By Barry Cohen
Photographs by Yann Mingard
Living in Lebanon during the civil war that started in the 1970s, Philippe Jabre acquired a perspective that most other hedge fund managers simply don’t have. “If the crash was the most traumatic experience you’ve ever known,” he says, thinking of his peers who were paralyzed by the events of 2008, “it’s very hard to survive because you don’t know how to address the trauma. No one told you that clients would be screaming at you.”
Surviving war is not a prerequisite for being a successful hedge fund manager, but it certainly has toughened the 50-year-old Jabre, who has fought battles on many fronts. Once the star
convertible arbitrage trader of London’s now $10.4 billion GLG Partners hedge fund group, Jabre left
England after a two-year investigation by the U.K.'s Financial Services Authority that led to a record-breaking personal fine against him and his departure from the U.K. Instead of fighting the charges of market abuse, Jabre shelled out £750,000 and started over in Geneva, where his three-year-old firm, Jabre Capital Partners, now manages five funds with $5 billion under management and is playing a pioneering role in putting the Swiss city on the map as an up-and-coming hedge fund center.
Jabre’s redemption from his past brush with the law appears complete. Jabre’s flagship multistrategy fund survived a 36.4% loss in 2008 to gain 85% in 2009, earning it such accolades as the coveted EuroHedge Fund of the Year award, one of two Jabre took home in January. The flagship also has an annualized return since inception of 11.29%, after gaining almost 10% through March.
The losses in 2008 were painful to Jabre, who had been early in railing against what he called a “credit orgy” and telling investors that “leverage is like a drug” (and one he largely abstained from). Even though Jabre moved to cash in as many funds as possible—which turned out to be a godsend—the deleveraging by other funds made losses unavoidable, especially given his exposure to convertible bonds, which collapsed after Lehman did.
Reflecting on the market turmoil, Jabre recalls that “a lot of people retreated into their shell.” But he continues to plunge ahead. The firm’s latest effort, in February, is a new UCITS-compliant convertible bond fund, launched jointly with Geneva’s Pictet & Cie, a leading private bank. UCITS, or undertakings for collective investment in transferable securities, allow funds to operate freely throughout the European Union, giving investors an onshore, regulated vehicle that can offer hedge fund-like strategies. In just nine days, the fund reached its capacity of €800 million ($1.09 billion) as European private clients and institutional investors scrambled to hook up with the famous convertible bond manager. The firm is planning to launch another UCITS fund in May, raising an expected €600 million ($810 million) and bringing firm assets up to about $6 billion.
And what seemed horrific a little more than a year ago now is almost a blessing. “We’re very happy regarding what happened in the markets because they are now cleaner and cheaper,” Jabre says. “Our areas of concentration were previously overbought, overhedged and overarbitraged. But all that has disappeared, and so now we’re in an environment that is underhedged, underleveraged and underarbitraged. With this backdrop, if you make a mistake, the cost is lower.”
The son of prominent Lebanese Maronite Christians, Jabre attended Beirut’s College Notre-Dame de Jamhour, where his instructors were French-speaking Jesuits. He was a student there when the country’s brutal civil war erupted in 1975. Shortly after the start of the conflict, the invading army commandeered the Jabre family’s home in the Bois de Boulogne hills outside Beirut. Jabre’s older brother died trying to defend their property, which eventually became the Syrian military intelligence headquarters. During the 30-year occupation, the Jabres continued to run their brewery. (In 2005 Jabre finally reclaimed the house and land.)
In 1976, Jabre left war-torn Lebanon after spending a year at the American University of Beirut and transferred to Concordia University in Montreal, where he earned a degree in economics in 1980. Two years later he earned an MBA from Columbia University’s business school in New York and joined the convertible bond program at J.P. Morgan. He soon left for Paris, joining the Banque Arabe et Internationale d’Investissement, which managed the oil wealth of Middle Eastern countries and was half owned by Aragovernments and the Banque Nationale de Paris until BNP bought them out in 1990.
