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As Burbank’s Passport Capital Shuts Hedge Fund Industry Recovers

Yesterday, it emerged that John Burbank’s Passport Capital, which rose to fame following its bets against subprime housing, is planning to shutter its flagship hedge fund after a string of losses.

According to a letter to investors, Burbank wrote in a letter to clients that “returns over the past two years are unacceptable and cause me to rethink how to manage money in this environment” as reported in the Wall Street Journal.

Hedge Fund Q3 Letters

As ValueWalk has reported, over the past few years, Passport has had a string of bad luck. For the 12 months to the end of second quarter, Passport Global was down by 16.8%, and over the ten years to the end of June, the fund’s annualized return had slumped to just 3.6%, compared to the S&P 500’s annualized gain of 7.2%.

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urbank's Passport Capital Shuts

Assets have fled the fund as Burbank and team have struggled to beat the market. Since February 1, 2016, Passport Capital's assets fell from $4.5 billion to $900 million at the end of Q2 2017. The firm's total assets under management peaked at $5 billion post-crisis.

Only a few months ago, Passport changed the strategy of its main fund to "focus on longer duration, risk-managed positions."

In the fund's second-quarter letter to investors, Burbank wrote, "In particular, our anti-consensus Saudi liquidity catalyst has materialized with extra support given political changes, and our overall portfolio positioning—avoiding substantial short cycle macro bets and focusing on idiosyncratic and orthogonal themes—has proven to be advantageous."

Passport's main fund is closing, but the firm is keeping its Special Situations-focused fund open.

Hedge Fund Comeback

Passport is the latest in a string of formerly high-profile hedge funds that have shut their doors in recent years. Most have blamed a lack of volatility for their problems, but on the whole, after a rough few years, it looks as if the hedge fund industry is making a comeback this year.

According to hedge fund data provider Eurekahedge, hedge funds were up 0.24% during November, with 2017 year-to-date returns coming in at 7.19%.

In comparison, underlying markets as represented by the MSCI AC World Index gained 1.16% in November with its 2017 year-to-date returns coming in at 16.17%.

Roughly 76% of underlying constituent funds for the Eurekahedge Hedge Fund Index (majority long/short equity mandates) were in positive territory for November. Meanwhile, early estimates put hedge fund returns in positive territory at 0.36% for December. If the industry continues on this track, global hedge funds should end 2017 gains of 7.81% - 322 basis points higher compared to 2016.

According to data from Eurekahedge, this decisive run is the first time global hedge funds have posted 12 consecutive months of gains since 1999, and it's the strongest run for the industry since 2013. This positive performance has attracted new assets back to managers with total hedge fund industry AUM expanding by almost 7% in 2017. Industry assets grew by $160 billion in 2017 in contrast to a $20 billion decline last year.

However, more managers continue to leave the industry than join it. Fund closures continued to outpace launch activity for the second consecutive year with 490 funds liquidating in 2017 while the number of startups for the year stands at 451 according to Eurekahedge's figures.