Hedge Funds turn Frugal after Years Long Crisis Nightmare

John Henry Fuseli’s, The Nightmare.

After years of playing the markets like casinos, hedge funds are facing pressure from clients to avoid risk. After a number of recent failures (read here, here and here), this pressure has increased. This pressure hasn’t gone over well with some managers who are fighting back, while others are accommodating their new clients. Laurence Fletcher writes at The Wall Street Journal.

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An industry once known for maverick traders and huge profits—from George Soros’s $1 billion profit betting against the pound in 1992 to John Paulson’s $15 billion profit from U.S. subprime mortgages—faces a generational identity crisis.

The decision by Jersey-based BlueCrest Capital Management, headed by billionaire trader Mike Platt, to stop managing investors’ money illustrates the fundamental dilemma managers face.

In the roughly 18 months leading up to the early stages of the financial crisis, Mr. Platt was less actively involved in trading at the fund, said a person close to Mr. Platt. Instead he waited for placid financial markets to throw up an interesting trading opportunity.

Just a few months before the crash that brought down Lehman Brothers, he smelled an opportunity. He began putting on massive bearish bets, said two people familiar with BlueCrest’s trades. The trades, which included bets on volatility spiking, paid off in a big way. His flagship fund gained 45% in 2009.

That attracted billions of dollars from investors. Assets hit a peak of $36 billion in 2012, turning BlueCrest into one of the world’s biggest hedge funds. But the inflow of assets also changed his investor base away from rich individuals with more appetite for risk. In their place came more conservative institutional investors who wanted lower levels of risk than Mr. Platt would naturally have been happy with. By 2013 the fund’s returns had dipped to close to zero.

Mr. Platt said in December 2015 that a prime reason for the decision to stop managing outside investors’ money was to run his fund “more like the industry was run 20 years ago,” adding that the fund would increase risk levels again. Since returning client money, BlueCrest’s stocks fund has made profits in the low double-digits, said a person familiar with the matter.

E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.