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Does BlueCrest’s latest news send a message?

“I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for mine.” ― Ayn Rand, Atlas Shrugged

Much ink has flowed about the state hedge fund industry during the past year. CalPERS’ high-profile decision to exit the asset class was blamed on poor returns and high fees. The supply of talented managers was always scarce, so what if Atlas Shrugged-style, the talent just started withdrawing from the game – what then?

Prior to the last few years’ challenges, BlueCrest had executed brilliantly on Michael Platt and William Reeves’ initial vision; producing more than $22 billion in trading profits for investors since their inception in 2000.

With JP Morgan old-school values, Platt and Reeves built a firm destined to be ‘institutional’ from the outset, taking early stage strategic capital from Man’s visionary Stanley Fink to do so. This injection enabled their investment in the systematic business—which became BlueTrend (since spun out as Systematica)—that provided the risk-offset to the founders’ discretionary macro trading.

With the addition of AllBlue, their fund of internal funds, in the mix, BlueCrest had the perfect three-legged investment firm that grew steadily in the first decade with UK local authority pension funds such as Lambeth and Waltham Forest favouring AllBlue's superior risk reactivity over other FoHFs. Despite all the difficulties in 2007 and 2008, BlueCrest powered on to reach peak assets of $37 billion by 2013.

Now, after getting on the wrong side of the consultant community, with the BlueTrend spinout and a hard-to-manage operating structure split between, Geneva, London and Jersey, BlueCrest has joined a new trend by deciding to withdraw from the game to focus on managing their partners’ wealth. In their words: "We are going from earning 2 and 20 on clients’ money to earning 0 and 100 on our own".

“Ongoing secular changes in the industry, including trends in fee levels, the cost of hiring the best trading talent, and the challenges in tailoring investment products to meet the individual needs of a large number of investors, have weighed on hedge fund profitability,” said BlueCrest in the statement.

Despite the lacklustre performance of the hedge fund industry in 2015, assets have continued to flow into hedge fund style strategies allowing the industry to surpass the $3 trillion mark.

The dominance of the investment consultant as a key ‘direct’ allocator (replacing the largely discredited funds of funds community) in a post 2007 world has meant a heavy focus on operational due diligence and, with it, a concentration of assets within the bigger, multi strategy firms. In many cases, assets have grown exponentially but AUM growth and performance can be inversely correlated.

Platt joins an illustrious list of legends (George Soros, Julian Robertson and Stanley Druckenmiller), who have simply chosen to sit it out and free themselves of the constraints and pressures of managing money for other people.

After 30 years and an annual average return of 30% since 1986, Stanley Druckenmiller closed to outside investors in 2010. “The challenge of managing an enormous amount of capital was having a clear impact on my ability to perform,” he said in a statement.

The move seems to have worked; the Duquesne Family Office made a bet of more than $300 million on gold this summer.

As we have already noted, truly talented money managers are, and have always been, scarce. The offshore hedge fund structure originally emerged so that smart managers could have the investment freedoms they required to express themselves. So it is not entirely surprising that a modern revolt against consultant and regulatory oversight is coming in the form of a move away from funds, towards private investment partnerships.

Why wouldn’t other successful hedge fund managers shrug and follow in BlueCrest’s footsteps and give up the stress and hassle required to haggle for the 2% and 20% and keep 100% of the performance fee with no management fee?

If this trend were to gather pace, where would it leave the hedge fund industry? Potential winners are of course large-scale players, like Izzy Englander’s Millennium, which remains an investor favourite thanks to strong performance easing the pain of a famously heavy total fee burden. Millennium grew by $3.6 billion in the first half of 2015 to reach $31 billion, according to HedgeFund Intelligence’s latest Global Review.

As the interest cycle (particularly in America) seems set to turn and after years of central-bank cushioning of market volatility, hedge fund exposure seems more appealing, not less. If the supply of managers willing to live by ‘total returns’, rather than index-hugging, declines, can ‘smart beta’ products fill the gap for investors?

More likely, BlueCrest is retrenching, not retiring. Let others take the pain of the next few years of hard markets and harder regulators. Time will take care of those. But, then again, modern art collections and super yachts don't replace the raw adrenaline of markets. Like the comeback tours of 60's rock stars, they'll be back.

 

Photo: © Niki Natarajan 2019

Artist: Kenny Random

The views and opinions expressed in this article are those of the authors. CdR Capital Ltd is authorised and regulated by the Financial Conduct Authority. This article is for professional clients and eligible counterparties as defined by the FCA only.

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