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The Liquidations Begin: Three Hedge Funds Shut Down After Summer Rout

Tyler Durden's picture




 

If the last two months have taught us anything (other than that Fed is panicking) it’s that “hedge” funds sometimes aren’t so good at hedging. 

In fact, between i) the outright breakdown of the historical relationships between asset classes (volatilities and correlations) that are used to construct optimal "risk-parity" funds and ii) a number of “superstar”-specific disasters such as the Valeant debacle, anyone paying 2 and 20 might want to do a sanity check because as the recent performance of Pershing Square, Greenlight, and Paulson (who apparently decided that the best way to allocate capital was to spread it among Puerto Rico and Greece) seem to show, these leverage-assisted, beta train-riding, carried interest tax loophole-exploiting fund managers are ill-prepared to protect capital in the event of a real downturn.  

And while we wait anxiously to see who will be the first big name to liquidate, some of the “little” guys have already thrown in the towel. Here’s WSJ:

A messy stretch in global markets claimed two more victims as a pair of hedge-fund firms decided to shut down.

MeehanCombs LP, a Connecticut firm that managed about $300 million at its peak last year, will return most of its client money at the end of the month, President Eli Combs said. The fund was down 6% last year and 7% this year through August after it suffered mounting losses in the spring and summer.

 

Meanwhile, former Pacific Investment Management Co. executive John Brynjolfsson said he would return outside capital in his California-based Armored Wolf LLC hedge-fund firm, and manage only his own cash by year-end.

 

“The past year has been pretty horrendous” for some of the firm’s funds, particularly those exposed to a vicious downturn in commodities, Mr. Brynjolfsson said. “Some of our clients have thrown in the towel.”

 

The average Americas hedge fund fell 1.74% in September, pushing managers into the red for the year, according to Morgan Stanley estimates reviewed by The Wall Street Journal. High-profile managers including William Ackman and David Einhorn are down by double-digit percentages.

MeehanCombs was in worse shape than many peers due mostly to its heavy exposure to a shaky Europe.

 

The firm’s chief investment officer, Matthew Meehan, maintained a handful of large bets on some European banks, such as Germany’s HSH Nordbank, that became a drag on returns, according to investor documents and a person familiar with the matter. Mr. Meehan’s tendency to hold far more bullish than bearish wagers in areas such as junk bonds also turned against him as markets viewed as risky began to sell off en masse.

And that pretty much says it all: the “tendency to hold far more bullish wagers in junk.” In other words, the inability to kick a gambling habit.

Of course it wasn’t that long ago that Eli Combs was a “rising star”. Recall the following from Institutional Investor ca. … well, ca. just a little over a year ago: 

He might live in Rowayton, Connecticut, and work in Greenwich, but Eli Combs isn’t your cookie-cutter hedge fund manager. For starters, he’s a vegetarian. Ohio native Combs, 43, graduated from Miami University with a liberal arts degree before earning an MS in finance from City University of New York and an MBA from Yale University. In 2001 he became a private banker with Goldman Sachs Group in New York. Over the following decade Combs and his family settled in Carroll Gardens, Brooklyn, as he moved into hedge fund management. In April 2012, with seed capital from asset manager BlackRock, he and Matthew Meehan, a former colleague from New York hedge fund Eos Partners, launched MeehanCombs, a Greenwich-based hedge fund that manages just shy of $300 million and focuses on credit and distressed investing. It’s important to Combs and Meehan that their firm be not only best-in-class when it comes to investment performance but a model of good governance. 

Yes, it's very important to Combs and Meehan that they are "best-in-class" when it comes to performance and good governance which is why they have done horribly at both. But don't be too hard them, because even the PE heavyweights of the world are finding this to be a particularly difficult operating environment. Via Bloomberg

Bain Capital is liquidating its Absolute Return Capital hedge fund after more than three years of losses, citing a “challenging” environment for macro trading.

 

The fund, run by Jonathan Goodman and Jeff Woolbert, had about $2.2 billion in assets as of Aug. 1, including $552 million of internal money, according to an investor presentation dated August 2015. The fund was down 13 percent this year through July, which would be its worst year since inception in 2004.

 

“As you know, the environment for global macro fundamentals-based trading continues to be challenging,” the Boston-based firm told clients in a letter Tuesday. “That factor, combined with the lack of certainty over when a recovery will take hold, led us to conclude that the time was right to return capital to you.”

