| John Burbank, Passport Capital (David Paul Morris/Bloomberg) |
Another hedge fund manager who earned his fortune and reputation from the global financial crisis has suffered a major setback.
John Burbank III’s announcement that he is shutting down his firm Passport Capital’s $636 million long-short equity fund is the latest example of a growing number of hedge fund managers who made their fortunes and reputations off the financial crisis and have subsequently closed down or sharply contracted in size.
At least three of these managers made their debut on Alpha’s Rich List ranking in 2007, when they were among the 25 highest-earning hedge fund managers.
To be clear, these managers are still quite wealthy. But it seems their success from hitting a grand slam home run during the global financial crisis inspired them to swing for the fences again with a different bet — but each wound up with a totally different outcome.
Take Burbank. He made at least $370 million in 2007, tying for No. 23 on the Rich List. He had felt as early as 2005 that the subprime mortgage market was a bubble that would inevitably burst. So, late that year he began to heavily short subprime mortgage pools and riskier, heavily leveraged collateralized debt obligations. The move paid off in a big way in 2007, as the firm’s macro fund, Passport Global Strategy, surged 219.6 percent.
Not surprisingly, the San Francisco firm’s assets soared from $1.2 billion to $4 billion. The firm also raised its management fee at the time to 2 percent from 1.5 percent but kept the performance fee at 20 percent.
By contrast, last year all three of Burbank’s main funds declined by double digits. The Passport Long Short Strategy Fund lost 11.8 percent, Global Strategy fell 17.6 percent, and the Special Opportunities Fund declined 26.4 percent.
In the first quarter of this year, Long Short fell 3.4 percent, while Global Strategy declined 6.4 percent.
This year Passport has been fairly bearish, or at least defensively positioned, with a low net exposure to the market. “Our overall positioning for well over a year has reflected serious concerns about the consequences of the ending of Quantitative Easing in the U.S.,” Passport told clients of its Passport Global fund in its 2016 first-quarter letter, released in May last year. “Investment funds began 2016 either both informed and cautious of broad deflationary risks facing global markets, or oblivious and positioned poorly for them. We believed 2016 would mimic 2008 with widespread deleveraging into illiquid markets.”
Philip Falcone of Harbinger Capital Partners made $1.7 billion in 2007, enabling him to rank fourth on that year’s Rich List. In early 2007 he began to short subprime mortgages, helping to steer Harbinger to a 117 percent gain that year. At one point he was managing $26 billion.
However, Falcone subsequently lost a huge sum with an outsize bet on LightSquared, which was trying to build a wireless network. LightSquared filed for bankruptcy in May 2012.
Then in August 2013, Falcone and Harbinger agreed to pay more than $18 million, admit wrongdoing, and be barred from the securities industry for at least five years as part of a settlement with the Securities and Exchange Commission stemming from enforcement actions in June 2012. The regulator had accused Falcone of improperly using $113 million in fund assets to pay his personal taxes, secretly favoring certain customer redemption requests at the expense of other investors, and conducting an improper “short squeeze” in bonds issued by a Canadian manufacturing company.
Then there was John Paulson of Paulson & Co. He personally made a staggering $3.7 billion in 2007 betting the housing bubble would burst, topping the Rich List that year. He shorted risky pools of collateralized debt obligations and bought credit default swaps on the cheap for the firm’s merger arbitrage and event-driven funds. Paulson was betting that the U.S.’s five-year housing bubble was ready to burst.
Then in 2010 he made $4.9 billion, mostly from making an outsize long bet on gold.
However, since then Paulson has lost big bucks on drug stocks and some merger plays. As we reported a few days ago, his assets have shrunk by about 75 percent from their peak; the firm is now managing about $10 billion.
James Melcher of Balestra Capital, who did not qualify for the Rich List, also benefited from the financial crisis. His main macro fund gained about 200 percent in 2007 and 46 percent in 2008.
In 2007 his firm also predicted the housing bubble would burst, shorting the ABX and CDX indexes and purchasing credit default swaps on CDOs backed by subprime mortgages. In 2008, Balestra was short high-yield bonds, financial services stocks, and Eastern European credit and currencies, and long gold.
In 2014, however, Melcher, a onetime Olympic fencer, was badly hurt by incorrectly going long Japan’s Nikkei stock index and shorting the yen. He was also expecting interest rates to rise in the U.S. that year.
Two of Melcher’s three partners left the firm that year, and by late in the year, assets had shrunk to just $278 million, from $2.2 billion just two years earlier. That year the fund lost money for the second time in three years and the third year in five years. At year-end 2016 the firm reported having $124 million in regulatory capital.
