Why $1.5 Billion Nevsky Capital Is Shutting Down: The Full Letter
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:
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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.
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The full letter, which includes Martin Taylor's investment outlook, is below.
(25 votes)
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Fuck you... if you guys are going to Cheat I'm Going Home..
I think that's what he's saying..
"I'm going to take my ball and go home"
At least it's not 'I'm going to take YOUR ball and go home' - like all the others are planning. Plus your glove, bat, cleats...
Sounds about right. As my wife might say, "Its all bullshit". And if you arent prepared to be shady and deliver paper sacks of cash to the right people to get real information, then your're going to get your clocked cleaned.
"Markets"...heh. The definition of that needs updating I think. 'Price discovery' is a double entendre, and actually means that you discover that the true price of an aset or equity has no bearing on any available supporting data.
"There are no markets only manipulations" Chris Powell GATA. Made this comment at least 5 years ago and it is more true every day. How long until the market is only the Fed, the ESF, and the in the yoke Banksters? It can't be far off now...Perhaps already well beyond the majority.
Alas dear market we knew her well...
We are sooooo screwed!
The Federal Reserve's Plunge Protection Team will save the day. Keep an eye on the Fed's balance sheet and see if it goes up and if they buy more mortgage-backed securities. Theor stock market manipulation is becoming more and more obvious.
Audit the Fed !!
US Treasury's Plunge Protection Team, aka "Exchange Stabilization Fund", which is way more powerful than The FED, and prefers to work behind the curtain and let The FED get all the publicity, credit, and blame.
Janet says buy buy buy buy........ with both stumps
The camels may die and the dogs may howl, but the caravan of fraud moves onward.
Nevsky Capital? Closing down?
Pussies!
I'm in it for the long-haul. That's why I 'm with Long Term Capital.
My broker doesnt even bother sending me the statements anymore - says its too boring.. just a steady 5.5% a year ...ZZzzz.....
(And "Yes", I do appreciate that 'personal' touch - not wanting me to waste my time reading thru reams of financial-statement bullsh!t. Just goes to show - not all brokers are scum-bags ;)
actually the explanation should read: the ownership of capital producing goods that 99.9% of people can not afford to buy (and other 0.1% already have) is useless
These guys don't deserve any pity or respect. How did they make 30%+ year after year? Who rigged the markets then?
Hedge funds are a blight on our economy, what's left of it. Good riddence.
Notice they did not complain as they rode the up elevator financed SOLEY by ponzi money.
But when they can't make it return money anymore they cry foul?
This is so typical it's everyone out for themselves and no one says anything until the piss starts raining down on their own backs.
Yeah notice they praise Abenomics 'helicopter fiscal policy' as reviving jaoan? Give me a break these guys are clueless. If only the world governments would print even more money and throw it out of helicopters, maybe Nezsky could stay in business.
So we are heading for a totally captured, "Potemkin Village' economy similar to the Soviet Union. People will pretend to work and the gubmint will pretend to pay us. Healthcare will suck and we'll all wait on long lines for potatoes once WalMart goes dark.
Forward Soviet !
I grow my own potatoes, I'll sell you some at a good price if you promise not to turn me in for growing vegeatables without a license.
And it's green
and its' red
And it's gone.
test 123
market is floundering right now.....the card house appears very shaky with hard winds approaching from the east.....but the ramper squad will ramp..trade carefully
They need another '08 crash for the politcal cover to do a $2+ Trillion QE.
Nevsky Capital?
Nevsky heard of them.
blah blah blah we're too smart to understand the world now blah blah
A timely read and stroll down the memory hole like everything American that wishes to be discarded and forgotten.
http://www.henrymakow.com/us-citizens-property-collatera.html
What's the matter? Can't cheat easily any more?
and who is going to stop the criminal activity?
the SEC? the FBI? Obama? Congress? Bill Dudley (gasp)? Larry Summers? CNBC?
you could totally tell by the reaction in the MSM and inaction in the part of regulators when the book "flash boys" came out that it is all an inside job.
for 100+ years this kind of activity would have led to criminal prosecution (at some point) and would not be permitted by regulators as it is in clear breach of investment securities laws drafted in the 30s. but since 2012 the game has changed and is the only thing that allows them to keep the gig going, illegal or not.
Well, a hedge fund actually saying the obvious? What say you Hugh Hendry of Ecletica? Will you dare to be so honest or just fake it withy the rest?
I'm starting a new Hedge Fund!
Prospectus:
Exchange all investor's money for poker chips, stroll to the Roulette Wheel, spread chips out in a Fat Tail pattern, order a Vodka/Water. Wait.
rats scurrying the ship
wonder what it means?
.... They would rather quit than fight the Fraud/Fed.
It fits, make believe money for a make believe market.
Report is very careful to avoid criticism of western governments and policies...probably afraid to get sued like S&P.
No...just take the money and run. What they didn't tell you is that their "data analysis" also sees bankers and hedge fund guys getting bludgeoned with cricket bats in the near term.
Nobody that is connected to Banking/Finance industry will come out and call bullshit even after 7 years of 100% Fraud.... Really? WTF!
...And yet the market is going uppy again.
gotta commend em for acknowledging the two elephants...
"Data quality has deteriorated"
"The transparency of decision making has also declined"
So, figures don’t lie but
Liars can figure.
Facts are facts but because statistics are pliable we fear the unknown unknowns.
What we do know is the market is not a crap shoot – it is pure crap: Statistically.
Go figure!
This is bullish, right?
A couple of investment bankers decide to quit while they're ahead after 20 years, because in 2016 AD two guys in a London office can't compete with trading algorithms that don't need to sleep occasionally.
Heck, they can't even compete with Tyler for market analysis. Not much in their final report is news to anybody who reads ZH regularly.
So I fail to see who's expected to care, except Mesdames Taylor and Barnes. Now Martin and Nick will be sitting around the house all day working on their memoirs, while they wait for David Cameron to call and offer them life peerages, the wives won't be able to spend hours every afternoon cheating on their husbands.
Exactly - Take the money and run ...to the bunker. Robert Rubin, Sandy Weill, and Larry Summers have already done this 3 years ago. These guys were the catalyst and satanists behind repeal of Glass Steagal. Don't let them get away.
4 word summary:
All Markets Are Fake
But maybe they know more than we do? Could that be tidying up before the big war? I hope not.
...the laws of economics will never be repealed
that's because they don't exist asshat.
Nevsky Capital has actually done quite a good job of summarizing the current nature of world economic markets.
I particularly like the fact that they’ve highlighted several main factors as having a destabilizing effect on markets. Among those factors are inadequate disclosure, nationalism, lack of liquidity, and event risk.
The causes of those effects include constant central bank intervention, high frequency trading coupled with the use of dark pools, the use of corporate share buybacks to mask true earnings, and the suppression of prices in virtually the entire commodities sector.
Of course, central bank intervention is the greatest destabilizer of markets. True price discovery is impossible when an entity such as the Federal Reserve can set up its own trading floor and use high frequency trading and dark pools to manipulate stock indices.
No shit Sherlock. Thats what has been said on ZH for 5 years now. But thanks for participating.
Parasites are never happy.
i dono..i think trading is as hard as you make it..but.......when you manage big money and use derivatives there is more to it than just clicking buy or sell
liquidity is your best hedge!
The managers also said this:
Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don't know we don't know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.
So whats the strategy on hedgin the PPT again?