Jabre’s success at trading convertibles at BAII led GLG to lure him to London as a managing director in 1997. GLG had been started by Noam Gottesman, Jonathan Green and Pierre Lagrange as a division of Lehman Brothers in 1995 and in 2000 became a separate legal entity in which Lehman held a 20% stake. GLG went public in November 2007 and was renamed GLG Partners; it now manages $10.4 billion in hedge fund assets and $22.2 billion in total assets.
Soon after joining, Jabre emerged as GLG’s hottest trader and the lead manager of five funds running more than $7 billion in assets at their peak in 2005. One hedge fund industry consultant estimates that Jabre more than quadrupled GLG investors’ money from 1997 to 2005.
Investors loved what one describes as his “animal instincts” on the trading desk. Putting it more gently, Heather James, a principal and research manager of Federal Street Partners, a longtime investor, says that Jabre is “hands-on and totally focused on the investment process. He takes losing money very personally.”
But Jabre’s glittering career at GLG ran into trouble in 2003 when he was investigated by the FSA, which accused him of market abuse. According to the British financial industry regulator, Jabre had benefited from privileged information provided by a broker at Goldman Sachs in February 2003. The FSA claimed the broker told him that Sumitomo Mitsui Financial Group of Tokyo planned to issue billions of dollars of convertible preference shares. Jabre received confidential and price-sensitive information from Goldman, which was premarketing the issue, and the FSA said he should have known that he was restricted from trading until the information was no longer confidential. Jabre calculated that the shares would fall and shorted Sumitomo’s shares on behalf of GLG’s Market Neutral Fund.
Jabre’s bet triggered one of the biggest cases of market abuse that the City of London has ever witnessed. The FSA accused Jabre of using confidential information to sell short $16 million of Sumitomo shares, and on August 1, after a two-year investigation, the regulator fined Jabre £750,000, the largest fine it had ever levied against an individual. It hit GLG with a penalty of the same amount.
Although Jabre prefers not to dwell on this episode, he acknowledges that it remains the elephant in the room. “It was an unfortunate event, brought about by a lack of clarity,” says Jabre. “The whole affair created a lot of aggravation for my colleagues and investors. It was a massive distraction. I should have been more careful, and it taught me a very important lesson.”
The FSA affair led Jabre to leave GLG in 2006, and many in the London hedge fund community still believe GLG cut him loose to protect its own reputation. GLG refuses to comment, saying it is “ancient history.”
Jabre had initially appealed the ruling. “But after three or four months, I realized the case was probably going to take as much as two years, and so there was no point in pursuing the issue,” he recalls. Only by winning on appeal would have he been able to work in London again. So after his noncompete clause with GLG expired in December 2006, Jabre moved to Geneva in 2007 to start all over again. “We were looking forward to creating a business that focused on the particular talent of Philippe Jabre and his team,” explains Mark Cecil, a partner in the firm, who left his position as head of marketing at GLG to join Jabre in Geneva.
Jabre launched his first new fund, JabCap Multi Strategy, in February 2007, which reached $3 billion in May 2008. Assets fell as low as $1.4 billion in February 2009, but Jabre has been raising money for the fund and expects later this year to close at $2.5 billion, a size he thinks is optimal. “When I look back at my previous career managing a multistrategy fund at GLG, I reached my optimal return at $2.5 billion,” says Jabre. “Whenever my assets rose much higher, it drove me to address other sectors or else become too big in my particular sector, and it consequently brought my performance down.” The same thing happened in 2008, and overall assets fell from $4.5 billion to approximately $2.5 billion during the second half of 2008. Most of the losses came from the flagship JabCap Multi Strategy Fund, whose 36.4% loss was far worse than that of the EuroHedge Mixed Arbitrage & Multi-Strategy index, which fell a median 9.76% that year. But that fund came back with a vengeance, gaining 85.11% in 2009 and outperforming the median of the EuroHedge index of 14.53%. In October 2009 the fund surpassed its previous high-water mark, reached in February 2008.
