Why are Hedge Fund “Stars” Failing?

Date: Tuesday, November 13, 2012
Author: Nigel Someck, Director

The hedge fund world is dominated by big personalities and high profile traders that leave their home funds or bank and setup their own hedge fund. Greg Coffey of GLG and Pierre-Henri Flammand of Goldman Sachs are probably the most high profile examples of 2 stars that couldn’t emulate previous success at their own shop. 

Flammand shuttered his 2010 launch Edoma Partners last month citing “unprecedented market conditions” as the reason. His fund dropped 4.9% this year and credit must go to Flammand for doing the responsible thing and return money to investors. Today efinancial news reports on why these jewels in the hedge fund crown were unable to sustain themselves and create a business and what this means for the industry.

The most worrying conclusion from these closures is that if star managers cannot sustain themselves in current market conditions then it doesn’t bode well for the rest of us. Clearly market conditions are partly to blame, however, it should be noted that the average event-driven fund has returned 5.3% this year, indicating that Edmona was performing significantly below average.

Government policy intervention is also playing a part, shorting restrictions, limits on leverage and asset class restrictions are but a few. Governments are trying to win the war on volatility and understand how or if hedge funds are the cause of extreme market movements. The obvious conclusion is that the unfortunate combination of tough market conditions and government intervention make it difficult for a new hedge fund to succeed.

Investors need to ensure their invested capital is diversified across different strategies and fund managers. No strategy has consistently performed well since the financial crisis and the flavour of the year constantly changes. This year, for example favours credit strategies and equity strategies. Credit strategies benefited from “junk” trades that turned good, whilst equity markets have remained strong. Managed futures (Mr Coffey’s niche) was one of the most poorly performing strategy.

The lesson for hedge fund managers and investors alike is that the industry has become even more short-term in its outlook. As funds have been forced to reduce or remove lock-ins and gates, it is easier for investors to regularly move their money around. As we draw closer to the end of the year it is predicted that there will be an “asset-shuffle” within the industry as investors refresh their portfolio and allocate to strategies that will perform well in the first 6 months of 2013.

The trend of mergers and acquisitions within the hedge fund industry is therefore set to continue as hedge funds “hedge” their strategies and offer investors a diverse portfolio of investment opportunities. Single strategy hedge funds will find it very difficult to maintain long-term sticky investment capital.

As for Greg Coffey, he has retired at the ripe age of 41 and will have little interest in the trends for 2013!

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Nigel Someck

Director

Nigel@prohedge.co.uk

+44 (0) 77 88 215 727