Of course the real question here is this: if this is the kind of performance one can expect in a downturn and if asset classes continue to become more and more correlated, one certainly wonders how bad the rout will be if/when things actually get bad, because let's face it, what we've seen over the last 45 days or so is just a warm up. 

But if you're inclined to believe that it's still a good idea to fork over what, in mutual fund/ETF terms would be a laughably high expense ratio only to see your capital vaporized by egotistical, Fed put-surfing gurus, then be our guest and if you're particularly adventurous, you can start by handing your money over to the funds that decided to participate in Standard Chartered's new EM synthetic CDO...

 

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Tue, 10/06/2015 - 14:22 | 6636256 Dubaibanker
Dubaibanker's picture

Only 3?

Tue, 10/06/2015 - 14:44 | 6636335 NoDebt
NoDebt's picture

Love the firm at the top of the losers list- The Tulip Trend Fund.  You gotta have to have balls of steel to name it that AND lose 15% in a month.

Their prospectus reads:  "Would you like us to lose your money slowly over time or all at once?  If you're the "all at once" type, we're the hedge fund for you!"

Tue, 10/06/2015 - 14:53 | 6636358 ShrNfr
ShrNfr's picture

Well, wasn't that the final trend for Tulips??

Tue, 10/06/2015 - 15:10 | 6636443 Flatchestynerdette
Flatchestynerdette's picture

This ~hot~ money will have to find a landing place somewhere else

The Romans liked regurgitation didn't they?

Tue, 10/06/2015 - 15:13 | 6636457 Four chan
Four chan's picture

you have to be some kind of an idiot to lose money in the market the last 8 years.

Tue, 10/06/2015 - 16:25 | 6636833 The Once-ler
The Once-ler's picture

  
 …  you have to be some kind of a genius to  not  lose money in the market the last 8 weeks.

Wed, 10/07/2015 - 01:37 | 6638593 Colonel Klink
Colonel Klink's picture

Aaaaaaand it's GONE!

Tue, 10/06/2015 - 14:25 | 6636262 JustObserving
JustObserving's picture

Can we have a few banks and a few brokerages shut down?

Lehman and WaMu were so long ago.

Tue, 10/06/2015 - 14:56 | 6636368 abyssinian
abyssinian's picture

If the scams can't make money, who is making money? ? Gartman and Cramer? 

Tue, 10/06/2015 - 16:03 | 6636741 seek
seek's picture

Central banks and the select few commercial banks that they work for. There a whole bunch of names we see here every day that are conspicuously absent from the list. Most of them are profitable 89 out of 90 days a quarter or better.

Tue, 10/06/2015 - 15:47 | 6636663 Johnbrown
Johnbrown's picture
How Will We Get There? Three Potential Paths to a Free Society

"...But the statist message, as successful as it seems to be among the poor, has an inherent weakness, one that anarchists could exploit. And I’m not even talking about the fact that it is wrong. That’s something different. Instead, I’m talking strictly about the way statists market their message. It has to do with envy. Statists try to stimulate and inflame a person’s sense of envy. They try to get the poor to feel rage toward the rich. But I do not think that most poor people enjoy feeling envious. On the contrary, I think they are like the rest of us. When they feel a sense of envy, they also feel somewhat ashamed for having felt it. They understand that indulging in envy debases them. So I think that when they observe statists trying to stimulate their envy, they feel somewhat disrespected. It doesn’t feel right. And as a result they are reluctant to fully accept the statist interpretation of the world. They might ultimately acquiesce and even parrot the statist party line. But they do so, not as much out of conviction, as out of simple pragmatism. They think to themselves “Well, who knows what’s right, but why not take the money if they are offering it?” So to the underclass, statism is largely amoral. It may give them a certain justification for demanding money but that is all. It doesn’t give them that thing that they need. What they need is something much more valuable, a thing we all seek: dignity.

This is what the liberty movement can offer the poor. Dignity, and a sense of self respect. We can give them an alternate narrative about why the system is unjust. We also can legitimize their perspective. We also can identify the source of the injustice in the world: the state. We also can offer a solution: the elimination of the state. But unlike the statists, we can do this not by appealing to what is base in people, but instead by appealing to that which is most noble and enlightened within them. Our narrative can give them something that the statists’ narrative never can. We can show them how they can be morally superior to other people. We can give them a way to place themselves above those who are materially well off. We can explain: “Those who are well off, almost as a rule, play ball with the state. They benefit from it, or at least are harmed less by it, and for that reason they refuse to condemn it..."

http://anarchiststandard.com/2015/10/how-will-we-get-there-three-potenti...

