Why do good HFs shutdown?
Beyond the obvious reasons like poor performance, PM retirement, big redemptions etc. - why do HFs shutdown?
Bloomberg reported this week that SPO Partners ($5Bn fund) is shutting down:
“Today, we are finding it exceedingly difficult to deploy capital with an acceptable margin of safety,” Eli Weinberg, SPO co-managing partner, said in the letter. “Businesses we admire, in well-positioned sectors with attractive growth prospects, are priced to perfection.” - Eli Weinberg, SPO co-managing partner*
They've posted a 23% avg. annual return since founding! And from read here, they're a stellar fund that many would kill to work at. I get that they are a value fund (has underperformed vs. growth), they had some redemptions and haven't done that great in this market (nothing disastrous).
Assuming investors are willing to stick around, why not continue to earn a fee, shift strategies and wait for opportunities to appear?
It's generally not as simple as 'waiting for opportunities to appear' while they cruise on fees. The sources they've historically been drawing their alpha from seem to have dried up as they say and the partners seem all too aware that things may never return to business as usual for their strategy, or won't do so in an economically viable timeframe... the reality is most people get impatient waiting for things to turn around and don't want to be paying the fees for years if they aren't getting the performance no matter how legendary the PM is. Breakeven AUM level can be pretty high for some funds so this can add to the problem if people start to redeem.
They tend to be fairly limited in how much they can shift the strategy too since investors don't want to see them going outside their mandate in desperate search of returns.
I'd rather close a fund on a good run and have in my pocket that I actually added value to my LP's than sink into mediocrity and underperform my benchmarks like everyone else. If I close my fund with performance beating the market, I can at least say I'm better than 99% of the players ever
Yeah all of that makes sense.
I don't know their strategy but it's just striking that with thousands upon thousands of securities out there they don't feel like the opportunity is out there.
Well it's one thing to have enough opportunities, but another to have opportunities to deploy $5 BILLION. You can only deploy so many dollars that aren't large liquid securities with $5 billion without significantly shifting the market and being able to exit at a good return.
Like said above, I don’t know anyone over there but think this decision seems to have been in the cards for quite a while. The one founder remaining is pushing 70 and I am sure wants to go out on top after a 9 year bull market rather than seeing the fund get smoked in a correction or recession first. I’m sure that the top guys remaining will spin out and try to take some of the LPs, and I’m sure they’ll be successful doing that.
Like a lot of funds that have been around for a long time, the 23%+ annual returns could have come from excellent performance early on. I'd be curious to see how they have done post financial crisis. I imagine they have struggled to put up the kinds of returns they were previously accustomed to or expect of themselves. I could be wrong and am probably wrong since I have never seen their returns. But more importantly, Scully is in his mid-70s and is probabaly a billionaire. Even though he hasn't been involved with the fund for a while, his name and reputation are still attached to the fund. At this point in his life, his reputation and legacy as an investor are probably more important to him than keeping the fund going and squeezing more cash from the fund. And if there is an economic downturn over the next 1-2 years and his fund is down with the rest of the market, then that has a huge impact on those 23% returns that he spent his entire career building. For me, it's totally not surprising that he is calling it quits and going out on top.
Also, keep in mind that a lot of these guy’s have a material portion of their net worth tied up in the fund - if you’re not crushing it and think you’re likely to see either a slow bleed or the market tank, getting that money out could be pretty important to you.
Also, keep in mind that the management fees have to cover the costs of the management company before the senior guys get it - I’m sure the net number is not immaterial, but it’s gonna be much less than 2%*5bn.
If you go out on top, it's a lot easier to launch another fund down the road if you see opportunities re-appear.
I mean, it seems like Weinberg's comment pretty much sums it up. Their returns up to this point have been phenomenal but they're finding it hard to find new investment opportunities that will generate similar returns going forward. Frankly, it's the right thing to do.
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