Eminence Shutdown - Can SMs Compete?
Below is the story. How is it possible that a fund w/ $7bn can't get the right infrastructure to compete? Were their returns just that bad? Maybe the writing was on the wall when he went on Capital Allocators and Value Investing w/ Legends last year.
Hedge fund veteran Ricky Sandler is shuttering Eminence Capital and returning cash to investors after a 27-year run.
“Over the last few years, it has become increasingly difficult to apply our rigorous bottom-up investment process to rapidly shifting market conditions and an evolving market structure,” Sandler wrote in a letter seen by Bloomberg. “We believe that in recent years we have fallen short of our very high standard and your expectations.”
His fund has posted disappointing returns and the high costs of retaining talent and building out necessary infrastructure made continuing the firm too difficult, Sandler wrote.
A representative for the firm declined to comment.
Eminence has suspended redemptions in order to facilitate an orderly wind down, Sandler said in the letter. Cash distributions of at least 75% of each Eminence fund’s net asset value are expected by mid-to-late June.
“I am tremendously proud of the Eminence team for the business and culture we built and the quality of our investor base,” Sandler wrote. “The Firm has been far more than a professional endeavor to me. It has been a defining part of my life.”
Eminence manages about $7 billion.
The head trader and COO both retired end of last year which was probably an indication. One of the longest tenured IPs and sector heads got poached by Holocene. I suspect the “cost” piece was just referring to the massive guarantees from the multi managers due to pass through incentives.
But at $7bn their management fee alone is $140mm. For such a small team does that not leave enough $ to be spread amongst the PMs and analysts? I get it if the sector head got offered $30mm a year, but is paying, say, $10mm base really uncompetitive considering the structural safety of the SM model relative to a pod shop?
think below HWM too and was easier to just retire than claw it back when a bunch of the long time senior people either retired or left
Would be pretty surprised if they can charge more than 1% fixed fees on average, based on the strategies they manage
no chance their fees that high. most of that AUM in low cost long only
Who says this was about not having infrastructure?
This is 1 fund among thousands, where the founder I believe is in his 60s.
Why this impulse to turn one individual anecdote into a major structural trend?
Yeah, think a large part was just that a bunch of senior people retired or left and this was a more natural transition. Definitely lots of structural pieces coming together at once so may not be indicative of entire industry.
I'm referencing the part that says "building out necessary infrastructure made continuing the firm too difficult, Sandler wrote". I don't think it's necessarily a "structural trend", but just surprising considering I thought a fund of this size would be in the sweet spot in terms of being able to afford talent and systems.
As someone else said, performance sucked and lack of infra could well be a lazy excuse for poor stock picking.
I think it’s as simple as returns were ass recently
Another value investor bites the dust.
Just doesn’t work when you have to wait for the possibility that the market suddenly thinks the way you do and revalues your junk upwards.
How bad were their results ?
not a value investing HF
I mean look at their 13-F I think that kind of tells you all you need to know? His style (and many, many other single manager with the exact same style) just doesn’t work in this tape.
He’s had some awful calls and things that just haven’t worked
I think it’s the clearest it’s ever been that the age of the concentrated GARP tiger cub fund are over. I tell the associates at my firm all the time - at this point if you want to work in public markets L/S it needs to be at a multi manager otherwise at a single manager you’ll learn bad habits, be paid unfairly, and end up being pushed out 4-5 years later. This isn’t 2018. Wouldn’t shock me if some of these firms just stop hiring - there isn’t a need for a private equity associate to come in an do entry level research when the stakes just aren’t that high at some of these duration HFs.
What was his style? And what exactly do you mean on the stakes/duration point?
Just not super familiar with Eminence and broader public markets themes you alluded to.
I’d argue his portfolio isn’t GARP, it is more value, trying to buy low / sell high, catching falling knives.
Hence a lot of his portfolio is closer to 52 week lows than highs
The growthier funds like coatue , altimeter, whale rock, etc are still in the game
What bad habits do you mean by here?
Picking shitty names because you're stuck applying the rationale of a stock picker from 20yrs ago for starters.
Not just MM but tactical SM ie not eminence style do exist (think: Junto)
I don't think this is as big of a structural read as the headline implies. quite simply eminence was overinvested in a bunch of value esque names, heavy software, little to no semis, and has had very poor performance of late. Below high water mark so only collecting $ asset fees. probably had a bunch of redemptions in porcessing that would have taken it lower to 4-5-6bn. A LO at that size only clipping % asset fees cant go out is in run off mode
Fees at MMs are getting crazy though. There has to be a 'middle ground' with decent returns/fee proposition.
