The sudden demise of New Star Asset Management Group may serve as a warning to struggling hedge fund firms — like Och-Ziff Capital Management Group, GLG Partners and Fortress Investment Group — that followed New Star in going public. London-based New Star, which runs an array of money management services, was delisted from the London Stock Exchange in early December, four years after its IPO, when it became apparent that it was in tatters.
The expulsion followed a remarkably difficult few weeks. In late November, New Star management, led by founder and chairman John Duffield, asked the Financial Services Authority to allow the company to suspend trading in its battered shares, whose value had been halved in three weeks. The FSA refused, and a 43 percent one-day drop in share price followed. The firm’s bank syndicate — made up of HBOS, HSBC Bank, Lloyds TSB Group, National Australia Bank and Royal Bank of Scotland — seized control of the firm, canceling about $350 million of debt in exchange for a 75 percent equity stake and additional special shares. The banks are now said to be seeking buyers. A sale is likely after shareholders meet in late January, at which point Duffield may step aside.
Redemptions fueled a precipitous fall in New Star’s assets, which had dropped to about $21 billion as of November 30; the firm’s share price had plummeted to about 2 pence by mid-December. All this is a long way from the end of last year, when the firm had $35 billion in assets under management and a share price of £2.44 ($4.87). The firm’s midcap strategy — the dominant tack used across New Star’s eight long-short funds and one hedge fund index product, which collectively had some $2 billion in assets under management — had led the firm to a pretax profit of about $95 million on 2007 revenue of about $400 million.
Hedge fund investors have proved particularly keen to exit: Of the $750 million in outflows in the first half of November, $230 million was pulled from New Star’s hedge funds.
Duffield and other New Star managers concede they went overboard in finance sector stocks and underweight in commodities. New Star’s advertising campaign stressed that it placed a premium on fostering individual managers’ independence, deemphasizing the coordinated flow of information between them. It seems increasingly likely that CEO Howard Covington will replace recently fired CIO Stephen Whittaker with someone who will keep a tighter leash on fund managers.
