Here is the latest example of how the so-called smart money set just may not be as smart as their reputation suggests.
Convexity Capital Management, the Boston hedge fund firm headed by Jack Meyer, disclosed in a regulatory filing that it had $8.2 billion under management as of the beginning of the year.
This is down from $10.9 billion a year ago and $14 billion at the start of 2014. That means its assets are down more than 40 percent in just two years.
Convexity has done a good job of mostly avoiding the public eye since it was founded by Meyer, David Mittelman and Maurice Samuels in July 2005. Meyer was previously president and CEO of Harvard Management Co., which manages the university’s $37.6 billion in endowment assets, and other assets.
Convexity aims “to earn benchmark returns specified by the limited partners plus an additional return based on the success of long-short and other relative value strategies executed principally in the fixed-income and related markets,” according to its form ADV filed with the Securities and Exchange Commission. The firm charges a 1.25 percent management fee and 20 percent of the net returns generated above the returns of the benchmarks.
At the beginning of 2012, the firm also instituted a clawback policy if relative value performance is less than the benchmark return. The firm typically reports how it performs in relation to the benchmark.
It is not known how the firm fared in 2015. But according to a Wall Street Journal article one year ago, the firm’s main hedge fund lagged the benchmark by 2.4 percent in 2014, 3.7 percent in 2013 and by 0.3 percent in 2012.
Convexity has been suffering redemptions for several years now.
In July 2013 we reported that Convexity closed to new investments until its performance improved, citing Convexity’s second-quarter letter to clients, obtained at the time by Alpha. We noted Convexity suffered more than $500 million in net redemptions in the second quarter of 2013.
In 2012, Convexity pulled in about $1 billion in new money, including $425 million in the fourth quarter, but also suffered $1.2 billion in withdrawals for the full year. This worked out to $200 million in net outflows, according to its fourth-quarter report, obtained at the time by Alpha.
Offering rare insight into the firm’s thinking, Meyer lamented at the time that value from January 1, 2012, to June 2013, was a negative 161 basis points. “The charitable interpretation of this lean period would be that we did a pretty good job protecting capital in an extremely difficult environment — frozen interest rates, declining volatilities, few anomalous spread opportunities and increasing regulation,” Convexity told clients. “But you did not sign up for us to protect capital; you signed up for value added. When are you going to see some of it? We cannot be too precise in answering this question.”
In an interview with the Wall Street Journal last year, Meyer asserted: “The bleeding has stopped. We’re feeling better now. We have a handle on this.”
Apparently not.
