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The Biggest Surprise About Claren Road's Upcoming Liquidation

Tyler Durden's picture




 

That one (and pretty much all) of Carlyle's hedge funds, namely the commodity-focused Vermillion Asset Management, did not have a good 2015 was well-known after as Bloomberg reported, its founders - Chris Nygaard and Drew Gilbert - left after losses. Actually, losses is putting it mildly: AUM imploded to a paltry $50 million from $2 billion following horrible bets on the path of commodity prices.

As Bloomberg further noted, "losses in Vermillion’s Viridian commodity fund, which invested in oil, metals and agriculture assets, have led to investor redemptions that shrank its size. The vehicle had $1.7 billion when Washington-based Carlyle bought a 55 percent stake in Vermillion in 2012, before starting its decline."

The collapse driven by a record commodity crash, while unpleasant for all the millionaires and billionaires involved, was explainable: the hedge fund which was just a glorified and levered beta chaser, was simply betting everything - and then added some leverage for good measure - that the BTFD "investment strategy" would work and commodities would rebound.

They did not, and Vermillion is now shutting its doors, and leaving Carlyle with another hedge fund implosion on its hands.

But, as noted above, there was nothing particularly surprising about that: invest badly for long enough, and you get wiped out.

What, however, is far more surprising was the fate of that other, far bigger Carlyle hedge funds, Claren Road, which as we learned moments ago from Bloomberg is also on death's door following a whopping $2 billion in redemption requests, representing about half of the firm's total $4.1 billion in AUM.

By way of background, Claren Road was founded in 2005 by former Citigroup Inc. credit traders Brian Riano, John Eckerson, Sean Fahey and Marino. Carlyle bought a 55 percent stake in Claren Road five years ago as part of a push into hedge funds.

At its peak less than a year ago, in September of 2014, Claren Road managed $8.5 billion. Now, in one month, Claren Road is facing redemptions that will pull 48% of the funds investments, forcing across the board liquidations, mass layoffs, and what will ultimately almost certainly be the fund's liquidation. Incidentally, the pain for Claren Road started at the end of 2014:

Claren Road investors had asked to redeem $374 million last quarter, a person with knowledge of the matter said earlier this month. The firm had faced redemptions of $1.9 billion at the end of last year.

Which means that bleeding billions is not exactly a new thing for Claren Road (or Carlyle). And, it goes without saying, a few "expert networks" left in operation would have surely prevented the fund's demise.

But, as in the case of Vermillion, liquidations are perfectly normal, and happen every time there is a major market meltdown, such as what commodities experienced, if not the centrally-planned and central bank-micromanaged US equities, which are the last recourse policy tool for the legacy status quo to preserve confidence in a crumbling global economy.

No, what is most surprising, is that Claren Road actually did not perform that badly: "Claren Road’s main fund gained 1.7 percent in the first two weeks of August, according to the person. It had declined 7.2 percent this year through July. Its smaller credit opportunities fund has lost 6.2 percent this year through mid-month after rising 1.9 percent in the first two weeks of August."

In other words, Claren Road was down a palrty 5.6% through mid-August, or underperforming the broader market by just 5.6% and was likely performing in line or even better than its benchmark, and yet its skittish investors saw that return as sufficient to require a liquidation.

One then wonders: if a single-digit underperformance was enough to lead to the wipe out of one of the formerly biggest hedge funds, just how big, literally and metaphorically, will the hedge fund gates have to be when the central banks finally lose control, and hedge funds experience double digit losses (or get Madoffed).

Because if truly investors are so jittery that one bad quarter is enough to force the 50% of one's cash, then what happens during the market downturn is now very clear, and is precisely what we warned in "How The Market Is Like CYNK", and how investors in China's epic fraud Hanergy learned the hard way: you can make paper profits in a rigged market on the way up all you want, but once the time to cash out comes, you can never leave.

 

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Mon, 08/17/2015 - 16:44 | 6436864 phoolish
phoolish's picture

I'm sure the bailout checks are being delivered as we speak.

Mon, 08/17/2015 - 16:51 | 6436890 negative rates
negative rates's picture

WAITER, .............check please.

Mon, 08/17/2015 - 17:04 | 6436921 Antifaschistische
Antifaschistische's picture

sorry, you've been Hotel California'ed.  (dude got HC'ed)

Mon, 08/17/2015 - 17:06 | 6436932 Central Bankster
Central Bankster's picture

Finally, an account the E-Trade baby can out-trade.

Mon, 08/17/2015 - 17:05 | 6436925 Central Bankster
Central Bankster's picture

.

Mon, 08/17/2015 - 19:36 | 6437319 Manthong
Manthong's picture

14 or fight!

