The writing was on the wall three weeks ago when we reported that iconic hedge fund Perry Capital had lost some 60% of his AUM as LPs were rushing to withdraw their money.
As we reported on September 10, citing Bloomberg, Perry Capital's assets slumped to $4 billion as of the end of August compared with $10 billion in September last year. The reason for the tremendous outflows is that Perry has posted losses of 18.4% from the beginning of 2014 through July of this year. The fund declined 2.6% in the first seven months of this year after losing 12.6% in 2015.
Curiously, as on numerous previous occasions, while Perry's losses aren't even that substantial, in a time when the S&P500 just can't go negative courtesy of central banks, LPs patience has become non-existent (however, a shocking outlier in this regard is Bill Ackman's Pershing Square, where the LPs have continued to amaze the investing community by not redeeming what's left of their assets despite one terrible investment decision after another).
What is even more notable about Perry, is that the firm had never had a losing year from its 1988 inception through 2007, when it managed $14 billion. Perry, 61, had previously worked on Goldman’s risk-arbitrage desk, which was once led by Robert Rubin, who later became U.S. Treasury secretary. The team spawned a group of hedge fund managers that included Frank Brosens, who co-founded Taconic Capital Advisors, and Eric Mindich of Eton Park Capital Management.
So it is probably not very surprising that having lost more than half his assets moments ago Bloomberg reported that Perry's flagship fund is shutting down:
- PERRY CAPITAL TO CLOSE FLAGSHIP FUND AFTER ALMOST THREE DECADES
As Bloomberg writes, Richard Perry, one of the biggest names in hedge funds, is calling it quits after 28 years.
Perry, 61, is winding down his New York-based flagship fund as the industry confronts one of the most tumultuous periods in its history. In a letter to investors Monday, he said his style of investing no longer worked.
“Although I continue to believe very strongly in our investments, process and team, the industry and market headwinds against us have been strong, and the timing for success in our positions too unpredictable,” Perry wrote in the letter.
The biggest surprise, as noted above, is that as shown in the chart below, Perry's performance was not even that poor, down just fractionally in 2016 after a drop in the mid-teens in 2015.
Bloomberg adds that the fund will return a substantial amount of its client money next month, according to the letter. Perry’s fund has been selling out of investments in recent months. In the quarter ended June 30, it had dialed back its U.S. stock investments by 40 percent, exiting positions including hospital operator HCA Holdings Inc. and pipeline company Spectra Energy Corp., according to its latest filing.
Perry Capital’s less liquid positions will be sold over the next year, or longer. Some of them, including its remaining preferred shares in Fannie Mae and Freddie Mac, “will take time, energy and capital to successfully realize an appropriate result,” Perry wrote in the letter. The core team will remain in place to aid in the liquidations and capital will be returned quarterly as transactions are completed.
"Our interests are aligned -- the Perry funds represent almost all of my liquid capital," Perry said.
* * *
The surprising announcement followed even more bad news for the hedge fund industry when earlier today the WSJ reported that one of the world's largest hedge funds, Brevan Howard, would stop charging a management fee in its flagship fund for new money from current investors.
As the WSJ added, the 0% management fee marks one of the starkest signs yet of the pressure facing hedge funds. According to people familiar with the matter, the firm told clients the 0% fee will apply to any gains on the existing money they have invested in the fund, meaning that clients’ overall management fees will trend lower if the fund makes money.
While Brevan would still charge a 20% performance fee on money invested in the fund, it is likely that this will be the next big hedge fund benchmark to see downard revisions if the unprecedented pace of outflows continues.
As a reminder, Perry Capital is among the managers including Tudor Investment Corp. and Brevan Howard Asset Management that have seen investors flee. The $2.9 trillion hedge-fund industry has come under fire this year for everything from excessive fees to lackluster returns, with investors pulling the most money since the aftermath of the global financial crisis with over $20 billion withdrawn in just June and July.