Tue, 10/06/2015 - 14:25 | 6636266 pods
pods's picture

Hey, you gotta liquify the dead to  feed the living.

Long live the Matrix!

pods

Tue, 10/06/2015 - 14:26 | 6636267 Traderbeauty
Traderbeauty's picture

The title is so dramatic.....3 is peanuts compared to to the number of HF.  More shops in my local area have shut down over the last year.

Tue, 10/06/2015 - 15:27 | 6636534 DetectiveStern
DetectiveStern's picture

Yea but running a hedge fund is easier than running a shop.

Get money. Take 2%. BTFD. Keep 20% of the profits the Fed has gifted to you.

Tue, 10/06/2015 - 14:28 | 6636280 Kaiser Sousa
Kaiser Sousa's picture

HA, HA!

 

fuckers........

Tue, 10/06/2015 - 14:30 | 6636284 yogibear
yogibear's picture

Soon a Hank Paulson episode,

There will tanks in the street if the treasury and the Fed doesn't provide a much larger TARP2.

Boys on Wall Street need new Maserati's and Ferrari's. They need to upgrade their toys.  

Tue, 10/06/2015 - 14:29 | 6636285 buzzsaw99
buzzsaw99's picture

they got their 2 and 20 (well, the 2 anyway) and they aren't giving it back. i can't believe people pay assholes 2% to (mis)manage their money in an era of zirp. hell it takes a year to make 2% on the 10Y. it takes 4 years to make that from bunds.

Tue, 10/06/2015 - 14:38 | 6636324 asteroids
asteroids's picture

$300M * .02 = $6M if I did my math right. Times 2 for two years = $12M, pretty good paycheck.

Tue, 10/06/2015 - 14:54 | 6636363 Never One Roach
Never One Roach's picture

Moar "Hope & Change."

Tue, 10/06/2015 - 15:19 | 6636487 alphahammer
alphahammer's picture

---

Thats not how it works.

1) There is a hurdle. The fund needs to make x% for the LP BEFORE they are elgible for the management fee. This is usually based upon a Libor formula.

2) Then there is high water mark. This means you must meet hurdle -- then STAY above that to maintain management fee and 20% proift.

What this means is that a >$1bn HF can make zero fees on a down year just like the LPs in the fund. This also means the fund will be responsible for all the salaries, hard and soft costs to run the shop for an entire year without any revenue.

Lets also recognize that LPs will make the manager of the fund put a significant portion of their own personal wealth into the fund BEFORE they as an LP will invest. So it's not just house money the HF is playing with.

Of course, the media (including Zerohedge) never mentions how these funds actually work because apparently its not sexy enough to get the pitch forks shined up...

Tue, 10/06/2015 - 16:39 | 6636889 CTgoldcoast
CTgoldcoast's picture

How would you know pikerhammer???

Each LPA is different, some get their 2 and 20 without a hurdle, or have variable hurdles for different investor classes.  Some have variable fee structures that are far less than 2 and 20.   Some give up GP points to their initial large investors.   Hard to start a fund these days without a core investor at least asking for GP points and large fee concessions.    Some hedge funds have a hurdle for performance fee only.  And some dont know what the frark they are doing, which is why it was so refreshing to see Eli Combs picture attached to this article.   Yes, many other funds are going tits up.   But it's notworthy that one of Mehaan Combs is going under, especially when they were selected by institution investor as one of the few 'up and coming' new hedge funds.    That all just said, some Hedge Funds are doing far worse, yet are not getting pressure from their investors to shut down.    Mehaan was likely forced to shut down by their investors thru redemption requests.    Put another way, you could be down 40% but if no redemption requests are sent in, then you either keep going or shut down because you want to.   They allways say the decision to 'shut down' was internal - this is optics.   And allows for the possability that a new fund can be started in a year or so with their 'new thesis"

Lets see if Eli Combs resurfaces - same can be said for any fund that 'returns investor capital' and shuts down. 