Mandatory LSD FEMA camp at 30

Mon, 08/17/2015 - 16:47 | 6436872 B2u
B2u's picture
You can check out anytime you like, but you can never leave.
Mon, 08/17/2015 - 16:47 | 6436874 buzzsaw99
buzzsaw99's picture

yeah, -5.6% plus management expenses

Mon, 08/17/2015 - 16:48 | 6436881 Rainman
Rainman's picture

non-refundable of course

Mon, 08/17/2015 - 17:27 | 6436991 Omen IV
Omen IV's picture

Hillary manages the server ...so there is nothing left to answer for

Mon, 08/17/2015 - 16:59 | 6436886 Mr. Bones
Mr. Bones's picture

"but once the time to cash out comes, you can never leave."

 

 Her mind is Tiffany twisted...

 

Paging KCS

Mon, 08/17/2015 - 16:50 | 6436888 Tinky
Tinky's picture

"By way of background, Claren Road was founded in 2005 by former Citigroup Inc. credit traders..."

Citigroup? Knock me over with a feather.

Mon, 08/17/2015 - 16:56 | 6436902 Amish Hacker
Amish Hacker's picture

Two-and-twenty only works on the way up.

Mon, 08/17/2015 - 17:06 | 6436930 pragmatic hobo
pragmatic hobo's picture

i think people are deleveraging ahead of inevitable rate increase ... you know the old saying ... don't fight the fucking fed ...

Mon, 08/17/2015 - 17:10 | 6436945 Dr. Engali
Dr. Engali's picture

Those who panic first panics best.

Mon, 08/17/2015 - 17:14 | 6436955 Ms No
Ms No's picture

This is Carlyle as in Carlyle group?  No doubt this will lead to a sordid trail of theft, corruption, homosexual parties with cocaine and child prostitutes.  Then there will be a scam, within a scam, within a scam like an unfolding matryoshka doll.  On the brightside, if they set something off they a probably a good candidate for bailouts.  

Mon, 08/17/2015 - 17:17 | 6436970 all-priced-in
all-priced-in's picture

I grew up in a town named Vermillion - it means a brilliant red color.

 

 

 

 

Mon, 08/17/2015 - 17:58 | 6437077 Tinfoil Hat
Tinfoil Hat's picture

I went to the FireFighter academy in a town called Vermillion

Tue, 08/18/2015 - 17:28 | 6440817 taoJones
taoJones's picture

I cleaned the toilets in the Firefighter Academy in a town called Vermillion 

Mon, 08/17/2015 - 17:20 | 6436972 Latitude25
Latitude25's picture

This is the difference between paper investments and buying physical assets.  Paper can go to ZERO so investors are jittery however my paid off house or PMs may drop a lot but they will never go to zero.  I sleep very well thank you.

Mon, 08/17/2015 - 17:32 | 6436998 Soul Glow
Soul Glow's picture

You'd think Carlyle's the smart money.  I guess even the Bushes can't make the market.

Mon, 08/17/2015 - 17:41 | 6437017 WilliamJGreene
WilliamJGreene's picture

Call Jon Corzine.

Mon, 08/17/2015 - 18:37 | 6437168 Chuck Knoblauch
Chuck Knoblauch's picture

Carlyle, PA is demonic.

 

Mon, 08/17/2015 - 21:02 | 6437568 Ms No
Ms No's picture

I would say the same thing about most of western and cental ND, it is interesting both places have schools whose mascot is either the "Demons" or the "Devils", makes one wonder after awhile.  Who the hell does that?

http://www.demonfootball.net/index.html

Mon, 08/17/2015 - 21:56 | 6437701 Chuck Knoblauch
Chuck Knoblauch's picture

Why are they near military bases?

US Army War College.

Mon, 08/17/2015 - 22:13 | 6437755 Ms No
Ms No's picture

I don't know but there is no amount of money that would get me back in that place.  DC is a really strange place too.  I noticed the history of Dickinson College in Carlyle (not Dickinson ND, another coincidence) and that was telling enough.  It's a bunch of creepy Nordic masonry as far as I can tell.   It's probably everywhere but I try to stay away from where it concentrates. 

Tue, 08/18/2015 - 17:21 | 6440783 mkhs
mkhs's picture

Wow.  The X-files was a documentary.

Mon, 08/17/2015 - 18:53 | 6437204 TxExPat
TxExPat's picture

Gold has a long history with Mankind, it was one of the first metals we ever worked.  Long Long ago (before the stream beds were picked clean), you could find "usable" quantities of relatively pure gold laying around in stream and river beds.  It has a relatively low melting point, low reactivity (stays pretty clean even using crude refining methods), and is soft/malliable enough to be worked with stone tools.  Mostly used for jewelery/status symbols (even back then), (nice and shiny and all). 

Common enough to knowledge about it to spread, rare enough to be noteworthy in quantity, and any metal would have been worth noting in a stone age world.  (Times/materials change, people not so much...).

Mon, 08/17/2015 - 23:14 | 6437889 synthetic
synthetic's picture

The redemptions are really more a result of Claren's inability to properly control risk and its positions is assets that weren't exactly in keeping with its strategy/mandate.  These resulted in losses, yes, but the losses were only the symptom.

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