Securities Fund at the same Purchase address; Schultze Apex Master Fund, at the same address; Uniondale, New York-based Stairway Capital Management II L.P; Group G Partners LP, based in New York; GGCP Sequoia L.P., at the same New York address; Oppenheimer Senior Floating Rate Fund, in New York; Oppenheimer Master Loan Fund LLC, at the same New York address; and Foxhill Opportunity Master Fund LP, based in Princeton, New Jersey."
We are not going to comment on the economic or political arguments for deciding to challenge either the US government or the US bankruptcy law (which one is being challenged, of course,depends on your point of view.) What is worthwhile noting, however, is that investors in these hedge funds will have their own economic and political positions on this highly contentious issue and, particularly, will have their own sensitivities as to reputational risk.
Some investors, we expect, will applaud the non TARP managers, both in their stated intent to get a better return and also in their drive to uphold what could simplistically be called due process in bankruptcy proceedings. Other investors would, we imagine, be horrified to see their capital used to impede what they consider to be a vital restructuring - think pension entities in Michigan.
As we all know, the hedge fund industry has progressively migrated from a model dominated by high net worth investors (where hedge funds were the secret club of the super rich) to a model dominated by institutions. Many institutions are not low profile - they attract criticism (and acclaim) and are forced to spend substantial resources managing their reputations, their media coverage and their relationships with their many stakeholders.
For at least some institutional investors, we imagine that it would be highly negative for it to be exposed that their capital was allocated to a non TARP fund. But - and this is the big but - these investors, as passive shareholders in a commingled investment vehicle, have absolutely no control over how managers deploy capital. Given transparency, they may not even know what their managers hold in the first place, and certainly have no right to be consulted before a manager engages in a strategy which is both public and highly controversial. This has the potential to be a massive problem for certain allocators.
Issues such as fees, transparency and control (think managed accounts) have already been flagged as areas where the current hedge fund model can be at odds with the needs of many institutional investors. Reputational risk is another which is just as real, but has received much less attention to date. Moreover, this is an issue that many hedge fund managers remain completely and comfortably oblivious to. Hedge funds are not typically questioned by their investors on socially responsible investing practices, on their carbon footprint, on their human rights policies etc. etc. For a subset of institutions, however, these are important, highly politicized issues which need to be considered.
Strategies which have more exposure to "reputational" risk are event driven styles such as distressed and equally activist investing. There is also the more random risk of not wanting to be an investor with a manager who decides to go on a personal, political crusade which turns out to be opposed to your investing organization's own values and mission.
The irony here is that distressed, certainly, is one of the strategies likely to be in favor over the next stage of the cycle. Chrysler is not the last time some institutions will be waking up to wonder what is happening somewhere in their hedge fund portfolios.
Hedge Fund Operational Due Diligence
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