Drake can't duck 2007 swoon

NEW YORK (Fortune) -- A year has made a big difference for Drake Capital Management, which has announced that it is shuttering its flagship hedge fund after a series of bad bets on government bonds.

The Global Opportunities Fund lost 23.85% in 2007 - it was just in 2006 that the fund won fame with an astronomical gain of 41%.

Opened in 2001 by Steven Lutrell and Anthony Faillace, Drake quickly amassed a total of more than $13 billion under management, with over $5 billion of that in three hedge funds. The actions in its struggling hedge fund unit won't affect its traditional bond management business.

Last December, after aggressive bets in U.S. Treasuries and Japanese securities didn't pan out, investors flooded the fund with requests to yank out their money and Drake suspended redemptions

At such times, funds frequently limit withdrawals in a process known as "raising the gates," to prevent the fund from having to stage a fire-sale of assets to raise cash.

A Drake letter telling of the fund closure noted that many investors have not given up hope. More than $300 million has been committed to a new fund that may launch later this year, replete with so-called high-water marks, which won't levy performance fees until their losses are recouped.

Getting capital back from hedge funds is not like redeeming an investment in a mutual fund or selling stocks; there is a multi-month valuation and auditing process. The Drake letter said that the majority of the investor capital should be returned by the end of the year, with the balance coming in the first quarter of next year.

The letter did note, however, that there are some possible headaches to come: "There remain a number of positions that are relatively less liquid in the current market," the note said. This is a polite way of telling investors that the fund may have to unwind more liquid positions at unfavorable prices to raise cash.

Another Drake fund, the $1.45 billion Absolute Return fund, has fallen on hard times and its future is also under consideration. This year, according to an HSBC database, the fund is down 12.53%. To be fair, April proved to be a pretty good month for the fund, with a gain of 2.10%.

A call to Lutrell was not returned, and a spokesman declined comment.