After Surging 12% In 2017, Hedge Fund Returns Profits To Clients

While the landscape for hedge funds has been increasingly dreary in recent years, with increasingly fewer able to beat their benchmark, let alone the broader market in a time when alpha creation - for most - has disappeared, there is the occasional success story. One among them is the Pharo Macro Fund, whose manager Guillaume Fonkenell said he is returning profits to investors from his $5 billion macro fund after it beat rivals this year, on concerns it is getting too big.

The Pharo Macro Fund, which won the Financial News award for Best Global Macro Hedge Fund award in 2015, and which according to Bloomberg returned 12% in the first half, will return those gains to clients on Sept. 1. Quoted by Bloomberg, Fonkenell wrote investors that "his firm told investors that the peak capacity for the trading-oriented fund was between $4 billion and $5 billion, and it stopped accepting new money three years ago."

While "returning" capital to investors is hardly new, it usually occurs due to LP demand not PM supply: some hedge funds (usually the most successful ones) do that to part of their capital when a surge in AUM triggers concern that overseeing too much money could harm returns... a very good problem to have. As Bloomberg notes, Pharo Management UK, which Fonkenell started in 2000 and manages $8.2 billion, is a macro hedge fund that focuses on emerging markets.

It’s among the firms including Glen Point Capital that have made money this year even as peers betting on broader economic trends had their worst first half since 2013.

Meanwhile, contrary to other hedge funds' laments that there are few investing opportunities available, Fonkenell begs to differ: "The opportunity set in macro emerging-market strategies continues to be unusually attractive," Fonkenell said. "Fundamentals paint a very diverse macro picture across countries. Central banks are very active. Markets are vibrant and volatile. We expect this environment to persist for a while."

Pharo’s decision to return money contrasts with well-known macro hedge funds such as Brevan Howard Asset Management and Tudor Investment Corp., which have been hurt by client redemptions after years of poor performance. That’s forced some of the firms to reduce fees and cut jobs.

Discussing Pharo, Hilmi Unver, head of ultra high net worth at Swiss money manager Notz Stucki told Bloomberg: "This is a manager who is more dedicated to producing returns than asset gathering" adding that "returning money allows them to be more flexible in their trading."

Of course, most of Pharo's peers would be perfectly delighted to just "gather assets" and collect their (declining) management fee.

Meanwhile, as Fonkenell was wondering how best to return the excess cash, most other macro hedge funds lost an average of 0.7% in the first six months after a 0.9% decline in June, based on Hedge Fund Research data. 

Sparately, Fonkenell’s Pharo Gaia Fund, which manages about $2.7 billion and returned 16.6 percent this year through June, will take in another $1 billion from clients in September, he said.