Why $1.5 Billion Nevsky Capital Is Shutting Down: The Full Letter

Tyler Durden's picture

As noted moments ago, the iconic $1.5 billion Nevsky Capital is calling it quits. What is surprising, is that unlike some "one hit wonder" hedge fund wannabe, Nevsky is actually a brand name in the hedge fund community, as demonstrated by the following performance charts.


And yet, despite its sterling performance, the fund is liquidating for all intents and purposes and returning outside money. Here is the full reason why, from the December letter to clients:

* * *

Why have Nevsky Capital decided to cease managing the Nevsky Fund?

The decision to stop managing the Fund, after just over fifteen years, has been a very difficult one. This decision has been driven by a growing recent awareness that certain features of the current market environment, which we believe might persist for a considerable period of time, are inconsistent with the achievement of our goal of producing satisfactory risk adjusted absolute returns for you, our clients.

Over our twenty-one year investment career we have always invested using a broadly unchanged process. This process marries the top down forecasting of key macro-economic variables with the bottom up forecasting of company earnings; initially just in Eastern Europe, then across the Emerging World and finally on a global basis from 2003 onwards.

For this process to work we have consistently needed the following criteria to be met:

  • Access to transparent and truthfully compiled data at both a macro and a company specific level, which is made available on a timely basis to all market participants. This allows us to construct and maintain detailed top down economic forecasts and bottom up company models.
  • Logical decision making by macro-economic policy makers.
  • An ability to achieve a clear understanding of the positioning of other investors in the market so as to be able to come to a view as to what is ‘in the price’ and what is ‘fair value’.
  • A reasonable level of divergence in equity prices between different geographies and sectors and the existence of constantly evolving, but logical, inter-relationships between these different asset classes.
  • Manageable ‘fat tail risk’
  • A reasonable spread of uncorrelated potential investments across time zones.

Unfortunately, global trends over the past couple of years have begun to militate against these pre-conditions for successful fundamental investing. Namely:

Data quality has deteriorated

  • Data releases have become much less transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever increasing importance of China and India. China is the world’s second largest economy, but already much larger than the US in a broad swathe of sectors. India will be the world’s third largest economy within a decade. Unfortunately their rise is increasing the global cost of capital because an ever growing share of the most important data they produce is simply not credible. Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe.
  • At a micro level corporates have also responded to greater market scrutiny since the GFC to disclose less not more, on the basis that the less they reveal the less often they can be proved wrong by regulators, investors or law courts. This means the cost of capital relating to holding large company specific exposures has risen as the ‘headline’ risk of being proved wrong with regard our earnings projections is now commensurately higher.

The transparency of decision making has also declined

Assuming we can obtain trustworthy data we then apply logic to produce our forecasts. The validity of this process becomes questionable if economic policy makers do not themselves apply economic logic and in a transparent manner. Obviously we accept politics can trump economics and political analysis has always been a very big part of our process, but surely never has so much of the world been governed by leaders where the logic of that peculiarly parochial yet multi headed beast – nationalism - trumps all (China, India, Russia, Turkey, South Africa, Malaysia etc. etc.). Almost by definition the path of logic within nationalism is difficult for ‘outsiders’ to follow with any confidence, leading to highly unpredictable and potentially dysfunctional modelling outcomes.

  • At the start of our careers we spent much time being forced to try and decipher the indecipherable – the moods and subsequent decisions of Boris Yeltsin. This ‘Kremlinology’ was truly the definition of banging your head against a proverbial brick wall. Fortunately this and similar masochistic macro-analytical tasks then gave way to the logical joy of the Washington Consensus which was adopted almost without exception across the Emerging World following the multiple devaluation crises in the mid-1990’s. Unfortunately though the Washington Consensus, having been severely wounded by the GFC is now stone dead. Kremlinology, with an additional nationalist twist, is back – and it is now the norm, not the exception, for most countries in the Emerging World. We are not convinced that knowingly continuing to bang our heads against these newly erected brick walls would be a sensible decision.
  • Equity markets are also less transparent
  • The unintended consequences of those new regulations introduced as a result of the GFC, which have largely removed the market making role of investment banks from global equity markets, has coincided with the recent massive increase in market share of both ‘dumb’ index funds and ‘black box’ algorithmic funds to create a situation where equity market volumes have fallen sharply and individual stock volatility has risen dramatically. An initially badly executed order can now inadvertently create a price trend (because there is no longer the cushion to price moves which was in the past provided by market maker inventories) that, as algorithmic funds feast on it, can create a market event even if the initial order was a simple innocent error. Truly – to mix metaphors – butterflies flapping their wings now regularly create hurricanes that stop out fundamentally driven investors who cannot remain solvent longer than the market can remain irrational.
  • In such a world dominated by index and algorithmic funds historically logical correlations between different asset classes can remain in place long after they have ceased to be logical. More butterflies.
  • Index and algorithmic fund manoeuvrings also make it very hard to ascertain what the markets ‘clean’ positioning is at any given time. All of which pushes up the cost of capital.

