Hedge fund closures surged in the three months to the end of September as money managers reeled from declines in commodity and equity markets, while high-yield credit spreads widened.No doubt, it's been a brutal year for hedge funds, especially those trading commodities where one of the few surviving funds sees more pain ahead. I couldn't agree more.
The number of funds liquidated climbed to 257, up from 200 in the previous three months, according to a report from Hedge Fund Research Inc. on Friday, and taking total closures in the first nine months to 674, compared with 661 during the same period last year. Cargill Inc.’s Black River Asset Management shut four units, while Armajaro Asset Management LLP also closed one of its funds.
Liquidations rose “as investor risk tolerance fell sharply, and energy commodities and equities posted sharp declines, resulting in net capital outflows, wider performance dispersion and meaningful differentiation between hedge funds,” Kenneth Heinz, president of HFR, said in a statement.
The HFRI Fund Weighted Composite Index declined by more than 4 percent in the three months through September, its biggest quarterly drop in four years, as money managers were caught out by the devaluation of the Chinese yuan in August, which pummeled markets, and as oil and gold prices slumped.
Hedge-fund assets contracted by $95 billion to $2.87 trillion during the quarter, HFR data showed, the most since the fourth quarter of 2008, when the industry lost $314.4 billion amid the global financial crisis.
The number of new hedge funds rose to 269 during the quarter, compared with 252 in the previous three months, taking the total number of funds started in 2015 to 785, the data showed.
In response to another brutal year, and perhaps sensing a wave of redemptions on the horizon, Mary Childs of the Financial Times reports that hedge funds cut fees to stem client exodus:
Many hedge funds are cutting fees and negotiating with investors to trim some of their hefty costs and avert withdrawals after another mediocre year for returns.
The industry has been shifting for several years away from its traditional model of charging 2 per cent of assets and keeping 20 per cent of profit. Some funds are already wooing customers with fees closer to 1 per cent and 15 per cent, people in the industry say.
Now pressures are mounting on a wider range of fund managers, as a crowded sector copes with a middling year. The HFRI Fund Weighted Composite index is up 0.3 per cent on the year and returned just under 3 per cent in 2014, according to Hedge Fund Research.
Management fees declined this year in every strategy except event driven, falling to a mean of 1.61 per cent from 1.69 per cent, according to JPMorgan’s Capital Introduction Group.
For performance fees, some strategies were impacted more than others, with the biggest declines in global macro, multi-strategy, commodity trading advisers and relative value.
When Sir Chris Hohn founded The Children’s Investment Fund about a decade ago, he was an outlier. His $10bn fund charges management fees as low as 1 per cent, depending on how long investors lock up their money.
He recently referred to himself as “the antithesis of the classic hedge fund,” because he waived performance fees until the fund crossed a set return hurdle for the year. But others are following his lead in an effort to attract and retain clients amid tough competition.
There are now more than 10,000 hedge funds compared with 610 in 1990, HFR data show, and there are increasing benefits for the larger operators, including lower prime broker costs and better access to company management for research.
The client base has also moved away from wealthy individuals, who were happy to take on significant risk in exchange for high returns.
Now funds depend on institutional investors such as insurers and pension schemes, who cannot afford to miss minimum return targets and are themselves under pressure from boards that oversee investments.
“Most [fund] managers prefer to haggle like rug-salesmen at a bazaar; institutional investors would rather shop at Ikea,” says Simon Ruddick, founder of consultant Albourne.I've long argued that hedge funds need to chop their fees and think it's scandalous -- yes, scandalous and even criminal!! -- that in a world of deflation and ultra low rates some hedge funds managing billions have the gall to charge any management fee at all (if they're that good, let them survive on performance fees alone).
Several big-name funds have closed to outside investors or shut entirely this year: Michael Novogratz’s $2bn fund at Fortress Investment Group shut in October after having lost 17.5 per cent in 2015, and this month BlueCrest pushed out external investors, saying 2 and 20 was “no longer a particularly profitable business”.
Carlyle’s Claren Road, facing an exodus of half its clients after losses, delayed giving some money back, and offered reduced fees if investors agreed to stay with the fund for another two years, according to people familiar with the offer.
Glenview Capital manager Larry Robbins, whose fund is down 17 per cent this year, has now offered existing clients a chance to put new money into a healthcare-focused side fund, with no fees of any kind.
