Thomas Lee May Close Fund Of Hedge Funds Shop

Dec 4 2008 | 12:26pm ET

Private equity pioneer Thomas Lee may have to throw in the towel on his first hedge fund venture. Lee, the founder of private equity giant Thomas H. Lee Partners, may close his nascent fund of hedge funds venture, Thomas H. Lee Capital Management, which has seen its funds post losses of about 40% this year.

Lee Capital’s Blue Star and Lee Enhanced Offshore funds invest with about 110 underlying managers, including such heavy hitters as SAC Capital Advisors and D.E. Shaw Group. But the highly-levered funds, which manage a combined $1.5 billion, have been burned by the collapse in hedge fund returns, with the leverage roughly tripling their losses.

Now Lee, who founded Lee Capital and a new p.e. shop, Lee Equity Partners, before leaving Thomas H. Lee Partners in 2006, is considering cutting the size of the hedge funds, or shuttering them entirely. Lee himself is the funds’ biggest investor, and the fund’s debt, once as high as $3.2 billion, has fallen to less than $2 billion as other investors have fled. Meanwhile, Lee has sent redemption requests to most of the funds’ underlying managers.

Lee is expected to decide the fate of the funds of funds by the end of the year. Should he keep at it, he plans to reduce or eliminate the funds’ use of leverage.

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