 

Tue, 10/06/2015 - 14:30 | 6636293 RopeADope
RopeADope's picture

If hedge funds ran their own exchanges out of the banking system's sphere of influence they would perform much better.

It would also help to not have their positions held in custody at said banks.

Just saying.

Tue, 10/06/2015 - 14:40 | 6636325 Turin Turambar
Turin Turambar's picture

I wouldn't count on a whole lot more anytime soon.  PPT action the last 5 days or so gave a whole lot of people another roll of the dice.

Tue, 10/06/2015 - 14:46 | 6636339 ThroxxOfVron
ThroxxOfVron's picture

The self-loathers and contrarians such as Hendry and Taleb seem to be doing rather well.

Tue, 10/06/2015 - 14:55 | 6636359 somebody poison...
somebody poisoned the water hole's picture

:) cant b to soon for me

Tue, 10/06/2015 - 14:53 | 6636361 somebody poison...
somebody poisoned the water hole's picture

3 down and how many to go...

Tue, 10/06/2015 - 15:23 | 6636517 alphahammer
alphahammer's picture

---

Please ...

Are you long anything this market?

When a HF liquidates they will sell whatever isn't nailed down to close the fund. If you're long any of the names you might get your ass handed to you in the downdraft.

Be careful what you wish for.

On the other hand, I'd reckon that >70% of the people even commenting on ZH are Russian/Syrian/Iranian trolls that wouldn't know jack shit about finance if it slid off a roof and hit them in the head...

Tue, 10/06/2015 - 14:54 | 6636364 Latitude25
Latitude25's picture

Returning their clients' capital?  Clearly these guys didn't get the loot and pillage memo.

Tue, 10/06/2015 - 14:59 | 6636383 Soul Glow
Soul Glow's picture

BTFD are going to be the last words of many a trader.

Tue, 10/06/2015 - 15:14 | 6636460 CHX
CHX's picture

Where have all the "Bullish!" comments gone ?

Tue, 10/06/2015 - 23:59 | 6638495 ThroxxOfVron
ThroxxOfVron's picture

I dunno.

A bunch of people suddenlty up and ran out the EXIT and it got kinda quiet...

Tue, 10/06/2015 - 15:28 | 6636518 TheRideNeverEnds
TheRideNeverEnds's picture

Fools, don't they realize all you have to do is buy an hour before the end of the day then go away?  Sell the open the next day if its higher, if not wait till noon cause it will be green by then most likely.  

If you dont want overnight risk buy an hour before the close and sell the close, 53% of the time it works every time. 

Hey we are half hour to the close right now, que the panic buying!  

Tue, 10/06/2015 - 15:54 | 6636697 Archive_file
Archive_file's picture

How is CALPERS supposed to earn 9% for its retirees if these douchbags can't?

Tue, 10/06/2015 - 16:15 | 6636791 RopeADope
RopeADope's picture

That is easy.

Allow illegal immigrant housekeepers to take care of the elderly CALPERS retirees. After the housekeepers poison them to illegally obtain title to the retirees houses CALPERS is no longer liable for the pension payments.

Win Win, Amerikan style.

Tue, 10/06/2015 - 18:46 | 6637495 falak pema
falak pema's picture

So shadow banking's princes of 2/20 scam, the HFs that ZH adored, who shorted the market in 2008 and then raped the Sovereigns of Eurozone, Japan and Brics in Ben's free money spree, are now going down the shute after having lived off the halcyon years of pre Lehman demise and further thrived in the mad years of Ben's helicopter rides of QE/Zirp fame.

The times are now achanging...ZH will have to now burn those it once claimed incarnated the free libertarian spirit; now being shown as false nosed BTFD deniers, like are the Libertarians of Congress and their troll companion Trump of Casino dump fame.

"All honourable men...as we the Libertarians, come to bury Caesar not to praise him !"

Amen brother Libertarians of false noses.

When the pendulum moves we can't tell a genuine Libertarian from a libertarian troll ; a bit like the Sunni conundrum in Syrac !

Tue, 10/06/2015 - 23:36 | 6638460 hedgiex
hedgiex's picture

In deformed often rigged markets with collapsing price discoveries, this is just creative destruction for HFs that trade with their tired cliches. Amazing that the whole investment industry is not shrinking even faster. You want fun then take your 2% to the Casinos.

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