Public pension schemes including Railpen, one of the UK’s largest, and PFZW, Europe’s second-largest, have whittled their hedge fund investments. They follow Calpers, the biggest US public pension, which last year cut its programme entirely, citing complexity and cost.
An index of redemption requests, run by fund administrator SS&C, shows no significant uptick, but 2016 is projected to be volatile as the US Federal Reserve raises rates while other banks do not. Market ructions may favour hedge funds over traditional mutual funds, but investors are impatient for results.
“It’s across the board — every strategy is feeling the pressure,” says Adam Taback, head of global alternative investments for the Wells Fargo Investment Institute.
“Managers have been more flexible and understanding of needing to come down on fees a bit, but they’re also more willing to do it if you’re more willing to give them a more stable capital base. It’s a trade-off.”
Emma Bewley, Connection Capital’s head of fund investment, says investors who seek fee cuts need to be clear about what they are trying to achieve.
“If you’re pushing for lower management fees to save minimal basis points on a fund where you are unhappy with performance, as a fiduciary, you have to decide whether you want to keep that fund at all.”
For their part, funds are wary of offering deals to some clients, for fear of triggering “most favoured nation” clauses that guarantee other customers automatically receive the lowest fees charged. Poor returns also mean that many fund managers are not earning performance fees at all.
Still, the trend towards lower fees is not universal. The biggest and most popular hedge funds, including Millennium, Renaissance Technologies, Two Sigma, PDT Partners, and Citadel are not negotiating; they do not need to.
“No one’s complaining about the fees for the ones who are making money,” says Bob Jain, Credit Suisse’s global head of asset management. “You have to charge for what you’re offering.”
Of course, the truth is that it's always the funds that are struggling that offer to reduce their fees. When I discussed how some funds are investing in battered bonds through closed-end funds, I referred to how Boaz Weinstein's Saba Capital is finally doing the right thing, offering investors great terms, including an 8% hurdle rate before his fund starts collecting fees.
Other hedge funds don't need to lower fees or offer hurdle rates because they're outperforming their peers and delivering stellar results. Lawrence Delevingne of Reuters reports, Big losers mask net gains in hedge fund assets:
Hedge funds have had a lousy 2015 on average, but investors are little fazed by the meager returns.What else is new? Institutional clients are chasing after the hottest hedge funds and while some will continue delivering great returns, others are going to sorely disappoint investors.
The funds globally have taken in more than $45 billion of new money from clients this year, despite losing more than $100 billion on bad market bets and frequently reporting gains near zero.
Pension funds, endowments, wealthy individuals and other investors are not giving up, and instead are looking for funds that will provide better returns, or help cushion their portfolios from losses.
Unsurprisingly, fund managers that have performed well this year, including Millennium Management and Two Sigma, have attracted more money. Each has returned more than 10 percent in 2015, compared with gains of 0.3 percent for hedge funds on average, according to industry data tracker Hedge Fund Research. In turn, investors have poured billions of dollars into each, people with knowledge of the funds told Reuters.
But those gains belie asset declines elsewhere: Funds managed by P. Schoenfeld Asset Management, Litespeed Partners, JANA Partners, Perry Capital, Brevan Howard Asset Management, Och-Ziff Capital Management Group and Atlantic Investment Management have reported losses or meager gains year to date, apparently spurring investors to take money out, according to asset and performance information seen by Reuters.
"Without question, there have been some pretty sizeable losers this year,” said Rick Teisch, who heads up a group that picks hedge funds for institutional investors at Principal Global Investors in New York.
“There appears to be a rotation out of these weaker performers and into stronger ones. That's a tough game to play, as many of this year's losers have been among the strongest performers in years past.”
Growth of hedge fund assets has been relatively steady for decades. Investors added more money every year from 1995 to 2007, when assets reached $1.8 trillion before the financial crisis, according to HFR. Investors pulled money in 2008 and 2009, only to return the following year. Total hedge fund assets now stand at nearly $3 trillion.
Managers that Reuters reached out to either did not respond to requests for comment or would not speak on the record.
EVENT DRIVEN LOSSES
Many of the funds experiencing big client withdrawals are "event driven," meaning they bet on acquisitions, restructurings, dividend changes and other major corporate actions. It has been a tough year for these funds thanks to a series of popular wagers that went wrong, including ones on drug company Valeant Pharmaceuticals, whose shares have fallen more than 55 percent since August after questions arose about its accounting and drug pricing practices.
Event-driven hedge funds globally are on average down about 2.2 percent for the year through November, according to data tracked by HedgeFund Intelligence.
