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.
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.
Read more here.