Hedge fund managers like to boast that they operate in the ultimate Darwinist industry: the winners prosper, while failure is quickly punished as investors put underperforming funds out of business.
But, unlike evolutionary theory, in the topsy-turvy world of hedge funds there is life after death.
The latest manager to try to rise from the ashes of his fund is Geoff Grant, co-founder of London’s Peloton Partners, who plans to launch a new hedge fund this year.
Mr Grant is not alone in trying to resurrect a career as a money manager. Many of the biggest hedge fund failures, from Long Term Capital Management to Amaranth Advisors, have seen managers create new funds within months, often arguing that they were taken out by an unpredictable, unrepeatable event, or that they have learnt from their mistakes.
“There are investors out there who like managers who have been hit before,” says Andrew Gibson, head of client management at International Asset Management, a London-based fund of hedge funds. “They think people learn from their bad experiences.”
Experiences have certainly been bad for many former investors.
Investors in Peloton’s flagship ABS fund lost all $2bn of assets in two weeks, while the $1.6bn Multi-Strategy fund – which included the macro-strategy headed by Mr Grant – fell 57.6 per cent this year.
Amaranth Advisors managed to lose its investors $6.6bn in September 2006, the biggest loss ever by a hedge fund, thanks to bad bets on natural gas prices by the trader Brian Hunter.
Yet Mr Hunter set up Solengo Capital within six months of the failure, while Nicholas Maounis, Amaranth’s founder, is trying to raise $200m (£102m) for a new fund.
Even John Meriwether and Myron Scholes of LTCM managed to set up their own funds, after a $4.6bn loss at the group took the global financial system to the brink of crisis in 1998. LTCM was rescued by banks organised by the New York Federal Reserve.
“The world of money is a funny one,” says Andrew Baker, deputy chairman of the London-based Alternative Investment Management Association, which represents the hedge fund industry. “You have got to explain why (a) it wasn’t your fault or (b) you have got a mechanism in place that would guarantee that it won’t recur.”
Platinum Grove, chaired by Nobel-prizewinning Mr Scholes since LTCM failed, has far stricter controls on leverage and much greater disclosure than LTCM in order to reassure investors, according to one client.
But Mr Meriwether’s JWM Partners cannot offer much comfort to its investors: he hit another crisis this year, with his flagship fund plunging 31 per cent at one point. After the first four months of the year it was down 26.6 per cent, according to an investor.
Victor Niederhoffer, a former US squash champion and head of fixed-income trading for George Soros, last year repeated the crash that took down his first hedge fund in 1997 – when he literally sold his family silver to raise cash.
Last September he closed the largest of the funds he subsequently started, Matador, after big losses.
Arki Busson, chairman of EIM Group, a $15bn fund of hedge funds, refuses to invest with managers who have blown up, on the grounds that they should have controlled their risk properly.
“For these guys to have the nerve to come back three months later I think is outrageous,” he says. “It takes a certain mentality to blow up, and that doesn’t change.”
The latest round of credit-crunch-inspired crises in the hedge fund industry has prompted its share of comeback efforts by managers. New York-based Drake Management, an $11bn New York manager, said in a client letter that investors were willing to keep $900m with it after it announced the closure of its three hedge funds following dire performance. And it plans to launch new funds this year.
Jeffrey Larson, who shut his Boston-based Sowood Capital Management last year after a $1.5bn loss and returned the remaining cash to investors, is trying to raise a new fund.
And several structured credit specialists forced to suspend or close funds are pitching new vehicles designed to profit by buying up assets on the cheap.
London-based Endeavour, which lost more than a quarter of its then $3bn of assets in one day in March when Japanese government bond trades turned sour, has told investors it is considering closing its fund and launching a follow-on. The fund, now down 39 per cent for the year to the end of May and facing requests to repay 40 per cent of its remaining $1.7bn, has delayed a decision on its future until the end of this month.
Still, in the context of the 1,152 new funds launched and 563 closed last year, according to Chicago-based Hedge Fund Research, the hedge fund Lazarus remains rare, according to AIMA’s Mr Baker.
“The Darwinian theory is alive and well,” he says. “It is quite difficult to come back.”