Hedge Funds Closing Like It's 2009?
Hedge funds are shutting at a rate not seen since the financial crisis, as many managers post disappointing returns and an elite group of firms dominate money raising.
The $37 billion Brevan Howard Asset Management LLP is the latest firm to close a fund. Last week it pulled the plug on its $630 million commodity fund managed by Stephane Nicolas after it had tumbled 4.3 percent this year through the end of October, according to a person with knowledge of the firm.
In the first half of the year, 461 funds closed, Chicago-based Hedge Fund Research Inc. said. If that pace continues, it will be the worst year for closures since 2009, when there were 1,023 liquidations.
“Most hedge funds have not performed extraordinarily well,” said Stewart Massey, chief investment officer at Massey Quick & Co. in Morristown, New Jersey, which invests in the private partnerships. He expects that redemptions will hit small-and medium-sized firms this year, reducing assets to a level where “they will have to make a decision whether to carry on or not.”
Hedge funds, on average, have returned just 2 percent in 2014, their worst performance since 2011, according to data compiled by Bloomberg. Smaller funds have struggled to grow as institutional investors flocked to the biggest players. In the first half of 2014, 10 firms including Citadel LLC and Millennium Management LLC accounted for about a third of the $57 billion that came into the industry.
Interest Rates
Many of the closures have been among macro funds, which have returned less than 1 percent this year, on average, according to Bloomberg data. Macro managers have complained that in an environment of low interest rates and muted swings in prices, it’s difficult to make money.
Josh Berkowitz’s Woodbine Capital Advisors LP said earlier this year that it was closing down after assets dwindled to $400 million from a peak of $3 billion four years ago. Keith Anderson’s Anderson Global Macro LLC and Kingsguard Advisors LP, started by two former Goldman Sachs Group Inc. traders, both shut after less than three years in business.
Oil Prices
Some commodity strategies have also struggled as oil prices have tumbled. Hall Commodities LLP, a London-based $100 million hedge-fund firm run by Tony Hall and Arno Pilz, told clients in October it’s shutting down after less than two years, citing poor performance.
Other managers have struggled to regain after years of losses. Dan Arbess said last month that he’s closing his Perella Weinberg Xerion Fund after failing to recoup a 21 percent loss dating from 2011. The fund, which focused on distressed credit and special situations, hadn’t been able to charge any performance fees since then.
The $740 million Archipel Asset Management AB told investors in October it was closing after its biggest backer, Stockholm-based Brummer & Partners, pulled out because of lackluster performance. Archipel, which traded based on computer models, lost 3 percent in 2013 and 1.3 percent in the first nine months of this year.
Market BetsNo doubt about it, hedge funds are closing like it's 2009 and it's impacting all hedge funds, especially smaller funds which are struggling as investors gravitate toward bigger, better-known names.
Massey of Massey Quick expects to see more redemptions and closures among long-short equity funds, which have underperformed the bull market in stocks because they bet on falling shares as well as those they wager will rise. Stock hedge funds have climbed 41 percent since the end of 2008, according to data compiled by Bloomberg versus a 153 percent rise in the Standard & Poor’s 500 index.
Investors, he predicts, will end up pulling from funds at exactly the wrong time, giving up on their insurance just as stock markets tumble.
“I don’t think the next five will be like the last five,” he said. “But that’s classic investor behavior.”
And unlike Massey, I don't see good times ahead for hedge funds, most of which are ill-prepared for the deflationary boom/ bust ahead and the extreme volatility which will continue to confound all investors, including big hedge funds.
Interestingly, the article mentions the poor performance of macro funds which are still not bringing home the bacon. My sources tell me they got some calls right -- shorting the yen and euro and going long equities -- but got clobbered shorting rates which goes to show you that it just doesn't pay to sour on debt.