At Peter Schoenfeld’s PSAM, for example, assets under management have fallen nearly 25 percent to $2.8 billion, from $3.7 billion in January, according to a person familiar with the situation. That drop is much higher than the investment declines in its funds, suggesting that investors are taking their money out. PSAM's main fund, PSAM World Arb Partners, is down about 6 percent this year through November.
Another event-driven manager, Jamie Zimmerman’s Litespeed, has seen its overall assets decline by about 40 percent this year, to $1.93 billion in October from $3.24 billion around the new year, according to public filings and investor information seen by Reuters. Litespeed’s main Partners fund is down about 9 percent in 2015 through November, the second consecutive negative year and third overall since launching in 2000.
JANA, an event-driven manager led by Barry Rosenstein and best known for corporate activism, faces a more than 9 percent decline in overall assets to $9.9 billion at yearend from $10.9 billion as of Nov. 30, according to investor information seen by Reuters. Its largest fund, JANA Partners, is down an estimated 6.3 percent for 2015 through November.
A final example is Richard Perry’s Perry Capital, whose overall assets have fallen nearly 22 percent to about $7.9 billion as of Nov. 30, from $10.1 billion at yearend 2014, according to public filings and investor information seen by Reuters. Its International fund is down about 9.7 percent for 2015 through November.
“It’s definitely been a tough year for event,” said Jonathan Lubert, managing member of JL Squared Group, an investment adviser that allocates to hedge funds on behalf clients. “Given high volatility and underperformance, it wouldn’t be surprising to see even more outflows in 2016.”
OTHER MAJOR WITHDRAWALS
Capital at Alan Howard’s Brevan Howard is down nearly 11 percent to $24.8 billion despite small gains by its main multi-strategy funds this year through November, according to information obtained by Reuters.
Assets at publicly traded Och-Ziff, led by Dan Och, have fallen about 6 percent from yearend to $44.6 billion as of Dec. 1, according to public filings. That is also in spite of relatively positive performance by its hedge funds for the year, the filings show. Investors took out $4.18 billion from Och-Ziff’s multi-strategy hedge funds over the first nine months of the year, according to another filing. When inflows into credit and real estate funds are included, overall assets fell $1.71 billion this year through September.
A last example is Alexander Roepers’ Atlantic, whose assets have fallen nearly 29 percent since late February, to $1.5 billion, according to information obtained by Reuters. Its largest fund, which focuses on bets that stocks will appreciate in value, is down nearly 15 percent in 2015 through November. Smaller European and Asian focused funds are up between 11 percent and 21 percent for the year.
SOME BIG WINNERS
Predictably, hedge funds with strong performance had more money come in.
Israel Englander’s Millennium, for example, is up nearly 11 percent this year through November in its multi-strategy International fund, according to performance obtained by Reuters. Assets have risen nearly 26 percent from March to $34 billion as of Dec. 1.
Two Sigma, the data and technology-driven investment firm led by David Siegel and John Overdeck, has produced positive returns of 13 percent and 14.5 percent in two of its funds through November, according to return information see by Reuters. Firm assets are up more than 29 percent to $31 billion year to date as of Nov. 30.
And while most hedge funds are hurting, others are partying it up. Reuters reports, Katy Perry and Andrea Bocelli; Hedge funds party despite losses:
Hedge fund managers faced a tricky question this holiday season: how to thank employees but not offend disappointed clients.I understand, Katy Perry is a sight for sore eyes and Andrea Bocelli is music to my ears. It's hard to blame these overpaid hedge fund hot shots for splurging, especially Ken Griffin, the new king of hedge funds who just went through a brutal divorce which exposed he clips $68 million a month after taxes.
Despite a year of heavy losses for some in the industry, anecdotal evidence suggests holiday traditions were upheld and, in some cases, embellished, with guest appearances from pop star Katy Perry, acrobatic entertainers and at least one weekend sojourn to Florida as just some of the treats on offer.
"It's a very difficult and real balancing act," said Adam Herz, who specializes in hedge fund recruiting at Westwood Partners. "You want to recognize people for working hard even without bonuses and at the same time not offend clients when you may have lost money and taken fees."
Sliding commodity prices, a blow out in junk bonds and dramatic sell-offs in sectors such as healthcare have made 2015 one of the worst on record for the hedge fund industry. The Absolute Return Composite Index, which measures Americas-based hedge funds, is up just 0.66 percent for the year through November, the third worst performance since tracking began in 1998.
