Closing the book on 2018 couldn't come fast enough for the hedge fund industry, which has had a truly abysmal year, and which saw some quite notable casualties in the past 12 months.
This morning we reported the latest woes to beset Swiss multi-billion fund manager GAM Holdings, which after a series of internal scandals and underperformance, was hit with a record 4.2 billion Swiss francs in outflows in just the past two months, while quant fund losses and asset writedowns hammered total AUM which tumbled by over 24 billion Swiss francs, from CHF 84.4BN as of Jun 30 to just CHF 60.8BN as of Nov 30.
The good news is that while GAM may be suffering from a terminal redemption flight, it is still around to fight another day which is more than some other hedge funds can say.
Overnight, Bloomberg also reported that Philippe Jabre became the latest hedge fund manager to throw in the towel, when he announced he was returning money to investors after an "especially challenging" year, adding to the growing list of hedge-fund veterans giving up on an industry where money-making opportunities have dwindled as a result of the central bank take over of "markets.".
The Geneva-based Jabre Capital Partners SA is returning client money in the three funds personally managed by Jabre, said Mark Cecil, one of the firm’s founding partners. The remaining two funds, one focused on emerging markets and the other on European credit, will keep operating with outside money, he said. Jabre, the founder and chief investment officer of his namesake firm, is selling positions in a “disciplined manner” and intends to return most of the proceeds by February, he wrote in an investor newsletter dated Dec. 12 and obtained by Bloomberg News. Jabre Capital managed about $1.2 billion of assets as of April with more than 40 employees.
“In previous periods, weakness created opportunities but as we survey the outlook for 2019, we are concerned that we don’t see those opportunities,” Jabre wrote in the letter. “Both the political and economic outlooks remain confused and without clear direction.”
In his letter to investors, Jabre, now in his late 50s, also said that “financial markets have significantly evolved over the last decade driven by new technologies and the market itself is becoming more difficult to anticipate as traditional participants are imperceptibly replaced by computerized models.”
Another hedge fund which is ruing the takeover of capital markets by central banks and vacuum tubes, and likely won't be around much longer, is Convexity Capital Management, the once iconic hedge fund that was spun out of Harvard University’s endowment in 2005, and has seen its assets fall by almost half in the past year. AUM at the fund overseen by Jack Meyer collapsed to just $1.6 billion at the end of November, according to Bloomberg. That’s down from about $3 billion last year and a peak of $15 billion in 2013 as the fund - like virtually all of its peers - has struggled amid the low-rate environment.
Paradoxically, Convexity saw aggressive redemptions even as it outperformed the majority of its peers as rising interest rates helped lift the fund’s performance in 2018. The Boston-based fund performed as much as 3.7% better than benchmarks through November. It trailed those points of reference by about 1.8% in the first half of last year.
Which begs the question: are the worst, most underperforming hedge funds quietly gating their clients, who are then forced to redeem funds at the more successful asset managers?
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While Jabre’s decision to return capital from three of his hedge funds rocked the industry this week, closures have been a key theme of 2018. Indeed, the $3 trillion market is shrinking by number of funds as veterans who survived several business cycles throw in the towel. Money-making opportunities have dwindled with the downturn in stocks, while higher barriers to entry from regulation make it harder for new blood to come in.
But the biggest problem is also the simplest one: nobody really knows how to many money consistently in the current "market" and so many are either converting to family offices as they return outside money, or simply shut down.
This year has been an exceptionally tough one for hedge funds as asset prices tanked and volatility - usually a friend for money managers seeking benchmark-beating returns, except when it arrives with a vengeance - returned after a period of calm. Wide price swings, a waning bull market and rising interest rates were seen as the elixir the $3.2 trillion industry needed to overcome years of subpar performance. Instead, many firms got pummeled in last month’s market swoon and are headed for their worst year since 2011.
As Bloomberg reminds us, one such fund is Jon Jacobson’s $12.1 billion Highfields Capital Management, which recently announced it would return client money after two decades, joining other well-known operators including Richard Perry’s namesake company, Eric Mindich’s Eton Park Capital Management LP and John Griffin’s Blue Ridge Capital LLC, which have all exited the industry over the past two years. Leon Cooperman, meanwhile, plans to convert his firm into a family office at the end of the year.
In total, an estimated 174 hedge funds were liquidated in the third quarter globally, outstripping new starts by 30, data from Hedge Fund Research Inc. show.
As a result, the $3 trillion market is shrinking by number of funds as veterans who survived several business cycles throw in the towel. Money-making opportunities have dwindled with the downturn in stocks, while higher barriers to entry from regulation make it harder for new blood to come in. According to a report from Eurekahedge, closures have outnumbered launches for the third year running: 580 funds decided to shut as of Dec. 3, compared with 552 openings.
Separately, data from Hedge Fund Research shows that there have been the fewest hedge-fund launches so far this year since 2000. This would be the 7th year in a which the total number of hedge fund launches has declined, and at only 450 YTD, would be the worst year for hedge funds since 2000.
No matter how one slices the data however, the $3 trillion market is shrinking by number of funds as veterans who survived several business cycles throw in the towel. Below is a partial list of some of the more prominent firms and funds that closed or turned into family offices (via Bloomberg):