Do you really think the only route is MMs? Even SMs with decade+ tenure, nichier and more illiquid strategies (ex: stressed credit, private crossovers, etc.), MSD+ $B AUM and high ratio of AUM:IP? A couple firms come to mind that have all these attributes and I’m just not seeing how these wouldn’t be great places to be as junior analyst, with direct access to cofounder/PM and a more stable seat… all assuming of course that returns are actually good enough for the strategy
single manager seats are still very good at many places
4-5 years is plenty. can get blown up and fucked on pay in 6 months at a pod lol
Seen this story before. Blaming the market for "no longer trading on fundamentals", "not rewarding bottom-up research", and so forth.
But when you look through the portfolios in question you find flakey businesses, or high valuations, or supposedly "low valuations" but actually companies with minimal/volatile FCF, and any number of other problems.
I followed a prominent value manager closely for years, upon doing the work myself on some of his names I'd often find the opportunities uninspiring. And then lo & behold, come back a couple of years later and the stocks hadn't worked.
The prominence of MM platforms and herding is actually creating opportunities for SM investors.
This becoming more of a broader trend not just amongst SMs but also within MMs.
Back in the days, you only had to get fundamentals right, now you have to worry about factors, crowding, quants, CTAs, ETFs, short squeeze, and so many more.
Not easy tape for anyone but it’s just inherently difficult for those who made successful career to change their style and philosophy. Alua, Eminence, and many more to follow.
At the same time, there were many PMs at MMs running biggest books either blowing up or retiring. They were still making money, but not high % return, with tapes being this crazy they probably hit a point where they feel “I have enough money, I don’t have to do this to myself”, and decided to end their career on a good spot before it gets ugly.
As an LP I've seen the returns. They have been poor. For a very long time. We are not investors but I know some folks who are. Some redeemed a while back. Many have not (why I can't fathom) - shame is on them, not on Sandler for clipping the fees as long as he did. If you didn't catch the first 6-8 years of Eminence (ie like 25-30 years ago) your long term performance with them has... not been great
How’s baupost doin
Ditto for Tiger, Lone Pine, and D1 - curious as to how much longer these guys will still be around.
lots of these guys have shifted majority of AUM to private strategies / crossover it seems so probably buys them a fair amount of time… it’s the pure L/S only middle duration SMHFs that are probably facing more pressure right now
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Add Abdiel to this list
Imagine you had a business that does worse than chance and making predictions and charges handsomely for this. It also fails to help reduce your anxiety because you can see how bad it is doing day to day. Private equity funds also possess zero skill but they charge for an extremely useful service - they don’t mark to market and so it is a more relaxed experience since you don’t have to feel the risk as much. I have genuinely wondered much of my life why this continues to surprise everyone other than me? One thing I do think you get is the entertainment value of the investor letters which can help with feeling smart sometimes. But to me it seems like a high price to pay for a letter. For hedge funds, I get they are selective and hire smart people, but I think we’ve established by now that they don’t have positive skill? I do think they are great jobs don’t get me wrong.
Like how is this not obvious? If you had a high return on capital it strikes me as basic capital allocation and protection of IP that you would not manage outside money? Just like empirically organizations with positive skill tend to buy out outside investors.
Like seemingly this group understands that there is such a thing as competition? So isn’t it obvious that organizations that have positive skill would beat ones with negative skill and that hedge funds self select for negative skill? Any fund with positive skill eventually is closed to and buys out outside investors so by definition is not a hedge fund. There are some edge cases like RenTech did eventually have enough strategies that didn’t work which is why they created a hedge fund but again it’s sort of proof here - you only create a hedge fund if you have negative skill? (RenTech is perfectly able to have positive skill so it’s no coincidence that the hedge fund marketed to others had negative skill. I think they are able to do math and realize there may be a big difference between the two products?)
Part of me thinks the reason why this is hard to understand is that the purpose of a hedge fund is to manage more outside money which requires good marketing which can make it seem like they have positive skill? Like if you manage onlyfans you want attractive women so people come to your site and here you need analysts with good pedigrees. I think this is maybe confusing to people since the point is not actually to create a good product since if you had a good product you’d never really have this business model?
But you’re also failing to understand the core concept of a hedge fund. LPs don’t pay for outperformance. LPs just wanted uncorrelated return streams since most have defined yearly payouts. Everyone likes to shit on hedge funds but most people fail to understand the true purpose/goal.
