Stark shuts down multistrategy funds

The demise of Stark Investments LP's flagship multistrategy hedge funds is one of the industry's largest to date, said industry sources.

Investors were informed last month that Stark Investment's multistrategy hedge funds will be closed. But the firm, founded in 1988 and one of the oldest hedge fund managers around, is still in business in St. Francis, Wis. Total assets are estimated to be less than $1 billion, down from a peak of $13.6 billion as of Aug. 31, 2007. Its head count is down to 120 people, 300 fewer than in 2007, and those employees now are focused solely on managing funds in Stark's legacy core strength — credit-related investments.

Just how large Stark's multistrategy hedge funds were at their peak is difficult to gauge, although sources said the vast majority of total assets under management traditionally were managed in the multistrategy funds.

According to Stark's most recent ADV filed with the Securities and Exchange Commission dated May 9, assets totaled $8.9 billion, of which about $7.2 billion was managed in the firm's Shepherd family of multistrategy hedge funds. Under new SEC reporting rules, Stark Investments is required to include leverage in its asset totals.

A source said assets minus leverage as of March 31 totaled $2.4 billion, of which about $1.8 billion was in Stark's two multistrategy funds. That source said Stark has less than $1 billion in assets now.

Stark Investments' co-founders, Brian J. Stark and Michael A. Roth, both managing partners, have maintained steadfast silence about the firm's past, present and future. Neither executive returned multiple calls seeking comment.

“Stark is the first of the really big multistrategy firms to essentially go away,” said Daniel Celeghin, partner at Casey, Quirk & Associates LLC, Darien, Conn., an adviser to money management firms.

Starks' multistrategy funds suffered deep wounds after the 2008 financial crisis led to poor performance and high redemption requests. Illiquid assets made returning investor money difficult, and redemptions were restricted. Measures taken in 2010 to stabilize the firm — including lowering fees, halving the head count and retooling the company culture to be more collaborative — apparently were not successful.

Other multistrategy hedge fund firms that also suffered performance problems and high redemptions — including Arrowhawk Capital Partners LLC, Drake Capital Management LLC and Deephaven Capital Management LLC — have closed. At their peak, these firms had about $575 million, $6 billion and $4.5 billion, respectively.

Ironically, Stark acquired the assets of Deephaven's $1.2 billion flagship Global Multi-Strategy Fund in 2008 and was selected as liquidator of four other Deephaven single-strategy funds after Deephaven announced it would close (P&I, April 2, 2009).

To avoid the same fate and in response to institutional investor demand, industry observers said other hedge fund managers best known for multistrategy funds have changed their businesses to focus far more on single investment strategies, often carving them from the multistrategy funds into separate hedge funds.

Sources said some of the most successful at these changes include Black River Asset Management LLC, S.A.C. Capital Advisors LP, Maverick Capital Ltd., Halcyon Asset Management LLC, Polygon Global Partners LLP, HBK Capital Management, Highbridge Capital Management LLC and York Capital Management LP.

“It's becoming clear that the multistrategy hedge fund model — multiple investment teams managing various strategies that are offered in a single fund — was the big loser” in the aftermath of the financial crisis, CQA's Mr. Celeghin said.

Said Stephen L. Nesbitt, CEO of Cliffwaer LLC, Marina Del Rey, Calif.: “The multistrategy business is very hard to maintain. It's hard to generate alpha in all strategies at the same time.”

Because “a lot of these multistrategy firms started in convertible arbitrage or event-driven strategies and then added a long/short equity team or other specialists,” the cultural mix often just doesn't work out, Mr., Nesbitt said, noting that multistrategy companies “have a propensity to lose talent, as turnover often is very high.”

In the case of once high-flying Stark Investments, that peak of $13.6 billion included large institutional investors such as the $230.3 billion California Public Employees' Retirement System, Sacramento, the $9.3 billion Louisiana State Employees' Retirement System, Baton Rouge, and the $11.9 billion New Mexico Public Employees Retirement Association, Santa Fe.

Stark announced on June 26 that it was closing its multistrategy hedge funds because of a “meaningful reduction” in assets under management and said it will concentrate on managing single-strategy hedge funds, according to a client letter obtained by P&I.

The firm will close the fund's flagship multistrategy hedge funds, Shepherd Investments International and Shepherd Guardian Fund, as well as Stark Investments LP, Messrs. Stark and Roth wrote in the client letter.

“Despite strong performance in our multistrategy funds this year, which are up between 5% and 6% year to date, it has become apparent to us that the financial markets have changed systematically over the past few years,” the executives said in their letter.

“As a result it has become increasingly challenging for multistrategy funds to deliver to their investors the types of attractive returns with low volatility and limited downside exposure which multistrategy funds have traditionally delivered.”

When the multistrategy hedge funds have been wound down, Stark Investments will manage just a few single-strategy funds, such as the Stark Mortgage Opportunities and the Stark ABS Opportunities fund. n