La. Pension Funds Petition for Liquidation of Hedge Fund

April 23, 2012 (PLANSPONSOR.com) - A judge in the Cayman Islands ordered the liquidation of the flagship fund of a New York hedge fund manager.

The judge ruled in favor of Louisiana’s Firefighters’ Retirement System, Municipal Employees’ Retirement System and New Orleans Firefighters’ Pension and Relief Fund, which petitioned for the liquidation after almost a year of failed negotiations to return about $145 million of their original investments and earnings, according to The Times-Picayune.  

The hedge fund in question, the Income Arbitrage Fund Ltd., is an investment company based in the Cayman Islands. It is the flagship fund of Fletcher Asset Management, run by Alphonse Fletcher Jr., the news report said. The judge found the hedge fund was insolvent and should be wound down.  

The Times-Picayune reports the petition made the case that liquidators should investigate the company’s affairs and take control of its assets, citing as examples of disarray the Income Arbitrage Fund Ltd.’s failure to file audited accounts since 2008, and its apparent lack of directors for two months beginning in November.  

Earlier this year, trustees of the state firefighters’ system set aside $8.5 million as a precautionary measure to cover potential losses stemming from the Fletcher investment.

According to the news report, in 2008, trustees of the pension systems invested a combined $100 million in Fletcher, which promised a guaranteed 12% return on their money. If the return dipped lower, the difference would be made up by an unnamed financial backer, officials have said.   

In March 2011, almost three years after investing $45 million in Fletcher, trustees of the Firefighters' Retirement System learned that the value of the holdings had grown to $63.7 million. Days later, they filed a request to cash out $17 million of their investment to capture a portion of the profit. That same month, the Municipal Employees' Retirement System made a similar request, to redeem $15 million.   

Initially, Fletcher said the requests would be fulfilled after 60 days, but before that time had passed, Fletcher told fund officials that they would instead be issued promissory notes for the money, saying that selling the assets in the current financial market probably would result in a loss, and the process would require a more drawn-out approach to yield a better value.   

When the requests were not met by June, trustees of the three funds requested that their original investment and earnings be redeemed from the hedge fund.  

The news report said negotiations to determine a redemption schedule for the holdings continued through the fall, according to the petition. The investment company missed multiple deadlines for redeeming the holdings, and had asked for a reprieve until February, before the lawyers for the funds filed the motion. 

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