I’m convinced this was written by a high school student
This is amongst the most ignorant posts I've ever seen.
(Responding below my original posts since too many distinct response / insults.)
Suppose you have a business that earns 50% a year like many top trading firms do. I assume you are all in college but when you get some experience you’ll learn the basic banker math here, which is that a buyback can be accretive if your earnings yield is high enough. A similar set of reasoning applies here.
The entire long short industry is maybe $1T AUM and let’s say it generously earns on the order of 1% of alpha per year (real number is almost certainly negative but I’m being generous), with the rest being beta. This is on the order of $10B alpha.
Sorry to tell you this but this is far less than the annual pnl of even a couple of the top trading firms. This is what you’d expect if there are some firms that genuinely do outperform the market — eventually a small number will capture most of the alpha that exists. You’re right that most hedge funds simply seek to reduce correlation, it’s because the original goal is no longer possible. (Believe it or not people used to believe hedge funds could beat the market!) Top trading firms buy out any initial investors for the same reason why you might do a share buyback, which is perhaps a concept you might understand.
What’s really unique about this case is that I think MySpace understood that Facebook was in the same industry. They probably had reactions similar to what you kids have, which is understandable, but they at least know why they were losing and who they were losing to. The top trading firms today are the size of Walmart in terms of revenue but you don’t even know they exist, which is remarkable if you think about it. Imagine being a mom and pop retailer losing to Walmart but not even having heard of Walmart! “But Walmart doesn’t sell X” is something they might say, which is a good analogy to the sort of reasoning the hedge fund industry has, and why they perform so poorly today. They generally have no understanding that probably 50 people at maybe 3 firms or so can extract most of the fundamental alpha that exists. It’s not really the core business for these firms and is a drop in the bucket for them, but yes it does happen to be your whole industry.
The part that I find the most cute here is that this group is typically smug about how technological advances might lead to greater inequality of outcomes. Or how industries can consolidate around winners. Wait till they find out that’s already happened to their own industry — no retarded ai was even needed but it did help a bit! You might even get to find out 5 years from now on an expert network call!
Yall are the same people who love capitalism rewarding winners but somehow it’s a conspiracy or fake news when you are the loser. It’s tough to accept this but this is how capitalism works — it ruthlessly rewards more efficient solutions. Don’t worry there are good exit opps to consider. When we realized that it was more efficient to manufacture in China a lot of factory laborers found good exit opps like fentanyl and Medicaid for example. I’m sure you’ll find something!
The ad hominems are what you’d expect for most cases like this in history but what’s remarkable about this case is that an entire industry of people has no idea that this is happening. It honestly is all very cute given the industry loves “shorting disrupted companies” and “being on the right side of change” and “betting on the second derivative” etc but the same people have literally no clue what is happening to them!
Hi I sense that you are clearly very knowledgeable about this space. Is there a resource you recommend to find a list of funds that are active but are closed off to new investors/bought back their stakes from existing ones? I know RenTech is one, but trying to find others. Thank you again for sharing your view, even if it was unpopular.
Still incredibly ignorant and inaccurate. First off, alpha is zero sum so the fact you say anything otherwise instantly destroys any credibility you had.
Regardless, congrats on being smarter than every allocator ever and figuring out something so genius. You’re totally right, I don’t want 12% annualized w almost no vol, how could that be helpful at all.
Also, you do realize most LPs are dying to get access to the large pods in terms of allocations? So your entire initial hypothesis is just completely false.
LPs cannot get access to alpha as a product generally speaking except through a few multis. I have a friend at an LP that I’m convinced was only friends with me because i worked at one of these few funds that returns 100% or so a year annualized (there’s 10 or so in the world). He would always ask whether maybe they could invest or something and I’m like bro I’m not a partner so kind of above my pay grade but also that’s irrational for them and they would never do this. This again goes back to my point that a high alpha fund that returns 50% or more will always buy out external investors in almost every case since that is rational to do due to basic math that maybe you will learn doing investment banking or something one day. (The very best funds do take outside investors but they are all employees that are partners. So if you become a partner perhaps you can get to pay 5 and 50% or so for the privilege of investing in your own firm lmao; the original founders hence become quite rich; hopefully this is a secondary reason that explains why these funds would never raise outside money… making your own employees filthy rich is the source of capital in many cases).