Geneva, the home of Swiss private banking, has proven to be a hospitable place for Jabre and his new hedge fund firm. Jabre Capital’s offices are situated in a modest four-story building on a small island in the Rhone River at the center of Geneva. As the firm has grown to employ 55 people (three are in the Cayman Islands), it has taken over three floors, with the ground floor occupied by Goldman Sachs.
Jabre’s office, furnished in a modernist French style—black leather and chrome—is filled with photographs of the higher reaches of the Swiss Alps, as if he can stay above it all in Switzerland. And maybe he can. Jabre’s relocation to Geneva coincided with rising hostility toward hedge funds by the U.K.'s Labor government and regulatory authorities, combined with a more punishing tax regime. The U.K. has eliminated various tax breaks, including some of the benefits of nondomicile status that allows non-Brits living in England to avoid taxes on overseas assets, while imposing a new top marginal tax rate of 50% for the highest earners. Also, the European Union’s Alternative Investment Fund Managers draft directive, which is designed to implement tighter regulations on such matters as disclosure, leverage and even pay limits on the European hedge fund industry, has soured the outlook.
But can Jabre put Geneva on the map? Since his move, an increasing number of managers have been looking closely at operating in Switzerland as a way to avoid the more stringent EU regulations being proposed. Several leading London houses, such as Brevan Howard Asset Management and BlueCrest Capital Management, have already moved some of their operations, including back-office functions, to Geneva. Some of BlueCrest’s key portfolio managers and partners have relocated there as well, while its headquarters switched to Guernsey in the Channel Islands. Nevertheless, London still accounts for 75% of the European hedge fund industry.
The Swiss authorities have been working hard to tempt hedge funds by publicizing the attractions of a much lighter regulatory touch and the prospect of lower taxes. Also, since 2005 the immigration rules have been relaxed thanks to bilateral agreements signed with the European Union.
In Switzerland, hedge fund firms may register with FINMA, the Swiss Financial Market Supervisory Authority, but it’s not mandatory. Jabre Capital has registered with FINMA in order to run its UCITS funds out of Luxembourg.
For the Swiss, getting such a big name to set up shop in the country was important. Philippe Riachi, who serves as the chief operating officer and is a managing partner of Jabre Capital, worked closely with Jabre (who is also his brother-in-law) to set up the firm’s operations. But he won’t elaborate on what special incentives the firm may have received, saying only, “When we arrived here, we were welcomed and very well supported.”
Tax lawyers warn, however, that prospective residents should not assume they are necessarily moving into a low-tax environment, as they will be faced with three layers of federal, canton and communal (municipal) taxation.
Yet there are clear advantages. In Switzerland there is no capital gains tax on personal assets, and the federal individual income tax rate is 11.5%. In Geneva, the highest individual rate is 44%, adding another layer. But dividends are taxed at around 26%, compared with 40% in London.
In 2008 Jabre was one of a handful of hedge fund managers who publicly warned about dire times ahead. “We are not at the end of this period in the markets, and we are not at the beginning. We are in the middle, and no one knows how to act or how long it will last,” he told attendees at the EuroHedge Summit in April of that year. “You cannot afford to be wrong. For a hedge fund manager, if you lose 10% of your performance, you will lose 20% of your assets—that formula has been evidenced time and again.”
Even though he foresaw the financial crisis juggernaut rolling toward him, Jabre couldn’t get out of the way in time to avoid massive losses and investor redemptions. As he recalls, “I could see the economic crisis building up, but despite 25 years of working in the markets, I couldn’t manage to foresee the scale and speed of the liquidity crisis when everything was reduced to zero. It’s generally very hard to predict a liquidity crisis. Also, the decline was fueled by the additional forced selling on the part of my competitors. One major problem was that many managers had forgotten the golden rules about leverage, overconcentration and illiquidity.”
Jabre had always been cautious about leverage, saying that “once you’ve taken it, you can’t live without it. Employing leverage in liquid assets is fine, but using leverage in illiquid assets takes you to hell.”
