Hedge fund Millennium shuts several ‘trading pods’ over virus turmoil
Lay-offs expected as market swings wreak havoc on fixed-income and relative-value strategies
US hedge fund Millennium Management has closed several of its “pods” run by teams of traders in response to losses related to violent market swings caused by growing fears over the economic impact of coronavirus.
Closures of the so-called “trading pods” at the $40bn multi-strategy firm — which has about 150 to 200 of them — have reached double digits, according to two sources familiar with the situation.
Millennium gained 0.75 per cent in the first two months of the year before declining 2.67 per cent this month through to March 12, people briefed on the numbers said.
But there has been a wide disparity in performance between different hedge fund strategies at Millennium.
The large moves in markets have wreaked havoc on strategies such as relative value — eking out profits from small price differences in similar securities — fixed income, and quantitative trading. Millennium had close to 40 per cent of its strategy allocation in relative-value fundamental equity, 19 per cent in quant and arbitrage, and 22 per cent in fixed income as of mid-2019, according to an investor document seen by the Financial Times.
Millennium was founded more than 30 years ago by Izzy Englander. It is known as one of the industry’s best-performing hedge funds and has only had one down year, when it lost 3 per cent in 2008, according to an investor presentation.
Over the past three weeks the S&P 500 has tumbled into a bear market — defined as a 20 per cent drop from its recent peak. The US stock market sold off again on Wednesday, and is now 30 per cent below its peak.
Bond markets have also been hurt by the turmoil unleashed by the virus outbreak. Even the US Treasury market, usually seen as a safe haven for investors, has become less liquid than normal. Widening gaps between nearly identical government bonds, as well as Treasury bonds and Treasury futures, have hit “relative-value” hedge funds that use leverage to arbitrage and try to profit from the price differences.
Millennium’s problems have extended to Asia as well, where relative-value trades have also been wrongfooted, and lay-offs are expected imminently. “That is the disadvantage of being in transparent markets,” said one person familiar with the group in Asia. “Public market securities are the first to suffer. In the private market there is no transparency and nobody knows what the right mark is. Liquidity has vaporised.”
New York-based Millennium is structured as a sprawling empire of trading teams and strategies. It has expanded aggressively in recent years, hiring portfolio managers as banks retreated from proprietary trading and a trend of investors favouring large hedge fund groups. Each of its teams manages money independently with strict risk parameters.
Mr Englander is renowned for an “eat-what-you-kill” approach to managing his army of portfolio managers, traders and analysts. Successful traders can profit handsomely at Millennium, but those who lose money quickly have their risk levels cut, or are fired.
Millennium suffered a blow when Michael Gelband, its head of fixed income and heir-apparent to Mr Englander, abruptly departed in 2017 to set up his own firm, ExodusPoint.
Mr Gelband was head of fixed income at Lehman Brothers until he was ousted by its chief executive Dick Fuld in 2007, after a dispute over how much subprime mortgage risk the investment bank was running. He then returned to Lehman from June until October 2008 before leaving for Millennium. ExodusPoint became the biggest new hedge fund launch in history when it opened in 2018, raising $8bn despite a tough environment for the broader industry.
A spokesperson for Millennium declined to comment.
Gapping down
In reaction to disappointing earnings/guidance:
- DRI -12.2%, CBRL -7.4% (withdraws guidance), TLRD -6.7%, EXAS -3.7% (withdraws guidance), LEN -3%, BURL -1.2% (withdraws guidance)
Select ETFs showing weakness:
- XLF -2.3%, DIA -2.2%, XLK -1.9%, IWM -1.8%, SPY -1.7%, QQQ -1.7%, XLI -1.5%, GLD -1.4%, XLP -1.3%, XLY -1.1%
Other news:
- CARG -10.8% (offers 50% rate reduction on all marketplace subscription billings in April; suspends full year guidance)
- MAR -9.9% (withdraws all aspects of its 2020 outlook; provides business update)
- FCAU -9.7% (will cease production at its plants across North America)
- MT -6.9% (taking steps to reduce production from its European operations)
- HOG -5.8% (temporarily suspends U.S. production)
- MTN -4.2% (anticipates a negative impact of $180-$200 mln to EBITDA from coronavirus)
- PTLA -3.3% (co suspends face-to-face field activity and instituted a mandatory work from home policy)
- TRGP -2.7% (reduces dividend and capital spend)
- PFE -1.9% (announces clinical data for two studies)
- SBUX -1.8% (bullish Mad Money interview on CNBC)
- VIAC -1.7% (suspends marketing efforts to sell Black Rock)
- CNQ -1.7% (provides corporate update on capital flexibility)
- JNJ -1.6% (Janssen unit submits NDA to the FDA for multiple sclerosis)
- DRNA -1.2% (receives orphan drug designation from FDA for DCR-A1AT)
Analyst comments:
- BYND -3% (downgraded to Underperform from Neutral at BofA/Merrill)
- ETSY -0.6% (downgraded to Neutral from Buy at ROTH Capital)
Gapping upIn reaction to strong earnings/guidance:
- GES +12.2%, CSPR +11.4%, POL +6.9% (reaffirms guidance), DOYU +6.1%, MOMO +6%, MLHR +5.6%, TCOM +4.5%, WSM +3.7%, ACN +2.6%, CMC +1%, CMC +1%, FIVE +0.8%
Select ETFs showing strength:
- XLC +2.9%, XLE +1%, XLB +0.9%, GDX +0.9%
Other news:
- CHEF +20% (issues update on liquidity)
- BTAI +19.5% (announced that more than one-third of the patients in the Phase 3 SERENITY trials have been enrolled and treated)
- CODX +11.7% (JV receives license in India to sell COVID-19 test kits)
- AEG +8.1% (provides update on capital position; Aegon remains well capitalized in the upper half of the Solvency II ratio target range)
- KL +2.8% (increases dividend)
- ICE +1.9% (to move temporarily to fully electronic trading, effective March 23)
- ABT +1.3% (announces that the FDA has issued Emergency Use Authorization (EUA) for the co's molecular test for novel coronavirus)
- CBTX +1% (suspends share repurchase program)
Analyst comments:
- APHA +2.8% (upgraded to Buy from Neutral at BofA/Merrill)
- DPZ +1% (upgraded to Hold from Sell at Deutsche Bank)
