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Hedge Funds

Tough environment has hedge funds heading for the exits

Jason H. Karp announced the shutdown of Tourbillon Capital Partners’ flagship hedge fund.

Difficult investment conditions for hedge fund managers are pushing even seasoned firms to get out of the business.

Since the beginning of 2017, 16 well-established firms managing multiple billions in hedge funds and hedge funds of funds have either closed up shop completely or set up family offices and returned money to external investors.

Among a spate of recent closures that began in June were:

  • BP Capital LLC.
  • Criterion Capital Management LLC.
  • EACM Advisors LLC.
  • Emerging Sovereign Group LLC.
  • Highfields Capital Management LP.
  • Ivory Investment Management LLC.
  • Omega Advisors Inc.
  • Tide Point Capital Management LP.
  • Tourbillon Capital Partners LP.

Long-tenured industry observers said it's unusual to see so many large well-known hedge fund management companies return investor cash over a short period of time.

Hedge fund returns have been muted this year — the year-to-date return of Hedge Fund Research Inc.'s HFRI Fund Weighted Composite index as of Sept. 30 was just 1.45%, compared to 8.59% in 2017 and 5.44% in 2016 — highlighting the difficulty of managing large asset pools in such a tough market, sources stressed.

"The industry seems to be moving toward midsized, more entrepreneurial hedge fund managers who can invest more nimbly in current market conditions," said Andrew Saunders, senior managing director at Castle Hill Capital Partners Inc., New York, a specialist consultant to hedge funds.

Sources said some closures were prompted by generational issues as founders near retirement without the will to undertake succession planning.

"Many veteran managers already have made a lot of money and are asking themselves: 'Why should I look under the hood of my strategy? Why do I need to deal with all of these regulations?' Some managers decide to skip the hassle and convert to family offices," said hedge fund attorney Steven B. Nadel, partner in the investment management group of Seward & Kissel LLP, New York.

The most common reason managers gave for closing their funds or returning investor money was simply that the investment strategy stopped working.

A case in point is New York-based Tourbillon Capital Partners. The global long/short equity hedge fund manager announced in an Oct. 8 letter to clients obtained by Pensions & Investments that it will return money managed for external investors in its flagship Global Master Fund at the end of the year.

In the letter, Jason H. Karp, founder, CEO and co-chief investment officer, said executives after thorough analysis concluded that the firm's primary investment principle — "to isolate and only be compensated for alpha" — is "no longer an optimal way to manage your and our own money."

Mr. Karp told investors that he and senior executives will continue to manage their own money "in a radically different, unconstrained manner that I believe will allow us to focus only on our highest-conviction ideas."

As of June 30, Tourbillon managed $1.2 billion, according to data provided to P&I. As of Feb. 28, the firm managed $3.4 billion, per its most recent ADV filing with the Securities and Exchange Commission.

Tourbillon is a comparative youngster — the firm launched in 2012 — among the venerable hedge fund managers returning capital after decades in the business.

Others returning money

Other firms with decades of hedge fund management under their belts that are returning money to investors include BP Capital, Emerging Sovereign Group and Omega Advisors.

Founders of New York-based Emerging Sovereign Group, for example, started trading in emerging market hedge funds in 2002 and, like Tourbillon, are returning money managed for external investors, a client letter seen by Bloomberg said.

The firm will continue to manage employee money, the letter noted, adding: "We believe the time has come to return to a more flexible investment approach. We see in today's market dislocation a compelling opportunity to compound our internal capital and we are excited to pursue a more personal and aggressive investment style in both public and private markets." The firm manages a total of $1.3 billion.

A call requesting more information about the firm's plans to ESG founders Kevin J. Kenny, chief investment officer; Mete Tuncel, chief risk officer; and Jason P. Kirschner, global equity portfolio manager; was not returned.

The investment environment is much different than it was when many of the hedge fund industry's longest-tenured managers set up shop, said Donald A. Steinbrugge, CEO of Agecroft Partners LLC, a Richmond, Va.-based consulting and third-party marketing firm specializing in hedge funds and other alternative investments.

"The business has become much more competitive than in the early days," Mr. Steinbrugge said, pointing to the huge increase over the past 20-plus years in the number of hedge funds in operation.

In 1990, just 530 individual hedge funds were actively trading, compared to a peak of 8,474 funds in 2015, which dropped to 8,413 funds as of June 30, data from Hedge Fund Research showed.

Global markets also have become more efficient in recent years, he said, stressing that the hundreds of billions invested in hedge funds by institutional investors over the past decade mean that too many managers are chasing too few investment opportunities, leading to "much less potential for alpha generation."

Challenging alpha environment

The tough environment for alpha creation, burdensome regulation, demoralizing investor redemptions during times of challenged performance and the sheer difficulty of managing a hedge fund firm are all taking a toll on managers, Mr. Steinbrugge said.

Long/short equity hedge fund manager Highfields Capital Management, for example, started in 1998. John Jacobson, founder, CEO and CIO, said in a client letter obtained by P&I that he is closing the Boston-based firm because "after three-and-a-half decades of sitting in front of a screen, I realized I am ready for a change."

"Recently, I began to give serious consideration to the idea of winding down the portfolio and turning Highfields into a family office," Mr. Jacobson wrote. "I recently concluded this path is the best way forward."

Mr. Jacobson wrote that performance this year and "those of the last few years have clearly not met either my expectations or yours," adding that the Highfields Capital Fund lost slightly more than 1% last month, "and the funds are down slightly more than that for the year."

Officials at the firm declined to comment beyond the letter.

P&I data showed that the firm's assets declined 6.2% in the 12 months ended June 30 to $12.1 billion, rose 5.7% in the previous 12 months and fell 1.6% in the year ended June 30, 2016.

Like Highfield's Mr. Jacobson, Leon Cooperman, CEO and president of Omega Advisors, is ready to stop managing external money after 28 years, Bloomberg reported. "This decision is a very personal one driven not by any health concerns, but solely by how I want to spend my remaining years," Mr. Cooperman said in a letter to clients obtained by Bloomberg, adding, "I don't want to spend the rest of my life chasing the S&P 500 and focused on generating returns on investor capital."

Mr. Cooperman will convert his firm into a family office, managing his own money only. He was traveling and could not be reached for comment.

The firm, which oversees $3.8 billion, will return all outside capital at the end of the year. A little more than half the assets are Mr. Cooperman's and employees' money.

Senior Reporter Rick Baert contributed to this story.