A billionaire retrenches in a tough year for hedge funds

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Jamie Dinan

The main fund at his York Capital Management, which fell 14% last year, lost another 1% through early December. That performance has pushed Dinan to crisscross the globe in his most intense client interactions in years, people familiar with the matter say.

He took his private jet to Seoul in January to meet with South Korea’s sovereign wealth fund. In March and April, he met with investors in Switzerland, Sweden and Norway. More recently, the Abu Dhabi Investment Authority and large investors throughout the US have landed on his itinerary.

In New York, the 57-year-old told investors at the firm’s annual meeting: “We need to do a better job and make everyone some money.”

Investors, after years of disappointing performance across the industry, have pulled money from hedge funds for four consecutive quarters—the longest stretch of outflows since 2008, according to research firm HFR. By April, roughly 85% of hedge funds were below their high-water marks, or the point at which investment gains make up for losses, and funds can start charging performance fees again, a recent Morgan Stanley report said.

The pressure is particularly visible at York, where the decline in assets under management has been among the most stark. Assets have slumped to $ 17 billion this year, down 35% from $ 26 billion last year, according to investor documents and a person familiar with the matter.

Some inside York point to the flagship fund’s having made up nearly all of a 7.7% loss it had for the first two months of 2016 as a sign it is now on the right track.

Other large funds, including Brevan Howard Asset Management, Och-Ziff Capital Management, Pershing Square Capital Management and Tudor Investment, also have faced poor performance and investor withdrawals. All four have announced some form of fee cuts this year; some have laid off employees.

“In some cases, you’ve just seen the emperor has no clothes,” Rhode Island general treasurer Seth Magaziner said in an interview.

Rhode Island in September decided to halve its hedge fund investments and it is redeeming from firms including Brevan Howard and Och-Ziff. It isn’t invested in York. The state plans to redeploy some of its hedge fund money into private equity.

High fees helped drive the decision. Magaziner said more than half of the state’s gross returns from hedge funds were lost to fees and expenses over the three-year period that ended June 30. The costs of investing in other fund types relative to their returns were nowhere near as high, he said.

Dinan recently told partners at York he has no intention of closing the firm. He has doled out fee discounts to big investors. He has stopped naming new partners and has met with division heads to identify possible staff cuts. A person close to York said such meetings are routine and that Dinan has no plans to lay off employees.

Dinan assigned a top lieutenant, Christophe Aurand, to help right the $ 3.7 billion flagship fund that Dinan and York’s chief investment officer, Daniel Schwartz, run. Michael Weinberger, who contributed to the fund and was one of the earliest partners at York, left earlier this year to start his own hedge fund.

The flagship fund bets on deals and other corporate changes around the world, on stocks and on debt. York also manages other hedge, private equity and collateralised loan obligation funds.

The flagship’s executives are putting stricter limits on “crowded trades”, in which hedge funds own more than 20% of a company’s shares, said a person close to the firm.

Dinan, a baseball fan, told investors on a recent conference call that York would supersize “fat pitch” bets they think are particularly attractive. “I’m quite pleased with portfolio stability as well as the firm’s stability,” Dinan said on the call, according to a recording of the call reviewed by The Wall Street Journal.

The fund’s average annualised return since its 1991 start is 12.1%. Most of York’s other hedge funds are up in 2016 through Dec. 7, said a person close to the firm.

But the gap between the main fund and its benchmark, the S&P 500, has widened this year and some of the firm’s other funds remain under their high-water marks. Another person close to York described York’s 2016 income as several hundred million dollars, less than in the firm’s boom years.

With a personal fortune estimated at $ 2 billion, Dinan paid $ 100 million for a piece of the NBA’s Milwaukee Bucks in 2014. He had enough clout to help get wrestling reinstated to the Olympics; his sons wrestled in school.

The plain-spoken Dinan has overcome setbacks before. Dinan started York in 1991 with $ 3.6 million as an event-driven fund. The flagship rebounded after taking steep losses in 2002, 2008 and 2011.

But now the fund is likely to have two underperforming years in a row. By late 2015, investment consultant Cambridge Associates had recommended some clients redeem from the fund, according to people familiar with the matter. Cliffwater, another investment consultant, followed suit.

This year, the fund was hurt by the Brexit vote and the breakup of the planned $ 150 billion merger of Pfizer and Allergan. Allergan was one of the fund’s biggest positions at the time. Recently, the fund made money on Medivation and a bet that the Marriott International-Starwood Hotels & Resorts Worldwide deal would happen.

Still, earlier this month, the $ 24.5 billion Texas County & District Retirement System, which manages money for workers including nurses and mechanics, said it was pulling nearly a quarter-billion dollars from York.

People close to York say they expect investors to return if the fund performs well.

Richard Galanti, chief financial officer of Costco Wholesale and an investor with the fund since its inception, described himself as “a believer” given the fund’s long-term record. He said he was keeping his money at the firm and that York’s smaller size might improve performance. “Is a little smaller better? It can’t hurt,” Galanti said.

—Mark Maremont contributed to this article.

Write to Juliet Chung at juliet.chung@wsj.com

This article was first published by The Wall Street Journal

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