Credit-Focused Hedge Fund Shrinks as Returns Fall

GLG Partners is preparing to close one of its largest funds to new investors, amid growing concerns about the ability of supersize hedge fund portfolios to deliver strong returns.

Sharon Lorimer

The London hedge fund’s market neutral fund will shut when it grows beyond $1 billion – expected to be in the next few weeks – Steve Roth, the fund’s manager, has told the Financial Times.

At such a size the credit-focused fund would still be only a third as large as its pre-crisis peak, when it ran more than $3 billion in investor capital.

“The industry has changed,” said Mr Roth, citing the liquidity crisis of 2008 and the subsequent rush to redeem capital by hedge fund investors as having significantly altered the way hedge funds behave.

“The advantages of managing a smaller fund is that trading has a bigger impact on performance and one has the ability to get in and out of positions even though liquidity has not returned to pre-crisis levels,” he said.

The move marks a step change for GLG, a company that led a breed of rapidly growing, highly successful and aggressive hedge funds at the vanguard of London’s financial surge.

It also raises the sensitive topic of whether hedge fund managers are often guilty of accumulating assets at the expense of performance.

Lisa Fridman, head of European research at Paamco, the $9.5 billion fund of hedge funds, said: “The biggest question at the moment is whether managers align themselves with investor interests. Is it better to just get bigger? Then performance may become less of a driving force for managers”.

Many of the world’s largest fund managers have seen disappointing returns for their flagship portfolios over the past 18 months.

Mr Roth said: “Size is the wrong measure of success in this industry. It’s very satisfying to have new money coming in and build relationships with new investors but it should take second place to performance and organic asset growth”.

Mr Roth said it was even likely that the GLG market neutral fund would begin handing back capital to its existing investors in the future in order to keep it at a size optimal for performance.

The fund – which until 2006 was managed by star trader Philippe Jabre – had a near-death experience during the financial crisis when it dropped 53 percent.

It rapidly clawed back losses, returning 85 percent in 2009 and 35 percent last year, making it an industry top-performer again.