2 Deephaven hedge funds to close

Blaming a tough lending environment and investor requests for their money back, Minnetonka-based hedge fund Deephaven Capital Management announced plans to close two funds worth $780 million, according to documents filed Thursday with the Securities and Exchange Commission.

Deephaven's parent company, Knight Capital Group, told the SEC it was closing the Deephaven Event Funds for several reasons, including their poor performance over the past nine months and because "significant levels" of the funds' investors were trying to cash out.

It also cited "the current macro-economic environment" and declining interest in event-driven investments, which focus on companies dealing with significant changes, such as bankruptcy, mergers and takeovers, or bad press.

The hedge funds make wagers on how such corporate events will affect its stock and bond prices. In 2007, hedge funds using this strategy returned 13.6 percent, according to the Credit Suisse/Tremont Event-Driven Index.

Knight Capital also said Andrew Greenberg, the funds' portfolio manager, is out, one year into his three-year contract. Greenberg came to Deephaven in late 2006 after nine years with Chicago-based Citadel Investment Group.

London-based Tony Chedraoui, portfolio manager for Deephaven's European Event portfolios, takes over for Greenberg. A Deephaven spokesman declined to comment.

Ferenc Sanderson, a senior research analyst at Lipper who studies hedge funds, doesn't know the circumstances surrounding Deephaven's fund closings.

Deephaven voluntarily returned about $19 million in incentive allocation fees to investors in the fourth quarter, blaming uncertainty in the credit markets. Deephaven had previously announced that if a Deephaven fund lost money in the six-month performance period ending Dec. 31, 2007, it would return some or all of its fees.

An unidentified Deephaven investor quoted by Bloomberg said its Event Funds had declined 6 percent in the past three weeks. Most equity markets have experienced steep declines so far in 2008.

The funds will gradually liquidate assets and return them to investors.

Keith Tufte, a former hedge fund manager who now runs Longview Wealth Management, said returning money to investors when a strategy's not working isn't uncommon.

"It's the stand-up, right thing to do when you've got a fund that doesn't have a particularly strong outlook -- like this particular space with what's happened in the financial markets in the last three or four months," he said.

A deal for Deephaven executives Colin Smith, Shailesh Vasundhra and Matt Nunn to buy a 49 percent stake in the hedge fund is expected to close shortly.