Jabre’s own leverage wasn’t the problem that year; maximum leverage was 2.7 times equity in June 2008. By the start of December 2008, it had dropped to 1.35 times for the flagship fund. But true to Jabre’s own predictions, the firm lost twice as much in assets (60%) as it did in performance for the flagship, which accounted for most of the assets and fell 36.4%.
Some of Jabre’s funds withstood the crisis better. The JabCap Global Balanced Fund, a long-biased global equity vehicle with $1.4 billion in assets, went against the tide and returned 2.36%, compared with a loss of 16.11% for the EuroHedge Global Equity U.S. Dollar index.
The fund’s success came from moving 97% of its assets into cash during October and November 2008 and drastically reducing equity exposure. “That enabled us to survive the crisis, meet all our redemptions at that time, and eventually allowed us to start buying securities when our competitors were forced sellers,” recalls Cecil. In 2009 the fund, which pursues a strategy Jabre employed in the GLG Capital Appreciation Fund, came back to end the year with a gain of 45.01%.
Whereas many convertible bond managers were severely punished by the devastation wrought on the sector in 2008, Jabre managed to contain the losses in the JabCap Global Convertible Fund, which fell only 16.57% against a drop of 29.35% in the ML Global Convertible 300 Index. It did so by going to 50% cash. Jabre believes they were ahead of the game because they were always within their margin limits, having deleveraged so aggressively. And the convertibles fund outdid the multistrat fund, due in part to its lack of leverage.
In 2009 the convertibles fund gained 69.6%, giving Jabre its second EuroHedge award, in the convertibles and arbitrage category. “Last year proved to be very profitable in the convertible bond strategy,” says Jabre. “We accumulated a lot of convertible bonds at ridiculously low prices. We kept the faith by buying stocks instead of selling them, and that’s what accounts for our great performance in 2009.”
Similarly, the JabCap Mangousta Fund, a directional long-short European equity fund, fell only 7.12% compared with a decline of 9.9% in the EuroHedge European Equity EUR Index in 2008, and returned 19.82% in 2009. Launched in September 2007, the fund is managed by Renaud Saleur, who also ran a fund for several years with the same name at GLG, having previously headed Fidelity Investments in Europe for ten years. With $104 million in assets and a maximum capacity of around €600 million ($810 million), Mangousta’s average gross exposure ranges between 150% and 250%.
Philipe Jabre often wakes up at 2 a.m in Geneva to check the Tokyo market for a couple of hours, goes back to sleep and then wakes up again a few hours later to check the progress of the Hong Kong and European markets. By 8 a.m. he is on the trading floor and unlikely to leave before 8 p.m.
“However hard you work, he is always one step ahead of you,” says Cecil. “And whenever you tell him that you’ve just learned about something, he always seems to be aware of it already.”
Because he uses an active trading style, Jabre can adjust his portfolio quickly to changing situations. Maintaining a strict stop-loss approach to his investments is one of his rules.
“Always understand what you’re doing and what constitutes your downside risk,” asserts Jabre. “Don’t look at the upside. When you do a trade, always look to see how much you could lose if things go wrong. And if necessary, realize your losses so that you don’t lose more than 10% of your fund’s assets. That’s how you can avoid a whole range of illiquid trades, like distressed debt and private placements, which are never liquid when you need to divest.
“If you lose your clients’ money, you can never make back your losses—even if you happen to be right,” he says. “So the keys to this business are clients and cash. You must never mislead your clients because they will never forget. And with cash you have to be very cautious. You need to sense when conditions are deteriorating, listen closely to people and not sit in your castle, saying everything will come right one day.”
Despite the glitches in Jabre’s career—the FSA fine and the losses in 2008—many investors are exceedingly loyal, some following Jabre from GLG to be with Jabre Capital from the beginning.
“We’ve been investors in his funds from day one,” says Michel Genolet, a partner at Geneva- and Paris-based Massena, an independent asset manager and adviser to wealthy investors, which has a sizable position in the Global Balanced Fund. “We’re great admirers of people who do what they say and say what they do. His predictions in 2008 and 2009 were pretty close to reality. In 2008 the world was in a very tricky position, and yet the level of transparency he provided was impressive.”