Fat tail risk has also increased

  • Less disclosure means more event risk, while thin volumes coupled with trend seeking algorithmic trading mean the markets responses to such events have become much more violent. Instant downside risk on both longs and shorts has become immeasurably larger as a result.

Asia is becoming an increasingly dominant time zone

  • If this wasn’t enough, the growing dominance of Asia, because of the growth of China and India and (happily) the resuscitation of Japan as a viable investment destination by Abenomics, also makes operating our all inclusive global equity process ever more difficult from a time management perspective. With the world ever more interlinked economically, gone are the days when one time zone (of Asia/Europe/the US) could be neglected at any given time to the benefit of the others. This has forced us, over the past two years, to resume the brutal hours we stepped back from in 2010, but which we now think are both unavoidable going forward and unsustainable.

In summary, all of the above factors now mean that it is more difficult than ever before for us to accurately forecast macroeconomic and corporate variables. This pushes up our cost of capital and substantially increases the risk of us suffering substantial capital loss on individual positions either because of a forecast error or simply because we could be caught up in an erroneous market trend, which could then persist for far longer than we could take the pain. This has made what we enjoy most – the thrill of analysing economic data releases and company accounts – no longer enjoyable. It is therefore time to accept that what we have done has worked brilliantly for twenty years but does not work anymore and move on. We are confident our process will eventually work again – for the laws of economics will never be repealed – but for now they are suspended and may be for some time; an indefinite period involving indeterminate levels of risk during which we think it would be wrong for us to be the stewards of your money.

The final reason we have decided to cease managing the Fund is our increasing concern with regard the health of the global economic cycle, which we describe in detail in section 3 (below). This view is relevant because, in our experience, periods of economic pressure and high market volatility will tend to make the issues that are already making it more difficult for our process to work (which we have discussed above) such as poor disclosure, the triumph of nationalism over economic logic, low market liquidity and heightened event risk, worse not better, thus potentially leading to a further deterioration in our risk adjusted returns.

* * *

The full letter, which includes Martin Taylor's investment outlook, is below.

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Kaiser Sousa's picture

Dow futures were down over 100 points until 1 hour left before the open....

now green for the start....


ps: funny how they didnt mention how the USgovt. data is all bullshit just like everybody elses....whatever man.

Cautiously Pessimistic's picture

This market bounce has been brought to you by the kind folks at the FED and their hard working, dedicated PPT.  Serving America since 1913!


Mr.Sono's picture

That and China throwing $20b into there markets. What a fucking joke to keep this economy alive.

new game's picture

all ponzi schemes end the same way, they run out of new money to keep the first dupes happy.

will the fed run out of money? that is the 4.5 trillion(and growing) question. and what will the value be of said fiat funny ponzi dollas be? ha, pretty fucking simple, get out and divest to safer assests, like, hmmmmm, real estate? lead? gold? a business? seems as though the ponzi has limited the logical choices. fucken-eh, do we live in a fucked up world brought to you by the ptb?

PT's picture

How many's that then?  Something tells me we should keep track of how many of these funds shut down.  Reminds me of the suspicious banker deaths of 2013.  Speaking of which, what happened to all those mysterious banker deaths?  Did it just, ummm, ahem, die out?

