This has been a year where a number of big name hedge funds chose to return some capital rather than sit on their enormous and increasing wealth. While there can be other reasons for giving back money, it seems a lack of sufficient investment opportunities has been causing a shrink-down of assets. Returning capital is not exactly what hedge funds enjoy doing, as it means letting go of some hefty management fees.
Hedge funds closing funds, turning away new money
Earlier, we did a roundup of which hedge funds have wound down their business in 2013 so far; the strategy that has seen the most exits is quant and macro, where previously well-known names like Arablet Capital and Clive Capital have decided to close up shop. Almost all established or newly successful hedge funds are not taking new money and more joined in with others in turning away new investors this year, including Viking Global, D.E.Shaw, Blue Ridge Capital, Lone Pine Capital and possibly Citadel Group.
Lately, only Paul Singer’s Elliott Management raised $3.3 billion in new capital.
The overall performance of hedge funds this year has been lackluster. Credit Suisse Hedge Fund Index gained only 5.35 percent until the end of Q3 after adding a +1.27 percent return in September. Managed Futures or CTAs fared the worst of all, losing -7.4 percent YTD, according to Credit Suisse indices. Most traders failed to predict the shake-down of emerging markets, and apparently could not rope in profits from the rise of euro and British pound as well, reports Katie Martin for WSJ.
Third Point returning 10 percent of funds
Most recently Dan Loeb’s Third Point decided to scale down the asset base of its private funds. The hedge fund manages $14 billion, and communicated its intention to investors in the third quarter letter released yesterday. Third Point is returning 10 percent of assets in its private funds, and it has been widely reported by news outlets that it is giving back $1.4 billion. However, Third Point declined to confirm the amount when we requested comment.
Loeb said that the decision to return capital was to moderate the growth of his funds, which have been returning nearly 25 percent since inception. This announcement follows the earlier communication of the fund that it will not replace the redemptions from Third Point’s hedge funds with new investments.
Klarman and Jacobson see lack of opportunities
Seth Klarman’s Baupost Group also made a similar call. The hedge fund made the decision to limit the growing capital in the first quarter this year. Baupost Group, which has expanded its asset base through liquidations from Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) debt, would be giving back some amount of the $28 billion under management to clients at the end of this year. The last time Baupost returned cash, in 2010, it was 5 percent of $23 billion under management, citing exactly the same reasons: that it saw a limited opportunity set in the current market environment.
Highfields Capital, founded by Jonathan Jacobson, announced just this month that it was returning 5-15 percent of its AuM back to clients, according to an exclusive from Reuters. The long/short equity hedge fund manages $13 billion, and said to investors that there were fewer investible opportunities in the markets. Jacobson wrote, ”It has become increasingly difficult to find new compelling investments given today’s low interest rates and how much equity multiples have expanded over the past 12 months.”
The fund is up 18 percent this year until the end of third quarter. The media-shy hedge fund manager is known for being one of the first ones to spot trouble at Enron; Highfields’ top positions in the long book are in Canadian Natural Resources Limited (NYSE:CNQ) (TSE:CNQ), SLM Corp (NASDAQ:SLM) and News Corp (NASDAQ:NWSA).