Who’s next?
This is the biggest topic of gossip and speculation making the rounds in the hedge fund community, after Gabe Plotkin announced that he’s shuttering his once-vaunted hedge fund firm, Melvin Capital Management.
This happens every time there is a big market meltdown, and this time will be no different.
The reasons are plentiful.
What-have-you-done-for-me lately investors are very quick to redeem their investments after short-term losses, especially funds of funds managers. And many hedge funds that specialize in once high-flying sectors like tech and life sciences stocks are not only down by double-digits this year, they also lost large amounts in 2021.
General partners who don’t have one of those modified high-water marks know they won’t be able to charge performance fees until they get back to even. This means that if they’re down more than 50 percent from their peaks, they’ll have to double their money just to break even before they can even think about charging existing clients the performance fee.
This makes it harder to recruit and retain top talent. Yes, billionaire general partners can dip into their own pockets to pay people, if they’re so inclined. But most hedge funds don’t have that luxury, and those funds are the most vulnerable.
This means that any fund that’s down sharply this year — especially those that also lost money last year — are candidates to fold. And there are many candidates, especially among those that specialize in tech, internet, biopharma, and life sciences stocks.
Of course, there’s no indication that any of them are planning to shut down, and we’re not predicting that any will. Furthermore, history shows that the funds that do shut down are often not the obvious candidates with very large losses. For example, when Tybourne Capital announced late last year that it was planning to close its long-short fund, it had come off a 42 percent gain the previous year. The firm simply decided to focus on its long-only and private funds.
In fact, there are a number of reasons besides bad performance that firms have cited when they’ve decided to close a fund. In 2020, Lansdowne Partners, one of the oldest such firms in Europe, announced that it was shutting down its main long-short fund and directing investors to switch to one of two long-only offerings, including a new fund it was launching.
In a letter to investors in its Lansdowne Developed Markets Fund, the firm said at the time that its “listed long book has never felt more compelling” and that it was much harder to find opportunities in the short book, “either in terms of generating specific value or as a hedging offset to the long investments.”
Others have shut down for personal reasons, even when the going was good. When Tiger Cub Robert Karr announced that he was shutting down Joho Capital in January 2014 after 17 years, he had just posted a 30.3 percent gain the prior year. “This is something I have been considering for the past few years, with the hope that when we ended, it would be on a positive note and we would be able to reward our investors for their loyalty and our colleagues for their very hard work,” he told clients in a letter obtained by II at the time.
When Lee Cooperman announced in July 2018 that he was shutting down Omega Advisors, the then 75-year-old stressed that his age was the motivation. In a letter to clients, the intense one-time Goldman, Sachs partner, who was earlier cleared by regulators of insider trading allegations, explained, “I don’t want to spend the rest of my life chasing the S&P 500 and generating returns on investor capital,” adding that more than half of the firm’s assets under management were general partner capital.
Other mega firms headed by well-known billionaire names seem like candidates to shut their funds and turn their operations into family offices, given the fact that a big part of their personal earnings in recent years have been generated from gains on their own capital, not from fees.
However, the firms that do choose to convert to a family office will probably be those in which the principals represent the vast majority of the firm’s assets. For example, when George Soros converted Soros Fund Management to a family office rather than meeting regulators’ new requirement to register, we learned that the fund possessed very little outside capital — virtually all of it was his.
That being said, those that do have huge amounts of outside capital are less likely to shut down. They’re generally headed by multibillionaires who can afford to pay the firm’s expenses for some time.
One prominent hedge fund manager who has no plans to convert to a family office stressed that there are at least three reasons he wouldn’t go this route. First, he wouldn’t want to let down the many loyal investors who have been with him for years; second, he doesn’t want to fire employees who wouldn’t be needed if the firm had no clients; and third, he said, “We’re fighters.”