The9thDoctor's picture

"for the laws of economics will never be repealed – but for now they are suspended and may be for some time; an indefinite period involving indeterminate levels of risk during which we think it would be wrong for us to be the stewards of your money."

I respect that they threw in the towel at the right time.  The joke is that there are no "laws" of economics, just mere theories.  Not only that, these theories are horrendously obsolete as they have agrarian age or early industrial age variables as inputs.

That's why I laugh at economics.  Despite typing this post on the world wide web from my office computer, which would have been science fiction fantasy when I was a child, we still have economists peddling theories that haven't been relavant since Detroit was the industrial capital of the world.

We are in the information age, so we have to think in terms related to information at the speed of now.

I can't believe that we still have debates on socialism, capitalism, fascism and communism when all of these -isms are from a time when the agrarian age farmers were transitioning into urban centers to work on factory floors.  Science and technology are having an exponential rise, but yet we still cling to a 1913 central bank model that was already obsolete when the 100,000 workers at the Rogue plant were replaced by primitive robots.

Of course housing bubbles and Nasdaq bubbles have the can being kicked down the road, then there are useless unwinnable wars to use chewing gum and bailing wire to prop up a horrendously antiquated economic model.  Then we talk about unemployment figures being too high or being "cooked" when the real debate should be having employment as an antique concept.  I don't know who in their right mind would want a job.  A job is the most authoritarian model we have in a so-called democratic society (I prefer to use the term Republic but you get the idea)  Unemployment being 100% should be a goal so we are liberated from mundane tasks that can be replaced by robots and AI.

Hats off to Max Keiser for having guests on his show who are at least tackling the primitive economic models that we are stuck with despite us being in the 21st Century.

UncleChopChop's picture

upvote for both the post, and my favorite doctor (ecclesition).. although for some reason the isn't letting me upvote

daveO's picture

See the IRS for your answer. The state is still getting most of it's revenue thru income taxes. Then, it upped the ante with ObamaCare penalties that are also collected with the IRS. Just last week CONgress gave the IRS authority to seize your passport for owing over $50K in taxes. Tax Slaves matter!

Rabbi Chaim Cohen's picture

I understand and mostly agree. Today science is diluted and contaminated. Western culture erroneously considers so much of what is really pseudo-science hard science. It has always defined the disciplines of human behaviors such as Psychology, Economics, Sociology, and has infected even Quantum Physics and many fields of Medicine. We have so much hubris and dogma packed into every scientific discipline that we have crippled ourselves as not to damage the fragile reputations of the top acolytes who carry the torch of their chosen "science". Today most of these elites are blindly clinging to the current models in their fields in the face of radical new information. Most of the time the new information would do away with the status quo (and often their their precious contributions to it) in favor of new ways that actually better promise for progress.

However, that doesn't change the functional "laws of economics" I say they DO exist, as long as WE exist. The nature of mankind and how we pursue and protect our wealth hasn't changed since we began to live and trade with one another. However, often times somewhere on the long timeline of an empire someone gains so much of an unsavory advantage as to take control over the key parts of the economic system, at which time they begin to simply make up self-serving rules or obfuscations as they go along. This is no different than tilting a table under a "ramp and marble experiment" in physics. If you can't see that the table is tilted, you'd say, for example, that a marble rolled uphill, appearing to have violated a law of Newtonian Physics. The law still exists, but artificial conditions have allowed the appearance of unexpected results.

We are in the collapse/decay phase of a decadent empire it will take a massive paradigm shift, but things will fall back in line some day once the deck is shuffled sufficiently. But that is another discussion...

PaperTaperFakerCaper's picture


re: "law" and "theory" ...  Please don't impune the foundations of language to suit your needs.  Get their definitions straight first.  If you want a different model of society, that's not too hard to state.  Just do it. 

I see nothing to uproot the use of phrases "laws (or theories) of economics" since pure markets do have properties that are modeled well by mathematics.  But I tend to think the academics offer the hypotheses of economics lately, masquerading as part of law.  The result, yes, is the implementations that pollute incentives are self-destructing.  Lastly, it was organized employment and entrepreneurship that gave us perpetuating markets, that gave us ultimately the technology you worship (apparently).  Geez, are you inhaling something forbidden?  

From wikipedia (a decent summary) ...

