Crispin Odey hedge fund's 110% gain in 5 months wipes out years of losses

Crispin Odey has recouped years of losses at his hedge fund, showing other managers such as Gabe Plotkin that surrender isn't the only option under pressure.

Last month, the Odey European Inc. hedge fund made 14%, boosting returns for this year to 110%, according to an investor document seen by Bloomberg News. Combined with a 54% surge last year, the fund is now above the level set in 2015, marking a full recovery and allowing it to charge incentive fees.

The turnaround is a rare feat in the $4 trillion hedge fund industry, where investors are used to seeing their managers throw in the towel after big losses that erase prospects of earning fees for years. In May, Plotkin's Melvin Capital Management was the latest hedge fund to abruptly return money to clients after losing 57%.

"I have the ability to remain in an uncomfortable place for an uncomfortable amount of time," Mr. Odey told Bloomberg. "It is difficult to be a contrarian. You are wrong when you are early, and you make your money very quickly when you are right. It is a bad business structure, and that is why we are rare beasts."

Mr. Odey's bearish bets during a protracted bull market for stocks led to a 68% plunge in his flagship hedge fund between 2015 and 2020. He changed his fortunes with highly leveraged short wagers on long-dated government bonds as spiraling inflation sent yields surging.

The short exposure to bond trades was worth almost 400% of the fund's net asset value at the end of April, mostly related to two U.K. government securities that mature in 2050 and 2061, according to his investor note. The size of that trade has been reduced in recent months after earning some of the biggest gains in his hedge fund's three-decade history.

Still, most of his investors are gone. His flagship European fund is down to €245 million ($263 million), from €3.1 billion at the end of April 2015. And those who stuck around have made gains that pale in comparison to other investments. Since 2015 through the end of May, the S&P 500 index is up 131% including dividends, while hedge funds tracked by Bloomberg have risen on average 34%.

"Allocators talk about hedge fund managers who were born to invest — like someone who spends seven years crawling out of a drawdown ditch to make investors whole," said Andrew Beer, founder of Dynamic Beta Investments. "Sometimes the best opportunities are to invest with a hedge fund right after a drawdown — pride is a hell of a motivator for talented and committed hedge fund managers."

But few hedge funds have taken that path.

Melvin Capital Management, which once managed about $12.5 billion, suffered a brutal short squeeze last year as retail investors joined forces to boost meme stocks, including GameStop Corp. After an attempted reboot invited ridicule for trying to charge performance fees, Mr. Plotkin announced last month that he was closing the firm named after his grandfather.

"Shutting a fund during a drawdown violates the implicit agreement with investors," Mr. Beer said. "When allocators pay someone hundreds of millions of dollars after a good run, they damned well expect him or her to suck it up and keep working through the tough times."

Even after his recent success, Mr. Odey is sticking to his bleak worldview. Writing to investors in November, he promised "a great party in the spring, if we are all still here." While the reason to celebrate has finally arrived, his latest letter was just as ominous. "Life is going to be much more difficult for investors and for governments," he wrote last month. "Outages, shortages, strikes and war will come along."