Despite the bruising year, employees of David Einhorn's Greenlight Capital were treated to a weekend at the Naples Grand Beach Resort in southern Florida this month, according to people familiar with the situation. The firm's main hedge fund lost nearly 21 percent in the first 11 months of the year, but an offsite trip from New York is an annual tradition.
John Paulson's epinonimous hedge fund firm held its holiday party at PH-D, a slick rooftop lounge on the top of the Dream Downtown hotel in Manhattan, according to a person familiar with the matter. The event venue in 2014 was the same. Many of Paulson's funds have lost money this year.
Mike Harris' Campbell, where investment performance has been mixed, has continued its holiday traditions this year. One is hosting a party for employees and their families, including a Santa Claus impersonator who hands out presents paid for by the firm, according to Adam Tremper, Campbell's marketing director.
Other traditions that the Baltimore-based firm plans to maintain include an offsite holiday event next month and apparel gifts; this year employees got a soft-shell winter jacket branded with the company logo.
"Campbell generally does a little extra for the employees around Christmas," Tremper told Reuters in an email.
Other firms weren't shy to celebrate major milestones.
Ken Griffin's Citadel marked its 25th anniversary with major parties last month. One, in its hometown of Chicago, was a black tie affair featuring singer Perry backed by costumed dancers and an elaborate lighting display, according to video clips of the event posted online. Another, in New York, featured band Maroon 5 and violinists suspended by strings. Citadel's main hedge funds have again performed well this year and the firm now manages a record $25 billion.
Viking, Andreas Halvorsen's Greenwich, Connecticut-based firm, had an anniversary party for employees at the Museum of Natural History in New York, according to a person familiar with the situation. The October event featured dinner and Cirque du Soleil-style performers. Viking, founded in 1999, now manages more than $30 billion, making it one of the largest private fund managers in the world. Its main hedge fund was up about 4 percent for the year through September, according to a report in hedge fund news provider Alpha.
Other holiday parties, according to people with knowledge of them, included Fortress Investment Group hosting employees at high-end event space Gotham Hall in New York, Tudor Investment Corp. gathering staffers at The Pierre, a Manhattan luxury hotel, and Whitebox Advisors throwing an annual event near its Minneapolis headquarters.
Spokesman for Citadel, Viking, Fortress and Tudor declined to comment or did not respond to a request.
SkyBridge Capital, the hedge fund investment firm led by Anthony Scaramucci, held a relatively low-key dinner event for staffers at the Manhattan restaurant he co-owns, Hunt & Fish Club. SkyBridge has been known to throw major parties at its annual "SALT" investment conference in Las Vegas, Nevada and at the World Economic Forum in Davos, Switzerland, among others.
The firm's fund of hedge fund portfolios have lost a small amount of money this year, but Scaramucci couldn't resist one flourish at the New York dinner: star singer Andrea Bocelli. The blind tenor, a personal friend of the SkyBridge founder, was in town for a concert at Madison Square Garden and Scaramucci invited him and his wife to the party as guests, according to a familiar with the situation.
Bocelli came and, according to the person, asked if there was a piano. Wearing sunglasses and a scarf, he was soon belting out Ave Maria, a traditional Christmas song that references a prayer to the Virgin Mary.
Nonetheless, King Ken should show a lot more respect to Illinois and other states' public school teachers and civil servants which have made him outrageously rich. But I agree with him, the Greek pension disease has spread to Illinois and many other states (I just don't agree with the asinine and shortsighted solutions these wealthy interest groups are promoting).
One hedge fund hotshot who won't be partying it up this holiday season is the controversial Turing Pharmaceuticals CEO Martin Shkreli. He resigned a day after he was arrested by the FBI amid a federal investigation involving his former hedge fund and a pharmaceutical company he previously headed.
Below, a picture of Shkreli being taken into custody in New York City after the securities probe. The FBI indicted him on fraud charges not on manipulating drug prices (this picture is priceless; wish I was there to see the little punk's face when they barged in and read him his rights):
On behalf of all hard working decent people who were tired of listening to this arrogant, pathetic excuse of a "hedge fund manager," let me thank the FBI and wish all the men and women who worked hard on this case Happy Holidays and a Happy New Year!
But remember, just because you caught one hedge fund cockroach, doesn't mean there aren't others hiding in their Manhattan offices. They're just smarter and keep a much lower profile than this idiot.