Veteran Hedge Fund a Victim Of October Surprise


The combined “October Surprises” of poor market volatility, adverse tax inversion rulings and overall portfolio plummets have led one veteran hedge fund manager to call it quits. The San Francisco-based firm founded in 1995 managed assets of about $1 billion, but despite a long and storied history of success, this past year’s performance woes – especially October’s — were too unacceptable to the firm’s founder for him to continue. As it is the largest hedge fund to close this year, some observers wonder whether this is a harbinger of things to come.

Second Shutdown in Eight Years

The firm boasted returns of 29 percent during its first 11 years in business; however, being cautious of the possible bursting of 2006’s credit bubble, the manager returned outside capital to investors that year. Two years later, anticipating a new and improved financial environment in the aftermath of the 2008 crash, the firm reopened as an activist hedge fund specializing in energy, the exploitation of leveraged capital structure and distressed investing.

A Bittersweet Closing

In a November 10 letter to investors, the founder lamented the closing of the firm as “bittersweet” and noted that the hardest part about closing his company was his “inability to claim the very highest ground of perennial outperformance.” As of Oct. 31, returns were down about 2.4 percent for the year.

Significant Factors Cited

Two of the fund’s major positions were adversely affected by the U.S. Treasury Department’s about-face limiting tax inversion deals. However, according to the Wall Street Journal, it was the qualitative easing monetary policy implemented by the Bank of Japan in October in order to stimulate the Japanese economy that put the final nail in the firm’s coffin.

Research Trend Noted

According to the HFR hedge fund research organization, 904 hedge funds were liquidated in 2013 – a three-year high – while the slightly more than 1,000 new funds that were launched that year constituted the lowest level since 2010. Whether last year’s figures coupled with significant players closing up shop in 2014 constitute a trend remains to be seen.

Converting to a Family Office

As happened with SAC and other well-known once-public funds, the firm is not totally liquidating but rather converting to a “family fund” that will continue to manage the founder’s private wealth. A significant portion of its limited partners’ capital account will be distributed by the end of the year followed by further distributions during the first half of 2015. All outside capital distributions are targeted no later than June 30, 2015. Notwithstanding such moves, the founder has not ruled out accepting investor funds at some point in the future.