Hedge Fund Shutdowns At Fastest Pace Since 2009

December 15, 2014

Another strong year for the stock markets but hedge funds still can’t find a way out of the rut they are in. Having underperformed the broader stock market indices in each of the last five years, the hedge fund industry is on track to report yet another massive under-performance this year. The result is an increase in the number of hedge fund managers being forced to wind down operations as more investors demand their money back over frustration on continued disappointing returns. According to industry research firm HFR. the pace of hedge fund failures has picked up this year and is on track to hit the highest level since 2009.

Hedge Funds Continue To Disappoint

According to data compiled by Bloomberg. hedge funds have returned just 2 percent year to date in 2014, their worst performance since 2011. By comparison, the widely followed S&P 500 index is up a whopping 12 percent as of the end of November. This significant lag in performance is putting the viability of several small and medium-sized hedge funds in question as redemption pressure cuts assets to a level where it becomes financially difficult to operate.

Data published by HFR shows that during the first half of this year, a total of 461 hedge funds closed their operations. If that trend continues, the number of failures would likely approach closer to 1,000 this year, the most in a year since 2009 when 1,023 funds liquidated. For the record, hedge fund liquidations hit a peak of 1,471 in 2008 at the height of the financial crisis. Last year, a total of 904 funds shuttered.

Commenting on the uptick in the pace of hedge fund failures, Andrew Lee, who heads the alternative investment strategy at UBS Wealth Management, says that the current investment environment is challenging for hedge funds. He adds that many of the liquidations in 2014 are prompted by the difficult fundraising environment for smaller and less established money managers reporting poor performance over periods of time. A separate Bloomberg study earlier this year found institutional investors preferring big, established funds over smaller and newer funds. Investors allocated $57 billion in new capital to hedge funds in the first half of 2014 but about a third of that went to just 10 firms.

Notable Hedge Fund Shut Downs

According to Bloomberg, macro and commodity hedge funds figured prominently in the list of funds that called it quits this year. Among macro funds, the $600 million Perella Weinberg Partners Xerion fund managed by lawyer turned hedge fund manager Daniel Arbess is the latest to throw in the towel. The fund which managed more than $3 billion at its peak is returning money to investors. It never really recovered after losing 21 percent in a single year in 2011.

Other high profile hedge funds to fold tent include Josh Berkowitz’s Woodbine Capital Advisors LP which closed earlier this year after assets dwindled to $400 million from a peak of $3 billion four years ago. Hedge funds Anderson Global Macro LLC founded by Keith Anderson who once managed funds for George Soros and Kingsguard Advisors LP started by a former Goldman Sachs trader are both shut this year after less than three years in business.

San Francisco-based hedge fund Lonestar Capital Management which has $1 billion under management is another fund that decided to shut down after getting burned by volatile stock moves in October. The $630 million commodity hedge fund of Brevan Howard is also closing after suffering losses this year. Joining them in the chopping list is British insurer Aviva PLC which will shutter its $2 billion US hedge fund unit by the end of the year after a major client asked for its money back.

Relevance To Job Market

The HFR data clearly shows that many hedge funds are falling short of their targeted returns. Recent data from research firm eVestment showing net outflow of investor capital from hedge funds in September and October suggests that the underlying investor sentiment towards investing in hedge funds is muted at this point. A difficult fundraising environment coupled with a challenging investing environment will likely dampen prospects for a rebound in the hedge fund job market in the near future.

Two Paulson Hedge Funds Suffer Big Losses in September 2014

October 31, 2014

John Paulson has been a widely followed fund manager in the hedge fund circle ever since he thrust himself into the spotlight in 2008, a year in which the S&P 500 index lost almost 40 percent. Relatively unknown at that time, Paulson collected billions in profit that year as a result of his bold bet that the US housing market would collapse. His performance since that time, however, has been far from stellar. After seeing the assets under management drop to $18 billion in 2012 from a peak of $38 billion, Paulson rebounded in 2013 with an impressive performance but his rebound again seems to have hit a wall. According to Bloomberg. two of Paulsons main funds have suffered significant losses in the month of September 2014.

Volatile Fund

Citing sources with knowledge of the fund’s returns, Bloomberg is reporting that Paulson’s Advantage Fund, which looks for investment opportunities in corporate events such as spinoffs and bankruptcies, slumped 8 percent in September. The monthly loss widened the fund’s year to date losses to 13 percent.

Another fund within the Paulson family of hedge funds is the Advantage Plus Fund, which follows the same event driven strategy, but is a leveraged version of Advantage Fund. This leveraged fund lost 11 percent in September, taking the year to date loss to 14 percent.

The steep losses for Paulson’s funds during the month were driven by a collapse in the stock price of the hedge fund’s two large holdings. One of them is the government mortgage company Fannie Mae. which lost over half its value in September due to an unfavorable court ruling. The other unusually large loss for the hedge fund last month was its investment in Irish drug company Shire PLC which gave up 30 percent of its value after its planned acquisition by Chicago-based biotech firm AbbVie unexpectedly fell through.

Hedge Funds Struggle

According to data provider Preqin. hedge funds had their first losing quarter in over two years in the just concluded third quarter. Hedge funds lost 0.4 percent during the third quarter due largely to a loss of 1.4 percent by North America-focused funds. For the first nine months of the year, hedge fund returns averaged 3.3 percent compared with returns of 7.8 percent for the same period last year. In comparison, the S&P 500 index gained 1.14 percent in the third quarter, taking its overall gains for the first three quarters of the year to 8 percent. Despite the underperformance, hedge fund assets have continued to increase on strong capital inflow. According to Hedge Fund Research. assets at the end of the third quarter have reached approximately $2.82 trillion.

Relevance to Job Market

The performance of the two Paulson hedge funds in September brings to light that even large funds are vulnerable to big losses and wild swings when their large holdings take a hit. It is also a reminder that even hedge fund managers with a history of generating outsized returns are not immune from sudden, dramatic declines. The Preqin data for the third quarter continues the trend of hedge funds underperforming in the last six years. The net effect on job prospects is likely to be neutral as despite mediocre performance as the hedge fund industry continues to benefit from new capital inflow.