Tens of billions of dollars flew out of the industry as investors flagged disappointing returns and stubbornly high fees.
Even hedge fund stalwarts now concede the business model is in need of a rethink, largely built around three tenets: trading ideas, technology and fees. Too many firms are doing the same thing with each, skeptics say – meaning a firm that differentiates itself from the pack will stand out.
Steven A Cohen
Next year looks moribund for new hedge fund launches, with many young traders opting to stay inside bigger firms rather than risk a flame-out on their own.
Because of that, hedge fund investors are readying themselves for the once-unlikely return of an old favourite: the billionaire Steven A. Cohen.
Cohen’s SAC Capital Advisors agreed to plead guilty three years ago to criminal insider-trading charges. He later struck a personal civil settlement with securities regulators that would allow him to run a hedge fund again starting New Year’s Day 2018.
Cohen, 60 years old, says he is still ostensibly undecided on a return, but Cohen confidantes point to his formation this year of a new firm, Stamford Harbor Capital, across the street from SAC’s old offices and run by a longtime SAC deputy.
A Stamford Harbor consultant already has begun surveying potential investors about the fees they would pay for a new hedge fund, people familiar with the matter said.
If and when Cohen begins to raise money in earnest, he is expected to aim for a record-breaking sum.
Alan Howard may have reason for hope. A strong November on the back of Donald Trump’s election victory reversed what would have been a third consecutive year of losses for his Brevan Howard Asset Management’s flagship fund. The fund gained 5.6% in November, bringing its performance for the year through November to 2.8%, according to a person familiar with the matter.
The $ 12.7 billion fund is roughly at its high-water mark, or the point where investment gains make up for losses and funds can start charging performance fees again. That is good news for a fund that recently dropped its management fee to 0% for some investors in a bid to attract more assets.
Macro managers like Brevan Howard make calls on big-picture market movers like the economy and politics. If a Trump presidency spells a new, sustained regime of market volatility, that may spell a needed era of profits for them.
Scott Ferguson of Sachem Head Capital Management is often mentioned as near the head of the class for the next generation of activist investors. That is telling of where the industry is going.
Ferguson, 42 years old, worked under William Ackman at Pershing Square Capital Management before setting out on his own in 2012. Last year, he took his first board seat, at software company Autodesk, in only his third public activism fight.
That seat came without a shareholder vote. After Autodesk’s CEO blasted him, Ferguson didn’t fight back. Ferguson and the new school of activists are more into playing polite to get their way.
Autodesk shares have rallied since. Meanwhile, Ferguson has been selling down his first activist bet on a car-dealer software company CDK Global, which has more than doubled in value since October 2014.
Sachem Head told investors it was up slightly for the year as of December 15, according to a person familiar with the firm. But Ferguson’s CDK sale means he is fuelled up for 2017.
A new year can’t come quickly enough for Daniel Och.
The 56-year year old founder of Och-Ziff Capital Management Group, the largest publicly traded US hedge fund firm, endured a 48% stock plunge in his firm’s shares in 2016. That came as Och-Ziff paid $ 400 million to settle federal charges that it bribed African government officials in exchange for business.
The firm’s problems are magnified by its outsize reliance on US institutional investors, who have been among the most active in pulling their money from hedge funds. The firm now oversees $ 37 billion overall, down from $ 45 billion at the start of the year.
Och-Ziff couldn’t find a taker this year when it shopped a piece of itself to investment firms across Wall Street. Instead, Och and other top executives agreed to invest up to $ 500 million in the firm. More than ever, his fortune is riding on any comeback.
Two Sigma Investments has grown into one of the biggest quantitative hedge funds in the world. The New York firm had $ 24 billion in assets under management in 2015. That swelled to $ 38 billion in 2016 through a combination of performance and inflows.
Founded by computer scientist David Siegel and mathematician John Overdeck, Two Sigma uses computer systems to trawl data, make predictions and trade automatically. Like some other hedge funds, it is eager to say it considers itself more an technology company than an investment firm, styling itself as the Google of Wall Street.
In one sign of that ambitious casting, this year it joined with American International Group and Hamilton Insurance Group to provide an automated online system to issue insurance policies to small businesses in minutes.
The firm believes such efforts will help in recruiting and keeping talent, a person familiar with Two Sigma said. But the firm has told clients notching strong returns is its priority.
This article was published by The Wall Street Journal
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