A hedge fund titan has decided to return a large sum of money to investors, a revealing illustration of how dried-up markets, vicious volatility and a paralysis of ideas all borne of the crisis in Europe have been particularly hard on the traders who swing for the fences on currencies, stocks and bonds all over the world.
Louis M. Bacon, who together with Paul Tudor Jones and George Soros has come to define this style of high-stakes macro investing for more than 20 years, said in a letter to his investors on Wednesday that he would be giving back $2 billion, about one quarter of the size his benchmark Moore Global Investment fund.
He cited 18 months of what he called "disappointing" investment returns -- and a particularly tough second quarter this year when his main fund was down 3.18 percent.
"I am more comfortable taking down the size of the fund than increasing the size of the positions in order to give clients an adequate return given the fees they are paying," Mr. Bacon wrote.
Name-brand hedge fund investors will from time to time return money during fallow performance stretches, and Mr. Bacon is no different in this regard. But most do it with reluctance. For starters, such a step is costly.
Mr. Bacon, who deploys an expensive investment apparatus with about 400 professionals in his two main New York and London offices, charges a 3 percent management fee on the $14 billion he oversees (before the give back), one percentage point higher than the industry average.
That means he loses a chunk of revenue right off the bat and more if performance turns around and that upside (25 percent) is foregone as well.
More so, however, is the psychic impact. For this super-competitive breed, to admit that that a market has confounded them is to concede a small measure of defeat.
As Mr. Bacon sees it, he is giving back profits to investors who have stuck with him for a long time (although he has never given back such a large amount relative to overall assets).
But that does not make it any easier.
"I am going to let some people down," said Mr. Bacon, sitting in the living room of his fairly understated home—he splits his time between here and New York—in the Knightsbridge area of London. "The ability to manage large assets well—it's like being Michael Jordan or winning the gold in the Olympics, it's what you aspire to. And there is obviously the compensation benefit as well."
It is not as if all his funds' assets were tied up in Europe. As a big macro trader, Mr. Bacon has investments all over the world. But, with markets having become so tightly correlated -- veering up and down in line with what central bankers and European politicians are doing, or not doing for that matter -- true diversification has become harder than ever for him given his asset size. "Investing becomes primarily about who will be in the door first and out the door last...," he wrote in his letter. "Everyone is forced to become a macro investor or trader."
With this return of assets, Mr. Bacon will now personally manage $5 billion to $6 billion, with outside investors retaining a majority share of the fund, although he and other employees at Moore will have the largest single account. This amount he believes will give him a greater flexibility to move in and out of the markets with the necessary speed and effectiveness. Hedge fund experts say that there are few pure macro investors left who personally manage a portfolio greater than $6 billion for clients.
At the root of his thinking has been his inability to put on and execute a career-defining macro trade that would capitalize on the crisis in the euro zone. Like many of his peers, Mr. Bacon -- who along with Mr. Soros made a bundle when the euro zone's predecessor, the European exchange rate mechanism, blew up in 1992 -- recognized that the build up of debts, deficits and competitive imbalances in Europe made some form of collapse inevitable.
But with senior political figures in Europe favoring summit meetings, bailouts and more austerity as opposed to recognizing losses, making a bet that would move the needle on an $8 billion asset pile became difficult.
"The political involvement is so extreme -- we have not seen this since the post-war era," Mr. Bacon said. "And what they are doing is trying to thwart natural market outcomes. It is amazing how important the decision-making of one person, Angela Merkel, has become to world markets."
Mr. Bacon points out that his returns, up 0.35 percent through June, are not too far removed from the industry average this year. And that is true enough. According to Hedge Fund Research, hedge funds were broadly up 1.7 percent over the same period.
It is also true though that other big funds like Brevan Howard in London and Bridgewater in the United States -- both larger than Moore in size -- have had significant payoffs from their anti-Europe bets, as well as other funds without a pure macro bias.
Mr. Bacon accepts that he was late in recognizing how bad things were. And when he was ready to take action, the markets had dried up on him.
"I found myself trying to make money in a much less liquid environment, with less instruments to trade -- it's very frustrating," he said.
As for going short the euro, the most liquid and direct way to bet against Europe, Mr. Bacon argues that this has not been a one-way trade either. From late 2011, the currency's value against the dollar has gone from $1.28 to $1.32 to today's level of $1.23 -- a ragged path that has made putting on a winning currency position hard to achieve
Indeed, getting the geopolitics right is the stock and trade for macro investors like Mr. Bacon.
In 1990, a series of winning bets he made that Saddam Hussein would invade Kuwait and would be quickly routed with no lasting market impact became the foundation of his legend -- securing a 115 percent two-year investment return and a flood of investment assets.
Like one of his first backers, Paul Tudor Jones, Mr. Bacon is a son of the South, born in North Carolina, and he cut his early investment teeth trading commodities on Wall Street.
From then on, it was his talent in spotting big trends -- the Gulf War, the first European meltdown and most recently the market recovery in 2009 -- that gave him his best yearly returns.
All of which makes his inability so far to get Europe right harder to stomach.
"I have underperformed market opportunities, so yes, I have questioned myself a little bit," he said. "But I do think I can ultimately adapt to a changing market environment."
Although it is worth asking: If markets are as bad as he describes, will it it be that much easier to put $6 billion to work compared with $8 billion?
"That is a good question -- but I think in this case less is more," he said with a laugh, describing the fine balance between scaling funds down to a manageable investment size and the lost income that results from such a move.
In an industry that prizes secrecy, Mr. Bacon is more retiring than most -- indeed, for one who says that one of his first professional aims coming out of Middlebury College in 1979 was to become a journalist, he spends not a lot of time in the company of them.
Perhaps surprisingly, investors have stuck with Mr. Bacon though this rough patch -- which is part of the reason Mr. Bacon is giving money back. A big flow of redemptions would have done the job for him, he says.
As for taking the more drastic step of retreating to a form of retirement where he just keeps an eye on his personal wealth -- as other onetime titans like Mr. Soros, Stanley Druckenmiller, Julian Robertson and Bruce Kovner have done -- Mr. Bacon says he is not ready to make that move yet.
That's the case, even though Mr. Bacon is said to be worth about $1.4 billion. He owns an undeveloped 435-acre island off Long Island, 172,000 acres of ranch land in Colorado (much of which he has worked to protect from future development), a grouse hunting estate in Scotland and a retreat in the Bahamas.
And he certainly does not look as if he is ready to pack in his BlackBerry.
Despite his 55 years of age, Mr. Bacon, a fitness fanatic who feasts on sushi and skis, plays squash and hunts game with a bow and arrow with a boy's fervor, might pass for someone 10 years younger.
"If you were to see me right now, you might think I was ready to start a hedge fund," he said, before challenging his younger interviewer to a game of squash -- an offer that was sensibly refused.