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| Bruce Kovner |
Bruce Kovner has handed over the investment reins at Caxton Associates to Andrew Law, and the macro maven is retiring. The extent of his future involvement in the $9.4bn firm is not clear at this point.
2. Regulatory Body Success in Prosecutions – after much effort over the years, regulators in the United States got some hedge fund scalps of significance in 2011. After the SEC was criticised for its handling of allegations against Pequot Capital Management, the Securities and Exchange Commission need the conspicuous success it achieved in the convictions against the employees and owners of Galleon Group. Galleon founder Raj Rajaratnam was convicted of insider trading and sentenced to 11 years in jail in October. Galleon trader Zvi Goffer, who controlled two insider dealing rings, was sentenced to 10 years in prison and ordered to pay more than $10 million in forfeitures.
The other conspicuous success was the case brought against Chip Skowron, portfolio manager at FrontPoint Partners. The healthcare stock specialist was convicted of insider trading in August and sentenced to 5 years in prison.
3. A Hedge Fund Winner From The Euro Crisis – that classic global macro management can still be effective was demonstrated by Kyle Bass (and Hugh Hendry) last year. Kyle Bass, the principal of Hayman Capital Partners, made capital (both monetary and reputational) out of the sub-prime mortgage imbroglio of 2007-8. It required patience and the ability to structure the trade right. Having demonstrated that trait and that ability in making great returns then, in 2008, Kyle Bass went on to talk about the potential for the indebtedness of some European countries to become an issue of significance. He also identified that the long-dated credit default swaps were a great way to give low cost of carry and a big pay-off. Bass’ patience and insight were rewarded in returns when the structural flaws of the European project became clear to everyone in 2011.
The classic global macro set-up of a structural imbalance and an option like pay-off was also successfully used by another contrarian, Hugh Hendry. Hendry shares with Kyle Bass a wariness of fiat currencies, but his pay off in 2011 came from sharing the trait of patience. The manager of the Eclectica Fund had pointed out some problems with the phenomena of Chinese growth in 2008, and in 2010 he began last year to short highly-cyclical Japanese corporate credits with high exposure to Chinese demand. The Eclectica Fund was up over 12% for the year by early December of last year.
4. King Quants Come Back – several of the hedge fund industry leaders made money for their investors applying quantitative techniques to markets, but the crowns of these kings of the algorithms have been tarnished by the aftermath of the quant shock of August 2007. The archetype has been the Goldman Sachs Global Alpha fund. The two founders of the research process behind the product, Mark Carhart and Raymond Iwanowski, left Goldmans in 2009, and the fund itself was closed in the fourth quarter of 2011.
But not every quant outfit has followed a route of inexorable decline. It was commented here last year (see this article) that Renaissance Technologies, founded by Jim Simons, was back on form, and the Renaissance flowering was sustained into 2011. The Renaissance Institutional Equities Fund International Series B was up 32.47% through the end of November 2011.
The quant turnaround of 2011 was D.E. Shaw & Company. The firm had had a rough time post credit crunch – for a longer exposition of the decline in assets see this article. Asset growth is a function of returns, and returns for 2011 were excellent at D.E. Shaw: the firm’s multi-strategy Oculus fund was up 18.3% for 2011 (through the end of November), and the flagship Composite Fund was up 3.8% over the same period. AUM at D.E. Shaw went from $14bn at the end of 2010 to $16.5bn in the 4Q of 2011.
5. Closing to New Capital Reflecting Industry Concentration - the big have continued to get bigger in 2011, just as they have previously. But in 2011 the long-term trend was reflected in a phenomenon that was welcomed back like discovering an old friend who was out of contact for a long while – closing to new capital.
An early indicator in the year came when Cevian Capital announced that they were capping Cevian Capital II. That produced a wry smile of recognition for the return of the phenomenon, but it came to feel like it was contagious when indications came in May from SAC Capital Advisors that it was considering closing to new money (the actual cut-off point was August 2011), and in the same month Daniel Loeb closed Third Point Partners to new money with AUM of over $7bn. Good examples of the way flows were directed came in Europe at CQS and in the States at Sandler Capital Management.
In June 2011 CQS announced it was closing the CQS ABS Fund to new money. But what was more indicative was that the firm's total assets had almost doubled over the previous year-and-a-half ( to around $11 billion). Inflows at the aggregate level stopped half way through the year, amid the turmoil in Europe, but at the micro level the announcements kept on coming. In October New York-based Sandler Capital Management announced a six moratorium on new capital to its long/short hedge funds while it digested a tripling of assets over the previous 18 months.