As far as Brevan Howard, Laurence Fletcher of the Wall Street Journal reports that it suffered heavy losses on derivatives contracts despite correctly betting that the oil price would fall:
The $630 million Commodities Strategies fund, which was launched in 2010 and managed by Stephane Nicolas, suffered its worst-ever hit in September when it slumped 11.2%.Indeed, many commodity funds have closed but others are thriving. ValueWalk reports the more than 30% drop in the price of oil over the last few months has dinged a few portfolios and minted a few new millionaires:
Even before September the fund had suffered, but it was closed after a particularly difficult period for commodities investors. Oil prices slumped to a five-year low on the back of geopolitical concerns, including Western sanctions against Russia and slowing growth in China.
The Commodities Strategies fund is the latest in a long line of commodity hedge funds to be shut, with BlueGold Capital Management LLP, Clive Capital and Centaurus Capital among those wound down in recent years.
“The majority have been struggling in the past couple of years,” said one large investor in hedge funds. “It’s increasingly hard for us to find decent commodity managers.”
The Brevan fund’s fall primarily was driven by losses in energy, where the fund had a large exposure, according to investor letters reviewed by The Wall Street Journal.
“September was likely what was the final straw—a brutal month,” said one hedge-fund investor familiar with the fund’s performance.
It turns out that none of the biggest commodity funds saw the big move down in oil coming. “A lot of people who trade crude have a bullish bias,” noted Ernest Scalamandre, managing member of AC Investment Management, which invests in several hedge funds, also saying no large macro fund “really caught the big short move.”I wrote about the secret club that runs the world and Andurand Capital's negative IRR. In the latter comment, I had an interesting exchange with the fund on their net performance and wrote:
A number of smaller funds did have significant short positions established before September, and have enjoyed very strong returns over the last couple of months. Taylor Woods Capital Management LLC, a $932 hedge fund backed by Blackstone Group LP, has been one of the oil bears since December 2013. Taylor Woods’ fund moved up more than 8% in October, recovering from a loss for the year to up about 5% currently, according to knowledgeable sources.
Another winner was Andurand Capital Management LLP, run by former Goldman Sachs oil trader Pierre Andurand, which was up 6% in October due largely to shorts against both Nymex and Brent crude futures. Andurand didn’t short oil until early October when he became convinced Saudi Arabia was not going to cut its production significantly. Andurand’s $300 million fund is in the black by over 5% for the year as of November 24th.
Oil bulls suffering significant losses
Some hedge funds saw the move in oil coming. Balyasny Asset Management, the prominent multi strategy hedge fund, noted in a recent call to investors, a copy of which was reviewed by ValueWalk, that there could be a low priced oil strategy in place designed to derail U.S. shale oil production. After the recent OPEC meeting, many experts opined that Saudi Arabia is attempting to ‘kill’ the shale industry by keeping oil prices low.
Legendary oil trader Andrew John Hall, who manages his own Astenbeck Capital Management LLC, and serves as CEO of Phibro, a trading unit Occidental Petroleum bought from Citi in 2009, has definitely been caught on the wrong side of the recent slump in crude oil prices. Hall is sticking to his guns, however, and has been telling subscribers to his investment letters that he is buying long-dated crude contracts in anticipation of a run-up in prices as the U.S. shale boom fizzles.
Hall noted earlier this year:
That said, back in August, Astenbeck reduced its exposure to crude and moved a bigger share of its portfolio to cash.Finally, Andy Hall’s old firm, Duet Commodities foresaw the volatility in oil prices. In a letter to investors from mid-November, the hedge fund stated:
We are entering a period of high volatility in the oil market, where financial flows can create conditions for strange behaviour in both relative values and the shapes of forward curves.
We think the best risk/reward position today is to be long volatility and downside convexity in crude. Indeed, we observe changes in the behaviour of many market participants, with fewer people hedging via net selling of options. Furthermore, we see a strong possibility for a number of producers to hedge aggressively if the market moves lower, consequently increasing downside pressure and increasing volatility across the curve.
But this doesn't mean that investors should ignore active commodity managers, especially ones like Andurand who have a proven track record in printing money. I wouldn't bet the farm on him as his ostentatious lifestyle is a source of concern (he should be more humble like his parents), but journalists tend to exaggerate things and he definitely knows how to trade commodities, especially crude oil, and I would want to know his views on markets.