Throughout his career Jabre has consistently placed unusually high level of importance on winning and maintaining investors’ loyalty and goes out of his way to acknowledge their backing. “Many people in our business are coming from the trading environment,” he explains. “So they don’t understand the concept of liquidity because they never had to manage the investor; rather, they had to manage the risk manager of the bank.”
While private wealthy individuals and family offices still account for about 60% of his investors, the move to Geneva resulted in a shift in the firm’s client base. When it launched, Jabre attracted a good deal of fund of hedge fund money, but that has increasingly been replaced by cash from institutional pension funds.
Moreover, being close to the huge network of private banks and family offices in Geneva and the consequent ability to make personal contacts has proven to be beneficial in attracting clients.
Investor loyalty was put to the test in the latter months of 2008, when investors were frantically redeeming money from many hedge funds. The firm decided to be frank about the depth of the crisis and the dangers that lay ahead. “At the end of 2008, Philippe and I spent many hours with every client and gave as much transparency as possible,” says Cecil. “We also came to realize that we had underestimated how leveraged some of our client base were, especially many of the funds of funds.”
“He was very honest with his investors by telling us that he expected a very difficult period ahead,” says Alessandra Manuli, chief executive of Milan’s Hedge Invest, which has invested in Jabre’s funds since 2000 and stuck with Jabre through the crisis. “Back in 2008 he pointed out that the convertible space was under huge stress, the banks were in trouble and liquidity was drying up.”
Clients were taken through the portfolio, position by position, and shown that the funds had low leverage. “We explained that we didn’t have any margin calls with the prime brokers, but we needed time until the markets turned around,” says Jabre.
The approach seemed to work very well, succeeding in stemming the potential flood of investor redemptions. In December 2008, when the time came to vote on the firm’s program to phase the payment of redemptions over one year, the plan received approval from more than 80% of the shareholders.
“Like most of the other investors, we took only a split second to say okay,” recalls Massena’s Genolet. The result gave Jabre time to rebuild the portfolio and the cash to survive. And as the funds bounced back throughout 2009, recovering sooner than expected, the firm lifted the redemption restrictions by the end of September, allowing for an early return to its normal monthly liquidity terms, which is a 90 days’ notice.
With Jabre working markets for the best part of any 24-hour trading day, it’s evident he is the driving force behind the whole investment process. The five traders on the floor are essentially execution traders who don’t have proprietary capital to play with. This inevitably raises concerns that the firm is vulnerable to key man risk, especially as it does not have a succession plan.
Jabre is clearly aware of the investors’ concerns and is prepared to address it. “The key decision-making here really comes down to one person,” says Riachi. “So, if something very unfortunate should happen to Philippe Jabre, we will realize the investments in an orderly manner and pay everybody according to the same redemption terms.”
Reflecting a view held by a number of investors, Genolet is not unduly concerned. “Philippe has a very experienced team around him, many of whom have worked with him for more than ten years and know exactly how he thinks,” he says. “This means that if he becomes incapacitated, they would be able to actively manage the portfolio, and in the event of permanent incapacity, they would wind up the firm in an orderly manner.”
But were Jabre to leave, his colleagues and investors would surely miss the Lebanese war survivor’s ability to maintain grace under fire. Carl Tohme, portfolio manager of the firm’s emerging markets portfolio, who is running its new JabCap EMEA Fund, launched in October 2009, recalls the trading atmosphere at the firm in the midst of the financial meltdown.
“Philippe always maintains a cool demeanor even when conditions are very difficult, and he never loses sight of the big picture,” Tohme says. “In 2008, when the multistrategy fund was down by more than 30%, it was comforting to see that the captain of the ship wasn’t panicking. You always felt that everything was under control.”
FACT FILE: JABRE CAPITAL PARTNERS
Assets under management: $5.0 billion (March 31, 2010)
Founded: 2007
Founder: Philippe Jabre
Flagship: JabCap Multi Strategy Fund (11.29% annualized since inception February 2007)
Office: Geneva