Newer and smaller firms were also closing to new money (Edoma Partners, JAT Capital Management and Taylor Woods, for example), but the increasing concentration in the industry was reflected more by the announcements by the brand name managers. The news flow on major manager closings continued to the end of the year as Viking Global Investors announced it was closing Andreas Halvorsen’s flagship fund, Viking Global Equities, to additional capital.
6. The Volcker Rule Leads To Big Trader-Led Launches – the Volker Rule separating prop trading from the rest of investment banking came into law in July 2010, and put real juice into the launch calendar in 2011. Given the lead times to set up businesses, it was inevitable that the impact on the hedge fund industry would come in 2011, and many in prime brokerages have stated that they have seen the best quality pipeline in years as a result. Here are some of the more notable ones.
The epitome of launches from former prop traders was Hong Kong-based Azentus Capital, set up by Morgan Sze, who had headed Goldman Sachs Principal Strategies Group there. The fund launched with a billion dollars in April, an unusually large day-one size, but very unusual in Asia. And in an echo of the glory days of the hedge fund world, the Azentus fund doubled in size in four months and closed to new money.
A notable launch by a prop trader in 2011 was by Tony Hall – a trader with a good reputation. In his last year at Credit Suisse he had generated one of the most profitable books ever seen at the bank. Working with the Duet Group he launched a commodities focused hedge fund in early 2011 which was up over 27% after 10 months. Avantium Investment Management was founded by a team of executives from Deutsche Bank headed by Kay Haigh. Having traded emerging markets for the bank, they launched their Avantium Liquid EM Macro Master Fund onto the world in October.
Another fund launched to invest in commodity markets came from Taylor Woods, a management company set up by a 7-strong team of former traders at Credit Suisse led by Beau Taylor. With launch capital of $150m from Blackstone the Taylor Woods Master Fund made positive returns in 2011 by engaging in commodity arbitrage, particularly in energy markets.
A fund launch from ex-prop traders which reflected another trend for start-ups in the industry was Benros Capital Partners in London. The principals of the firm, Daniele Benatoff and Ariel Roskis, are alumni of Goldman Sachs who launched their European event-driven fund in the 2Q of 2011 with backing from a firm seasoned in the hedge fund industry. Stockholm’s Brummer and Partners were the first hedge fund company in Northern Europe, and have helped into business a string of hedge fund companies through part ownership of the management companies. In the case of Benros, Brummer own a chunk of the equity in return for seed capital of $300m.
7. Two Sides Of The Performance Race -Bridgewater outperforms (again), and some big name equity managers falter. After producing a return of up 27.4% in 2010 in its Pure Alpha Fund, Bridgewater Associates’ Ray Dalio described that outcome as a one-in-twenty year event. Given that in 2011 over the year to end November HFRI Fund Weighted Composite Index was down 4.6%, that probably makes the sequence of +27.4% for 2010 followed by +15.92% for 2011 (to end Nov) for Bridgewater’s flagship fund a once in a century series of events. While statisticians will claim that given 9,000-plus hedge funds there is bound to be a fund with these good-but-unlikely results – an argument used to negate Warren Buffett’s achievements – realistically one must congratulate Bridgewater Associates for taking advantage of some great market background for their big picture style of investing.
The same cannot be said for equity long/short managers in general. The HFRI Equity Hedge Index was down 7.39% for the first 11 months of 2011. Against this benchmark and over the same period the underperformers amongst the larger managers were Kingdon Capital Management (-18.15%) and Lansdowne Partners’ UK Equity Fund (-19.8%). It may not be taken into account fully by investors in equity hedge funds, but in contrast to the opportunity set for Bridgewater, the equity markets were down on the year in 2011 and the see-saw pattern they traced in the second half of the year – no direction but with high volatility – is an adverse market background for most equity long/short managers as they tend to be structurally long biased, and the larger ones have to be biased towards investing rather than trading.
The most noteworthy underperformer of the year amongst the mega managers, the range of funds run by Paulson & Company, has been well covered elsewhere.
The stories that didn’t quite make the list above were on the Shumway Capital Partners restructuring and the rise of seeding capital and seeders in 2011. If you would like to suggest other stories and themes that were characteristic of 2011 please use the comments input field below.