A theory is not the same as a hypothesis. A theory provides an explanatory framework for some observation, and from the assumptions of the explanation follows a number of possible hypotheses that can be tested in order to provide support for, or challenge, the theory.  

A theory can be ...

 * normative (or prescriptive), meaning a postulation about what ought to be. It provides "goals, norms, and standards". 

 * a body of knowledge, which may or may not be associated with particular explanatory models. To theorize is to develop this body of knowledge.

Scientific theories are the most reliable, rigorous, and comprehensive form of scientific knowledge, in contrast to more common 

uses of the word "theory" that imply that something is unproven or speculative (which is better characterized by the word 

'hypothesis'). Scientific theories are distinguished from hypotheses, which are individual empirically testable conjectures, and 

scientific laws, which are descriptive accounts of how nature will behave under certain conditions.  


daveO's picture

This tells me that the banks are covered with enough reserves to carry them thru the coming crash and that the FED is finished with QE counterfeiting. The funds, being more connected than me, see no more QE bailouts coming. The SHTF before election day.

asteroids's picture

Look folks, governent/central bank intervention is "moral hazard". It eventually ends in tears. Just because everyone does it doesn't mean its right. The FED/PPT can move the markets any direction they want. They just print and burn money as they see fit. The bright folks at Nevsky (and others) recognise they can't make money safely in this kind of environment, so they take their ball and bat and leave.

KnuckleDragger-X's picture

When you look around the casino and notice all the whales cashing out and sauntering towards the door, it might time to re-evaluate your bets......

cheech_wizard's picture

For a brief moment I thought you wrote "Serfing America since 1913!"

remain calm's picture

Comical might be your word to describe, mine is criminal.

JRobby's picture

Do not expect prosecution to be initiated by those who swore an oath and are PAID to prosecute.

First week of January which will become known as "gun control week" to some, "meltdown 2016" to others who don't seem to see that "gun control week" is the larger story. Rigged markets are old news.


Flagit's picture



NoVa's picture

UNLESS, you burned 127 acres of public land to protect your land from fire risk arising out of the public land ...

Calmyourself's picture

Obviously terrorist activity, burn em, burn em at the stake..

ebworthen's picture

"A reasonable spread of uncorrelated potential investments across time zones."

When the machines can buy/sell in less than the blink-of-an-eye and there are no "investments" because all the printing and bailouts have made money and labor meaningless - how can anyone be a steward of anything?

new game's picture

eb, labor is the key word. labor is time. time is the one thing in life that is the most valuable. ask anyone dying...

they steal our time by making it of less value viathe fiat dolla ponzi schem. they skim inordinate amounts up front which easily overcomes the devaluation. simply put they are ripping the majority off of their labor or time spent earning a living.

and when will enough people understand this to demand change? i feel so much in a super minority talking to dumbasses that are just dumb enough to not understand a system just complicated enough to loose the majority when the words; fed, economics, keynsian, ect. are uttered.

Nick Jihad's picture

People who vote for "Robin Hood" politics, expect the system to engage in theft, and the gummit checks are there to persuade them that they are getting their share of the loot.

PaperTaperFakerCaper's picture

Yeah baby.  Well said.  And I'd add:  Persuade them the gubbamint on their side and are the good guys and should be voted for.  And it all makes sense, and it's just. 

Yeah... The FreeShitArmy comin' atcha.  They comin' down yer block.  Real soon.  When they comes, it ain't gonna be fer a social visit.  No.  You might have some food, but don't matta.  First they gonna kill you.  Then they gonna eatcha.  

PaperTaperFakerCaper's picture

new game --- Now, now.  You are not alone.  There, there.  Feeling better?  

Yer just part of a diluted mass.  So you "see dumb people everywhere".  Handle it. 

Son of Captain Nemo's picture

Comical might be your word to describe, mine is criminal.

And the question remains the same after the criminality in our government and the Country went off the rails after 9/11...

Will we go isolationist with a Civil War to attempt a "fix" which of course would be the most noble thing we could do for the rest of humanity given what we've already done everywhere else?  Or do we let Russia and China do the honors on the rest of the fried pill heads in the U.S. Armed Forces and call it a day for everyone else that shouldn't be involved?...

