Balestra Capital, the once-high-flying New York macro firm headed by James Melcher, is hemorrhaging assets following what looks to be a second straight year of negative performance.
Balestra’s assets shriveled to just $278 million as of the end of November, according to a recent report sent to clients. This is way down from $1.64 billion at the beginning of this year and $2.2 billion just two years ago.
The precipitous drop in assets comes as the firm’s main hedge fund, Balestra Capital Partners, seems headed for its second losing year in the past three years and third loss in five years. The fund was down 10 percent through the first 11 months of 2014, despite gaining 3 percent in November and posting only one losing month in the most recent six months.This makes Balestra one of the worst-performing macro hedge funds this year.
To be fair, most discretionary macro managers — whose trading decisions are made by humans rather than being computer-driven — are not exactly leading the hedge fund pack this year. However, most of them are at least in positive territory by now, even if they are posting just single-digit returns.
Over the longer haul, Balestra looks a lot better. Since its 1999 inception, Balestra Capital Partners has compounded at nearly 19 percent per year.
But lately, the firm has also apparently been hurt by the departures of two key people in June — Norman Cerk and Matthew Luckett, who were co-portfolio managers and partners of the firm. Cerk had been with Balestra since 1997 and co-founded the hedge fund, where he served as head trader. Luckett joined Balestra in 2004 and was responsible for portfolio strategy, research and portfolio risk supervision for the hedge fund.
Melcher, who started his firm in 1979, did not return several calls seeking comment. His professional high point came just before and during the financial crisis, as he was one of a handful of people to correctly predict the collapse of the credit markets. Balestra Capital Partners posted a stunning 199.82 percent gain in 2007 and a 45.78 percent return in 2008.
Balestra presciently shorted the ABX index of subprime residential mortgage-backed securities, in addition to buying a number of credit default swap contracts on collateralized debt obligations. This was the same trade that helped make Paulson & Co.’s John Paulson and Harbinger Capital Partners’ Philip Falcone billionaires. In 2008, Balestra was short high-yield bonds, financial services stocks, and Eastern European credit and currencies, and long gold, according to a five-page report on Balestra published by MLC, the wealth management division of the National Australia Bank.
Since then, Melcher, who competed on the 1972 U.S. Olympic fencing team, has either lost money or posted single-digit gains in each of the six ensuing years. It is not known what caused the loss earlier this year.
But by November, Balestra clearly was on the side of the most popular winning macro trades such as being long U.S. equities and long the U.S. dollar. It also benefited from a short position in the South Korean won versus the dollar, according to the firm’s November report.
Looking ahead to 2015, Melcher tells clients that two major developments in November will be major themes next year — the decline in the price of oil and the rise in the value of the U.S. dollar. Melcher points out that since the beginning of July, the dollar has risen 14 percent versus the yen, 9 percent versus the euro, 8 percent versus the Canadian dollar and 12 percent compared with the Mexican peso.
“These are relatively large swings in a short period of time that will undoubtedly filter through the real economy,” the letter states. “We are already seeing the implications in these currency moves in some of our equity investments.”
Balestra also thinks the declines in certain emerging-markets currencies will make it very hard for these developing countries to service their sovereign-denominated debt.Going forward, the U.S. dollar is the only currency for which Balestra has a long position.
The bigger question is whether the hedge fund firm’s remaining investors will stay long on Balestra.
