Nashville-based hedge fund Rinehart Capital Partners, which specializes in value investing, is closing its operations, lamenting that the current market does not reward funds that employ value investing as a strategy. The seven year old fund was funded, in part, by hedge fund veteran Lee Ainslie who himself is a specialist value investor and who once managed capital at billionaire Julian Robertson’s hedge fund firm. Rinehart Capital founder Andrew Cunagin blamed its poor performance on stimulus driven market conditions and conceded that despite continued backing from Lee Ainslie, the fund was forced to cease operations on redemption pressure from other investors. The fund had been losing money in the last two years and was down again this year as of the end of June.
Value Investors Viewed as Out of Touch
It is not often that a hedge fund manager blames external factors for a fund’s failure but Andrew Cunagin blamed a host of external factors for his inability to generate returns. In his letter to investors, he said the current market is rewarding growth themes over value themes. As opposed to the traditional investment style of buying low and selling high, Cunagin says the strategy that works in this market is one of following momentum and buying high and selling low. The hedge fund manager is critical of high frequency trading and says there is evidence of high frequency traders rigging the price movement of stocks.
Cunagin says his unwillingness to subscribe to the new rules and go against the grain of convention did not find favor with his investors after a sustained period of underperformance. Rinehart was launched in 2007, just months before the pre-crisis peak. It outperformed most funds in 2008, losing only 12 percent during the year, compared to much bigger losses for several hedge funds. It also generated positive returns in each of the years 2009, 2010 and 2011, but struggled thereafter. The hedge fund lost 7 percent in 2012, and followed that up with a 15 percent loss in 2013 and extended its lean period through a further 4 percent loss in the first half of this year.
Some Hedge Funds Struggle
While the overall assets in the hedge fund industry continue to surge, it has not translated into widespread optimism within the industry. The demise of Rinehart Capital is not an exception and there are other funds that continue to struggle in this market.
Hedge fund Emrys Partners,which had assets as high as $200 million, is another example of a fund managed by a once successful manager ,but found the going tough in the current market. The fund was managed by Steve Eisman, who was one of the star managers during the financial crisis. He earned returns of 67 percent in 2007 by shorting the sub-prime mortgage market and for-profit education companies when working at hedge fund FrontPoint Partners. He started Emrys Partners in March 2012 after leaving Frontpoint. His fund reported gains of 3.6 percent in 2012 and 10.8 percent in 2013, significantly lagging the broader market in both years. The hedge fund was also losing money this year.
This year Emrys Partners noted in one of its investor letters that making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy. It closed its operations at the end of June.
A separate report by research firm eVestment found that investors are preferring larger funds over smaller funds. The report found that at the end of 2013, the number of hedge funds with assets in excess of $1 billion increased by 13 percent, while those hedge fund groups with assets between $750 million and $1 billion rose 44 percent. The hedge fund industry growth in assets came from funds with greater than $750 million in assets while reported assets in the universes of funds smaller than $750 million witnessed decline.
Relevance to Job Market
The recent shutdown of hedge funds Rinehart Capital Partners and Emrys Partners may not have much of an impact on the job market given the relatively small size of the two funds. But the concerns about the changed market conditions, as expressed by the two fund managers, are shared by many other hedge fund managers. It will be hard for the job market to see a rebound when many hedge fund managers, especially those managing small funds, are finding it hard to generate acceptable returns for investors.
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