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.
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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 [18]:
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 [19] 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 [20]:
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 [21]...
