Louis Moore Bacon plans to give back $2 billion, or 25 percent of his main hedge fund, to investors, saying it may be too big for him to achieve past returns as “liquidity and opportunities have become more constrained.”
Bacon, who seeks to exploit macroeconomic trends such as changes in interest rates and currencies, returned a “disappointing” 0.35 percent in the first half and a “tolerable” 6 percent in the past year, according to letter sent to clients. He has gained more than 18 percent since starting the Moore Global Investments fund in 1989.
“Unfortunately, as the amount and percentage of the assets I manage have increased these last several years, the markets have been trickier and less liquid,” Bacon, who is based in New York, wrote in his eight-page letter. “The ‘risk on/risk off’ environment appears to be an abiding presence that has kept my market engagement low.”
Bacon, 56, isn’t the only multibillion-dollar macro-fund manager struggling to make money this year. Ray Dalio’s Bridgewater Associates LP lost 2 percent in its $54 billion Pure Alpha II fund this year through July 20, according to investors. Alan Howard, who runs Brevan Howard Asset Management LLP, lost 1.3 percent in his $26 billion Master Fund in the same period, clients said.
Bacon declined to comment beyond the letter.
Macro funds trade in global equity, bond, currency and commodities markets. They lost an average of 1.3 percent in the first six months of the year, according to data compiled by Bloomberg. That compared with a gain of 6 percent by the MSCI ACWI Index and 2.79 percent for the Bank of America Merrill Lynch Global Broad Market Index.
Bacon, who manages virtually all of the $8 billion macro fund himself, up from 50 percent as recently as 2007, outlined several reasons for the need to be more nimble and put on smaller bets.
“Markets are increasingly distorted by central banks’ attempts to squeeze drops of growth from an over-indebted private sector across much of the developed world,” through such practices as bond purchases and super-low interest rates, Bacon wrote.
The U.S. markets are hindered by “a caustic political environment and an anti-business administration,” he said. U.S. banks have retreated from making markets in many securities because of the Dodd-Frank legislation, which limits them from trading for their own accounts. Bacon added that “in some Kafkaesque absurdity,” the rule is “named after the two high protectors from regulatory oversight of perhaps the most egregious of U.S. financial miscreants, Fannie Mae and Freddie Mac.”
The legislation is name after the former Connecticut Senator Christopher Dodd and Massachusetts Representative Barney Frank.
As for the euro zone, the “banking authorities have been a special case in ineptitude” because they delayed demanding that banks raise capital “until it is largely infeasible,” he wrote. He called the euro zone “a potential disaster area of catastrophic proportions.”
This environment has made markets much more difficult to trade and reduced opportunities in debt, currency and credit markets, he said.
“Disaster Economics, where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets,” he wrote.
It’s been difficult to put on big trades in debt markets in the European periphery, including the Italian bond market, the third largest in the world, he wrote.
Interest rates are at historically low levels, with short- term government notes in the U.K., France and Japan, yielding virtually nothing, and those in Germany, Switzerland and the Netherlands have negative yields.
There are also fewer opportunities in currency trading, another mainstay of macro investing. The Swiss franc, once a top-five trading currency, for example, is now capped to the euro, thus limiting the amount it can move, he said.
Trading in individual corporate credits has also been “decimated” he said. “I shudder to think of the stress that is going to occur during the new credit liquidation cycle,” now that banks won’t be there to make a market, he wrote.
Bacon’s Moore Capital Management LLC oversees a combined $15 billion in all its six funds. The manager previously returned about $2 billion over the life of the macro fund, he said in the letter. Every time he gave money back, performance improved.
Assets fell from $9 billion at the start of 2000 to $5.1 billion as of the beginning of December, after investors pulled $2 billion following losses and Bacon returned $400 million. That month, Bacon made 11 percent, ensuring that the fund posted a positive return for the year. At the time, Bacon said the smaller asset base “gave us a more flexible trading attitude.”
In 1999, Bacon returned $1 billion, after which the funds gained almost 20 percent in two months.
In 1994, the firm’s assets shrank by 70 percent after a 14 percent loss, client redemptions and the return of some capital. In the subsequent five years, the funds returned 280 percent.
Other funds have also returned capital in recent years.
In 2011, London-based Brevan Howard returned $2 billion to investors in its biggest fund after it told clients it would limit the fund’s size to about $25 billion to ensure it continued to produce top returns.
Paul Tudor Jones has limited investments in his $9 billion Tudor BVI Global fund since 2010, and recently opened a multimanager macro fund to give some of the most experienced portfolio managers at this Greenwich, Connecticut-based firm the ability to manage more money.
Moore will cap each client’s investment in the fund to 5 percent. The fund has already told some investors they will be redeemed in full as part of this capital return.
Investors wanting to keep their money with Moore can invest in the $4 billion Moore Macro Managers fund, which is run by 14 portfolio managers. That fund, which has limited new investments, has outperformed Bacon’s fund over the last five years, with a cumulative return of 37 percent, or 6.5 percent a year, on average, compared with 28.6 percent, or 5.2 percent, for Bacon’s fund. Through July, Bacon has returned 1.6 percent this year and the Macro Managers fund has climbed 1.8 percent.
Bacon said that fund doesn’t face the same capacity constraints as each manager trades a smaller amount of money and some trade in a broader number of markets.
There have been, and will continue to be, ample opportunities, Bacon said “but I want to determine whether it is asset size that has precluded me from better capitalizing on those opportunities we have found,” he wrote.
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