I think the rest of the World knows what  the U.S. mindset isfrom the politician in Washington to the banker in Manhattan all the way down to to beer drinking loser on the 50 yard line that can't afford his post season football tickets on "credit" let alone the mortgage on his house or the 7 year car loan he can no longer sustain!

Murika!  Fuck Yeah!!!

BullyBearish's picture

Fresh shorts MUST be punished as they stairstep this necrotic pig down...anybody assuming the "market" is fair, even when they're postulating it is not being manipulated, is delusional...it will always move the way the money printers want it to...it just may not be so readily apparent...

TRM's picture
  • Logical decision making by macro-economic policy makers.


I think that line covers it all. They are calling the gov and Fed illogical.

Lady Jessica's picture

So, to summarize:

1.  The data is rigged.

2.  Those in charge are behaving illogically.

3.  No one knows what fair value is anymore.

4.  Fait tail risk is no longer manageable.

5.  The things that shouldn't be expensive are, but not vice versa. 

jakesdad's picture

you left out:  "we aren't willing to spend 170 hrs/wk in rigged online poker games..."


otherwise pretty spot on!  ;-)

Max Cynical's picture

What does this analysis portend for the typical financial planner/money manager? I have close friends in this space...they're all quite positive about the future of "investing".

Spigot's picture

They are going to get fucked when the rigging gives out, that is what. And so will ALL of their clients.

Hope their clients do not know their home addresses or these managers have hidy holes to go to when the inevitable happens...

Nick Jihad's picture

Investing gets simpler. What this letter says, is that it is no longer possible to "beat the market" using things like research and analysis. So forget trading the equity markets - the HFT guys will eat you alive. Buy low-cost index funds, and hold them over the long term.

Ghordius's picture

excellent summary, with one thing missing: it's a hedge fund. fuelled by derivatives of the kind that used to be forbidden, later allowed and now... slightly regulated

I know that many here see them as the "good guys" because indeed they do have some skin in the game

but they are generally speaking strongly leveraged - courtesy of megabanks - and function on the basis of what I call "squid blood", i.e. derivatives

them giving up one after the other gives me the picture of tentacles drying up

nuubee's picture

But this one was only $1.5 billion. That sounds more like a surface mole drying up than a real tentacle. Lots of bigger pieces of the squid out there still moving around.

Spigot's picture

It's hot money fer sure. No pity. They did well in a known environment. Good of them to admit they are unable to perform a value function for their clients. That is honest.

What is interesting to me is all they did not say or the way they said what they did.

Every time one of these funds closes I take it that they are sure the casino will burn pretty soon and they are getting out before the doors get locked. Best out a bit early, IMO.

Watch what the smart, experienced rats are doing to a clue of what the future holds.

Spungo's picture

On the other hand, Kaputski Capital is still going strong.

DownWithYogaPants's picture

You be Geeyus "Kaputski Capital"

JRobby's picture

The letter seems to say it all: It's not a market, it's a farce.

Black box algo driven hacked shit

NoDebt's picture

Short version:  There are no "markets" any more.

unplugged's picture

wouldn't it just be easier, quicker, and straight to the point to say:

"criminals have taken over - we are getting out before they steal the funds - thanks"

JRobby's picture

before? (Laugh Track Deafening)

alus's picture

Domino effect will be increasing till the moment - one of big players will announce the problems. It has to be like that - because derivative market leverage is so high, that all population of the earth would have to earn for this for 100 years to pay the debt.

2016 - the year of really big crash is comming.

JRobby's picture

"because derivative market leverage is so high"

BOOM! The great market distorter is the market destroyer.

GRDguy's picture

Absolutely.  Since THEY decide whether or not a default has occured, it's pure "heads we win, tails you lose." It's like buying insurance from a corrupt Ponzi insurance company.  You pay in, but they never pay out. Never. Like Ron White once said, "You can't fix stupid."

JRobby's picture

Clearly a planned event/scenario. That is why they shut Brooksley Born down when she wanted to regulate the derivatives markets. And Greenspan, Summers, Rubin etc. all jumped in to discredit her. Now we have financial Armageddon a few years later.