LPs invest to reduce correlation because that is a valuable product no doubt but my point here is mostly that this is really the only viable product a typical hedge fund can sell since they generally make negative expected value bets in a idio return space. The very few good funds are really good at catching cheaters so to speak - eg citadel fundamental has done well simply because they force you to focus on idio and so they are among the few that have done well.
The typical single manager could potentially produce alpha but the main issue is they are naively unaware of how markets have changed in the last 10 years. Einhorn will point out why “markets are broken” but to him a “healthy” market is one where he anticipates the flow of a mutual fund that is simply slower than him - his strategy worked at that time because he had a clear eyed view of how he participates in an ecosystem just like Walmart might (eg someone will demand this product so I will buy it now and sell it to them). But though he might criticize a stock he is short for not understanding how customer needs have changed he himself has no idea how the needs of the market has changed. “Haha I’m so smart and clever because I was just more nimble than the mutual fund haha.” The typical hedge fund has no idea who this new participant is, what their needs are or how to cater to them and this is why they do so poorly. They also have no idea that they are definitely not nimble lmao. This is the same person who thinks the customer is always right and does a customer channel check then shorts a disrupted biz but never himself asks “who am I serving and how do I serve them best? Are needs changing and if so how can I change?” If a typical single manager does well it is somewhat by luck. Imagine trying to start a software company but refusing to ever talk to or understand your customer. It’s all adorable really.
Citadel’s fundamental hf business does well because it at least to some extent understands how it can add value in the ecosystem. Most fundamental news today is actually not priced by fundamental analysts, which is why the fundamental analyst adds essentially no value to markets unless the news is non-discrete. Fundamental news is priced by perhaps ~100 people in the world at top prop firms that know they can flip the repriced asset to a slower moving fund later (potentially a single manager or a mutual fund). The fundamental multimanager analyst anticipated this flow by positioning ahead of the fundamental event but typically has no concept of the market structure that allows their strategy to work - when a stock goes up on earnings the hedge fund analyst very cutely / naively believes that the market just moves to a new price almost by a will of God without ever asking why it does this - who do you think creates the new price in the morning? You realize it is set by a opening auction right? Do you have any idea how prices are set in the morning? The level of naive the typical hedge fund is about how markets work is honestly adorable. It’s not just someone looking at price and volume because that doesn’t exist until an imbalance indicator is published (which is 5 or so minutes before the open, which is too late), so if you think a faster moving firm cannot do this because they “only look at momentum” you are either David Einhorn or a retard not sure which. As a market participant your value is partly to price new information but note here that the morning of the repricing itself, a fundamental analyst has literally no idea how or why the repricing happens and what the market mechanic actually is. So in other words, they have no idea how the core value of “keeping markets efficient by pricing fundamental information” actually occurs, almost in a childlike innocence. “Haha capitalism is ruthless bro haha this is a eat what u kill industry bro haha only the strong survive bro haha.” Millennium will literally have instagram with job ads saying that being a fundamental analyst is like being in the nfl because of how competitive it is, which is adorable. If it actually was, why are you not fired yet?
the same bro that is all like “bro amzn crushing mom and mom retailers mwahaha captialism your margin my opportunity haha flywheel bro haha moat” and seem to have learned the concept that a superior cost structure is good seem to not understand this applies to their industry too. The reality is that any trade or idea has a labor cost as well as an execution cost but most ideas are not rocket science. Do you really think looking at a “second derivative” (which involves 2 lines in excel) cannot be done faster and less expensively by someone else? Do you really think someone can’t tell if u just copy the ideas of your buddy from HBS? It should be unsurprising that someone can execute the same ideas for vastly lower cost and it then also should be unsurprising that they will outcompete you over time. It really is not a subtle effect at all. If you do something with a week or a month of research (all to buy what your HBS buddy told u to buy) and you talk to people to get approval then you have an inferior cost structure and you will lose (this is ~all single managers btw). Single managers will delude themselves into buying the same stocks with a retarded amount of research that will not change their conclusion (after you invest a lot of time you are invariably biased). Why is it surprising to you that this is an exploitable strategy by another party? A better approach is to do the same thing in 30 seconds or at most 3 minutes not 30 days, because that has a lower cost structure. In all honesty you probably can’t evaluate yourself accurately but think through your peers: how often do they do work on a name with a rough bias then decide against their original idea? Is it surprising that someone that does something with 1/1000th the effort will beat you if they know this is true of your behavior?
I think a lot of people know this intuitively, there's just a perverse incentive because there are so many jobs associated with the space
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