The writing for John Burbank's Passport Capital was on the wall back in August, when as we reported, in his latest letter to investors Burbank reported that at what was once a multi-billion fund, total firm assets at Passport had shrunk to just $900 million as of June 30 as a result of net outflows totaling a whopping $565 million, or a nearly 40% loss of AUM due to redemptions. The collapse in assets took place just a few months after Passport announced it was liquidating its long/short strategy in April.
And unfortunately for Burbank, just four month later, a chapter of Passport Capital's history comes to a close, because as Bloomberg reported, the fund would shutter its flagship hedge fund after returns slumped and following unprecedented redemptions. Passport - which shot to fame for its lucrative bet against subprime housing ahead of the global financial crisis - peaked at around $5 billion but lately managed a fraction of that after a double digit loss last year and further losses in 2017.
The fund’s "returns over the past two years are unacceptable and cause me to rethink how to manage money in this environment," Burbank wrote in a Dec. 11 letter to investors, the Wall Street Journal first reported overnight. Passport will continue to operate its roughly $300 million special opportunities fund, which holds some of the firm’s more successful bets on companies such as Alibaba Group Holding Ltd.
As Bloomberg reminds us, Burbank founded Passport in 2000 which was best known for its big bet on a tumble in subprime mortgages in 2006. His fund made 220% the following year, ushering in the good times - if only briefly - with Passport AUM briefly hitting a peak of $5 billion before a double-digit loss last year and more losses in 2017, as we reported previously. Total assets declined to $2.4 billion in April, then plummeted further to $900 million amid client withdrawals and after it wound down its Long-Short Strategy fund after an "incredibly disappointing 2016," Bloomberg reported earlier this year.
“You will not hear about Passport shutting down -- there is too much opportunity available to do that,” Burbank wrote, adding that the firm may announce a new area of investment in the near future.
Well, yes, hedge funds rarely want to publicize that they are closing. And yes, even as Passport the hedge fund as we know it no longer exists, the company has decided to pivot into Mike Novogratz' sandbox, and as the WSJ reports this morning, even as Burbank's hedge fund is pulling back from traditional investing and trading, it is launching a new arm that focuses only on cryptocurrencies such as bitcoin. More from the WSJ:
Despite his recent performance, Mr. Burbank’s pronouncements remain closely followed by his peers. He would become one of the more prominent major investors to go big on bitcoin and the like, along with the former Fortress Investment Group hedge-fund manager Michael Novogratz and Horizon Kinetics Chief Investment Officer Murray Stahl.
To be sure, the burly John Burbank - a Duke University graduate - is in some ways an unlikely evangelist for digital currency. As the WSJ describes him, "he made his name buying up credit default swaps ahead of the financial crisis, resulting in a more-than 200% gain for his main fund in 2007. That year, he made $370 million personally, Forbes estimated."
His predictions have mostly failed to pan out since. Passport bet big on gold mining companies in 2014, but prices dropped thereafter, and slashed its overall exposure to rising stocks in early 2015, missing out on some of the subsequent rally.
Burbank's interest in bitcoin and cryptos is hardly new, however, and was reinforced in his last investor letter in which he shared the following perspective:
We have been monitoring block chain technology and cryptocurrencies for some time. We believe this technology represents a secular change with the potential to profoundly disrupt many markets. AMD is the first position in the portfolio that has been a net beneficiary of this trend, but we expect our understanding of block chain technology’s potential to be an increasingly relevant factor in stock selection.
Burbank continued in Monday's letter:
“Technological progress and its non-linear enhancement or deflation of the biggest industries and markets in the world is my choice for what will have mattered most five years from now. I want to capture these extraordinary outcomes in new ways appropriate to the current era.”
The new cryptocurrency-focused fund’s leadership will include longtime Passport executive Seth Spalding, the WSJ said. While Passport hasn’t told prospective investors much about its strategy, but has scheduled a call for later this week to lay out more.
It is unclear if bitcoin - in addition to everything else - will also emerge as a "hail mary" pass for fading hedge fund managers desperate to attract just enough capital - through the use of buzzwords or otherwise - to stay in business for just one more lap. If Burbank is successful, watch as every other hedge fund and family office promptly launches their own [Insert Name Here] Crypto Asset Special Situations LLC.