One month ago we wrote that as a result of the vicious gyrations in the market, even one of the top performing poster children of successful hedge fund investing, one which had so far avoided the P&L misery shared by many of its peers (mostly due to its “tactical trading” or HFT frontrunning group) Ken Griffen’s Citadel had been quietly unwinding its Surveyor Capital multi-manager long/short (not, as some mistaken assume “market neutral”) strategy.
As the WSJ further added at the time, through the second week of February, Citadel had been down some -6.5%, which is notable because as we showed some time ago, when looking at the ratio of its total regulatory to net assets, Citadel happens to be the world’s most levered hedge fund:
Since then things have only gone worse for the world’s most leveraged hedge fund.
According to a Bloomberg update, through march 11, or one month since the prior update, Citadel had lost another 1.5% and is now down 8% in its main hedge funds “as the $25 billion firm lost money in a unit that has helped drive profits in recent years.”
The culprit? The same Surveyor group whose problems we profiled in early February and which had extensive commodity and energy exposure: “The Surveyor arm, which trades equities across 29 teams, accounted for about three-quarters of Citadel’s losses during the first two months of the year, said one of the people.“
It’s not just Citadel:
Citadel’s early 2016 woes echo those at some other prominent multimanager funds, which typically farm out cash to dozens of individual teams, stay market neutral and are quick to cut losses. Senfina, the multimanager fund run by Blackstone Group LP, slid 17 percent last month, erasing much of its 2015 gain, Hedge Fund Alert reported last week. Izzy Englander’s $34 billion Millennium Management fell 2.7 percent in February, its third-worst month ever, according to people briefed on the matter.
Years of growth and top returns have built these firms into some of the biggest in the industry. Since the financial crisis, Citadel’s assets have more than doubled as the firm posted gains of more than 10 percent each year. Millennium pulled in $3.8 billion in 2015, or almost one-tenth of the net inflows coming into all hedge funds.
As we further noted in early February when noting the quant carnage, the violent moves had managed to shake out many of the multi-strats such as Surveyor: “Investors say multimanager firms, some of which held similar positions, were hit hard at the start of the year because their tight risk controls forced them to sell at the same time, further driving down prices.
“Some managers were liquidating sizable portfolios in a short period of time into a market with challenging liquidity characteristics,” said Adam Blitz, chief investment officer at Evanston Capital Management. The sales were significant, he said, given the amount of leverage many of the firm firms use to amplify returns.
For the past month on the back of unprecedented easing by central banks, stability has returned to the hedge fund realm, although with the VIX down 45% over the past 5 weeks, the largest 5-week decline in history, the recent devastation in vol may be finally coming to an end, and the same algos that chased the VIX stops on the way down may be preparing for the move higher next.
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