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Merrill Lynch Hedge Fund Investors Offered Opportunity To Exit The Endowment Fund With Substantial Losses

According to recent SEC filings, the Endowment Master Fund LP, has offered investors an exit strategy from the hedge fund offering a new fund through a Private Placement Memorandum (PPM) which will be used to liquidate the Fund.  The Endowment Master Fund, LP was marketed heavily by Wall Street firms, including Merrill Lynch.  The PPM describes the Offer as a like-kind exchange of investors’ pro-rata interest of the portfolio holdings into a new PMF Fund, LP.   According to the SEC filings, dated February 20, 2014, “the PMF Fund, LP and the Endowment Master Fund, LP will be managed differently, with the PMF Fund, LP managed for purposes of orderly liquidation.”

For investors, the Offer provides little certainty because investors must choose whether to liquidate now without knowing the true value of the Fund which will be determined at a later date.  `The Offer for the like-kind exchange expires March 19, 2014 which requires more than a leap of faith for investors in a hedge fund that has languished far behind the market returns.  Investors must make an investment decision without knowledge of the value exchanged and how much will be realized during the liquidation period.  According to the New York Times article, After Weak Returns, the Endowment Fund Limits Withdrawals, the hedge fund, “began to struggle in 2011, suffering losses of about 4.1 percent, after fees, compared with a gain of 2.5 percent by the S&P 500.”

 On February 24, 2014, a Thomson Reuters article underscores the effects of the substantial hedge fund costs on the Funds dismal performance, “Even for investors who stay with the fund, there will be high costs.  They will not be permitted to ask for any money back this year.  They will also be charged a 1 percent management fee and a 1 percent servicing fee.  On top of that there will be the fund’s underlying managers’ 1.3 percent management fee and a 16 percent of profits as an incentive fee.”  The article points to the hedge fund underperformance in 2013, “with the fund earning only 2.08 percent last year, dramatically trailing the Standard & Poor’s 32 percent gain.”  For Merrill Lynch customer’s, “If investors accessed the Endowment Fund through Merrill Lynch they will have paid as much as a 2.5 percent upfront charge.”

With these costs in mind, retail investors are discovering that these fees and costs can evaporate any real or potential profits they can earn.  Retail investor liquidity concerns make investments in the Endowment Fund suitable only when they have long enough investment time horizon over multiple market cycles.  Because of the uncertainties outlined in the PMF Fund PPM, investors who were advised to invest in the hedge fund now appreciate the risks associated with illiquidity when the funds experience such under performance.  Full-service brokerage firms such as Merrill Lynch are responsible for conducting adequate due diligence concerning the investment vehicles they recommend and whether these investments are suitable for their customers.  However, with multiple layers of fees, costs and incentive bonuses, these alternative investments are quickly becoming Wall Street’s favorite investment products to sell.

The Silver Law Group has Martindale Hubbell “AV” Preeminent Peer Review™ rated lawyers committed to the advocacy of investor rights who suffered from unsuitable investment advice, including investment losses from hedge funds such as the Endowment Master Fund, LP.  If you are interested in learning more about your investment options or your legal rights, you are encouraged to contact our law firm for a free consultation. Our attorneys have significant experience representing investors in securities arbitration claims.  If you have questions about your legal rights, or have been the victim of investment fraud, please contact us, toll free at (855) 755-4799.

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