By the way, my own thinking is that oil prices will go higher and then come crashing down once the next crisis hits and deflation sets in. It will be a replay of what happened in 2008 except this time, once oil prices come down, they will stay low for a protracted period.I'm now openly wondering whether oil is a leading indicator of more difficult economic times ahead. Mohamed El-Erian is right, nobody should be surprised by OPEC's latest move, and while some see an economic boom ahead, I worry that this will lull investors into a false sense of security, focusing too much on U.S. data, underestimating the risk of deflation spreading and coming to America.
Finally, a lot of long/short funds got caught with their pants down in the latest oil rout, including some legendary investors. Linette Lopez of Business Insider reports, This Oil Crash Is Blowing A Hole In Carl Icahn's Portfolio:
Billionaire investor Carl Icahn's company Icahn Enterprises (IEP) has significant holdings in a bunch of energy companies that have gotten annihilated since Friday.It's Tuesday morning and things are looking better but as I stated back in October when I urged my readers to selectively plunge into stocks, steer clear of energy (XLE), materials (XLB) and commodities (GSG) which are prone for more weakness ahead. They're bouncing back after suffering steep losses but use any relief rally to shed your positions in these sectors.
In the third quarter, IEP announced a $355 million loss on revenues of $4.4 billion for the quarter. At the same time the year before, the firm took in $472 million of net income on revenue of $5.8 billion.
In a release discussing the decline, IEP said that its losses were mostly on the investing side. A number of its holdings — mostly the energy companies that are getting pummeled — sucked $270 million out of IEP.
And it has gotten worse since Thursday, when OPEC decided not to boost the price of oil by cutting supply.
So let's go over the damage as it stands:
Talisman Energy (TLM)
In October 2013 Icahn disclosed a 61-million-share position in Talisman Energy. Since then he has doubled down on the stock, increasing his holding to almost 134 million shares, according to the most recent data collected by Bloomberg. In the past year the stock has fallen over 60%. It is priced at $4.75 a share after falling from $6.22 last week.
Chesapeake Energy (CHK)
Icahn's second largest of these energy holdings is in Chesapeake Energy. IEP owns over 66.4 million shares of the company. The stock closed down almost 15% last week from the beginning of the week to the short trading day Friday.
CVR Energy (CVI)
This Icahn subsidiary took a beating in the third quarter after a fire hit one of its refineries. Now it is the least bad of all the stocks on this list, down only a little more than 4% in the past five trading days. Before OPEC's decision, the stock was trading at $48.37; now it's trading at about $46.83. Icahn owns about 71.2 million shares of this stock. The next-largest holder is Goldman Sachs, with a 2-million-share position.
Transocean (RIG)
Icahn holds over 21 million shares of this offshore drilling company. Over the past five trading days it has fallen about 20%, from $25.60 t0 about $20.
Seventy Seven Energy (SSE)
Icahn reported a 10% stake in this oil field services company over the summer. In the past five trading days the stock has fallen almost 40%, from $11.55 to about $7.25.
Its Monday morning open was ugly, too.
For now IEP's stock is off only slightly — down 1.6% Monday morning — but who knows how long this crash in oil prices will last.
As far as Icahn and others, you can view his latest holdings in my Q3 2014 activity report. It will be interested to see if he cut his losses or added to his positions when the Q4 data become available in mid February.
And if you think that's bad, check out the dwindling fortune of Harold Hamm, the CEO of Continental Resources (CLR). This summer, analysts were predicting he could lose half of his $20 billion fortune in his divorce. Since then, Hamm's fortune has indeed been cut in half but the reason is oil prices, not his divorce (he will get clobbered there too!).
Also, the main fund at billionaire David Einhorn’s $10 billion hedge fund firm Greenlight Capital gained 5.8 percent in November as stocks rose. The month’s performance brought year-to-date returns to 11 percent, according to an e-mail to investors obtained by Bloomberg News. Bloomberg's Simone Foxman explains how Einhorn has managed to outperform on "Street Smart."
Lastly, Harbinger Group has announced that investor Phil Falcone is stepping down as chairman and chief executive officer to focus on his hedge fund. Bloomberg’s Max Abelson reports on “Market Makers.”
Update: See my follow-up comment on hurdles for hedge funds.
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