Wasim Rehman is a go-to person for investors desperate for an exit in the messy world of trading troubled, hard-to-sell assets — a sector that’s set to explode as sanctions against Russia and the ongoing equities meltdown create mountains of illiquid holdings.
But Rehman — who has invested in more than 200 funds in liquidations in the 13 years since retiring at age 28 as the youngest partner of hedge fund giant Marshall Wace — has a message for those tempted by the steep discounts of so-called side-pockets that money managers create to separate out their problem bets: Sometimes it takes more than just patience.
Take his 2014 purchase of claims tied to fraudster Bernie Madoff, mastermind of the biggest financial con job in history. The drawn-out effort to unwind that investment forced Rehman, one of the biggest players in the secretive world of side-pockets, to come out of the shadows, turn activist against the executives responsible for liquidating the assets and even prepare to take his battle to the courts. Rehman says it could still take years before he turns a profit on his bet.
“This is one of the worst-run liquidations I have experienced and to date is the only situation in which I have taken an activist approach,” the London-based investor said in an interview.
Rehman’s ordeal is a cautionary tale for investors after sanctions against Russia following its invasion of Ukraine trapped funds with billions of dollars of holdings of stocks, bonds and currencies they can’t easily offload. The ongoing selloff in growth stocks also threatens to lock investors in unlisted securities bought by hedge funds.
Already, hedge funds like EDL Capital have separated Russian shares, while Coatue Management has created a side-pocket for bets in private companies. UK regulators have been talking with retail funds about separating frozen Russian assets from core investments, according to a consultation document in March, to help new investors avoid exposure to such assets and let existing holders redeem the rest of their investment.
The Russian side-pockets may be too toxic even for him, Rehman says, pointing to the legal complications that may be involved in their unwinding. It’s also unclear how they can be bought without violating sanctions, he said.
Investors like Rehman buy hard-to-sell assets at a deep discount and hope to turn a profit if those funds are liquidated at higher values. Profits can be handsome. Jared Herman, president of Hedgebay Securities that brokers in private and illiquid assets, said investors typically get 15% to 20% annual returns but in some cases profits can exceed 50% or fall to zero.
The process is tedious. Disposing of illiquid assets has always been a murky area of finance where patience is tested, deep research and connections are required and ugly litigations are frequent. “Most investors tell me that they get the direction right but what they almost always get wrong is the duration,” Herman said.
Rehman’s Madoff case is a classic example of how bad things can get.
In real dollars, the Madoff Ponzi scheme lost around $19 billion and trapped investors in numerous side-pockets and funds under liquidation. Some of them are still ongoing and billions of dollars have yet to be recovered.