BlueMountain’s Flagship Fund is Losing Money so Far this Year Even as the Rest of the Industry Surges, and it’s Just the Latest Blow for the Hedge Fund (Business Insider) The turn of the calendar to 2019 has not been kind to Andrew Feldstein‘s BlueMountain Capital. BlueMountain’s flagship fund, Credit Alternatives Fund, lost nearly 4% in the first quarter before rebounding slightly in April, according to an investor letter obtained by Business Insider. As of the end of April, the fund was still losing money. The roughly $19 billion firm has also cut two of its three equity strategies this year, and a large investor in the firm’s business believes the manager’s growth prospects have ” declined significantly.” This streak of bad news is all happening while the hedge fund industry enjoys the best start to a year in a decade. PS this is where Michael Mauboussin works; “Paradox of skill”
BlueMountain’s Future Is Dimmer After the Hedge Fund Shuttered Its Equity Book By Mary Childs Updated May 13, 2019 3:18 p.m. ET Photograph by Paul Earle Text size A once rising-star hedge fund seems to have hit a snag. It might be another chapter in the age-old book Bond Managers Struggle When They Try To Do Stocks. The back story. Last week, Affiliated Managers Group (ticker: AMG) detailed its stake in hedge fund BlueMountain Capital in a filing—a stake it recently wrote down by hundreds of millions of dollars. AMG buys equity stakes in asset managers like hedge funds and profits when those firms grow. Its 70-plus affiliates oversee a cumulative $778 billion. It’s been a great business for years. The hedge-fund industry ballooned after the financial crisis as institutional investors like pensions sought returns uncorrelated to broader markets, and it was often better to be an owner in hedge funds instead of a hedge-fund client as performance often failed to keep pace with growing assets. But difficult markets can take a bite out of any asset manager. For hedge funds, that means lower performance fees, fees which flow to AMG as revenue. Last week AMG reported a first-quarter loss of $3.87 a share compared with a per-share loss of $2.88 in the prior quarter and EPS of $2.77 in the first quarter last year. What’s new. AMG’s first-quarter results included a noncash expense of $415 million solely to write down its stake in hedge fund BlueMountain Capital Management. AMG said it decided “growth expectations” had “declined significantly.” The firm’s flagship fund underperformed, AMG said in a filing, and “the cumulative effect of associated redemptions and scaled-down fundraising expectations” lowered the outlook for future fees. “This led to a significant decrease in projected operating cash flows available to fund [BlueMountain’s] growth strategy, prompting a change in the strategic objectives,” AMG said. That strategic shift included exiting its systematic equity business, “and reducing the number of new investment strategies being pursued.” Based on all that, AMG said, it determined that BlueMountain’s estimated fair value had “declined meaningfully,” forecasting that compounded fees on asset growth would shrink by 13% a year over the coming five years. That led AMG to conclude that “the fair value of its investment had declined below its carrying value and that the decline was other-than-temporary.” BlueMountain, founded in 2003 by Andrew Feldstein and Stephen Siderow, oversees about $19 billion. It’s long been a blue-chip name in credit investing, particularly in structured credit. It was the main harpooner of the London Whale in 2012, when there was still a relatively functional market for credit-default swaps. But CDS trading had been drying up after the financial crisis and the regulatory changes it wrought, a trend that quickened after the Whale’s removal. As it attracted more client money, BlueMountain sought to expand into other asset classes. But that transition hasn’t gone so well, AMG’s chief executive officer Nathaniel Dalton said on the company’s earnings call with analysts and investors. BlueMountain “had some real core strengths,” he said. “Over the last couple of years they were diversifying their business,” which meant building expensive infrastructure, he said, “but recent performance, and especially the first quarter’s performance, was really challenging.” “As a multistrategy asset manager, BlueMountain Capital Management continuously assesses and adjusts its strategies to address clients’ needs, respond to changing markets and optimize performance,” the hedge fund’s outside spokesman Tom Vogel said in an emailed statement to Barron’s. AMG declined to comment through a spokesperson. This month, Bloomberg News wrote that BlueMountain is liquidating a computer-driven portfolio, reportedly $1 billion, and is shifting back to its credit roots. Bloomberg had previously reported that some of those hired to do quant duties at the hedge fund were frustrated by feeling subordinated, like they couldn’t “gain enough influence over investing.” Some left for actual tech companies like Alphabet’s (GOOGL) Google, Bloomberg said. BlueMountain was also a big shareholder in PG&E (PCG) as it descended into bankruptcy. BlueMountain describes itself as growing from a “heritage” in the credit markets to a current “multistrategy platform,” with five investment strategies, according to its description on AMG’s website. Those five strategies are credit & capital structure; distressed & special situations; long/short equity; structured finance and real estate (which includes collateralized loan obligations, asset-backed securities, synthetic structured credit, mortgages, commercial real estate); and arbitrage and technical, which includes trading volatility and paired trades between cash bonds and credit derivatives. The firm has also suffered a wave of high-level defections in recent years. Of the eight men that ran the company in 2012, half are gone. Bryce Markus, one of the founding partners and a key player in the Whale trade, retired at the end of 2016, according to his LinkedIn profile. David Rubenstein, a founding partner, left in 2016, too, after 10 years. Ethan Auerbach, a distressed and special-situations portfolio manager, left at the start of 2017 after more than eight years. Peter Greatrex, a managing partner and head of private investments, left in January 2017 after almost 10 years. Reuters reported that at the end of 2017, partner Derek Smith and senior credit trader Dave Gibbs left what was then a $22 billion firm. Still there: co-founders Siderow and Feldstein; Michael Liberman, co-president and COO; and Alan Gerstein, who is now a “senior advisor.” BlueMountain staff in London have been declining. The firm has 24 people registered with the Financial Conduct Authority. That’s down from 33 in April 2016, according to efinancialcareers. Looking ahead. In some ways it’s a tale as old as time: a bond-world expert tried to venture into equities and somehow the magic didn’t translate. It’s happened to the best of ‘em. Pacific Investment Management Co. triedthree times. The Carlyle Group ’s long/short credit hedge fund Claren Road shut in 2016. When such attempts at new strategies fail, it’s called “mandate drift,” as the managers strayed from their core expertise. And it’s another example of the uphill battle hedge funds face for growth in general. For many, strategy diversification looks like the obvious path for growth. There are great examples of wild success in multistrategy platforms, like Ken Griffin’s Citadel and Israel Englander’s Millennium Management, where separate pods pursue disparate strategies within strict parameters. But that success has proven very difficult to replicate. Many firms have attempted, like Blackstone Group (BX), and come away empty-handed. That then only fuels the cycle as the teams populating those attempts go work for Citadel or Millennium. Write to Mary Childs at mary.childs@barrons.com
It is fine to not keep all eggs in one basket, not fine of having too many baskets and not enough eggs.