Falling down: hedge fund Lansdowne suffers string of bad bets
Flagship fund of one of Europe’s biggest managers has lost money over the past 3 years
At the end of 2004 equity analyst George Michelakis left Lansdowne Partners, once viewed as the gold standard of equity hedge funds, to set up shop on his own.
Today his Gladstone Capital Management has built up an enviable record, making large double-digit gains in each of the last three years, and also profiting during the sell-off in May.
The firm he left behind, however, is not faring so well. One of London’s oldest and most secretive hedge funds — and still one of the biggest with $20bn in assets — Lansdowne is struggling after a string of bad bets.
Its flagship Developed Markets hedge fund, known for profitable bets against Northern Rock during the last financial crisis, lost nearly 15 per cent in 2016 and 7.4 per cent last year. Even in this year’s rally the fund was down 4.4 per cent to the end of May, according to numbers sent to investors and seen by the Financial Times.
Some in the industry say the problem with the fund — run by Peter Davies, the best man at former chancellor George Osborne’s wedding, and co-manager Jonathon Regis — is its scale.
“Size is the main issue,” said one senior hedge fund investor. “If you run $20bn it’s very difficult to make money.”
The complaint is a familiar one: large funds cannot invest in some smaller assets and it can take them much longer to sell out of positions. But it fails to explain why some bigger funds than Lansdowne are regularly putting up better numbers. New York’s Millennium Management, for example, with some $39bn in assets, has delivered positive returns for years.
Lansdowne declined to comment for this story.
The firm, based just off Mayfair’s Berkeley Square, was founded in 1998 by Steven Heinz and Sir Paul Ruddock, who is known for the philanthropic donations he has made to institutes, including the Victoria and Albert Museum’s Medieval & Renaissance Galleries.
Lansdowne’s flagship strategy was launched in 2001 under Mr Davies and Stuart Roden, former colleagues at Mercury Asset Management, a former top funds house sold a few years earlier to Merrill Lynch. Now holding $13bn in assets, the strategy includes a $6bn hedge fund and a more-than-$6bn long-only fund that has made money this year.
It is the hedge fund, for which Lansdowne is best known, that has found the going tough. It still boasts an annualised return of more than 10 per cent, based on profits being reinvested, since its 2001 launch — a record that had led to investors queueing up to get in.
But the picture has changed. Its latest update to investors, seen by the FT, shows a compound annual loss of close to 3 per cent over the three years to May 2019. The S&P 500 is up 31 per cent over that period, equivalent to an annual gain of 9.5 per cent.
Its “short” bets on falling stock prices have not beaten the market in aggregate since 2008, according to a letter to investors.
The firm is notoriously secretive. Mr Davies shuns the limelight, while its letters to investors do not identify the funds’ biggest long positions or any of its shorts.
However, among bad calls in recent years have been underestimating the impact of Brexit on UK stocks, and a painful bet against a resurgent Glencore in 2016 (which was above regulatory levels for disclosure). Last year the fund lost money on positions in Lloyds Banking Group and Lufthansa, according to letters to investors.
“Our description of 2018 in September as ‘frustrating’ proved generous as a brutal final quarter left the year one that many, including us, were pleased to see end,” wrote Messrs Davies and Regis in a January letter.
Amin Rajan, chief executive of CREATE-Research, an asset management consultancy, said: “Maybe [Lansdowne has] reached a scale where they can’t deliver good performance any more.”
Lansdowne’s losses this year come as many other funds are thriving.
Gladstone gained 5.8 per cent in May’s sell-off and is up 11.4 per cent this year, according to a letter to investors seen by the FT. Pelham, run by another Lansdowne alumnus, Ross Turner, lost 6 per cent last month but is still up 4 per cent this year.
“Market strength just overwhelmed negative newsflow,” wrote the Lansdowne duo in their latest letter, about some short positions this year.
Lansdowne has been trying to shrink the Developed Markets fund, which has fallen in assets from more than $10bn, and has not been taking in new money when investors redeem, say people with close knowledge of the fund.
Some investors also point to the fund’s change of management as a possible problem. Mr Roden, who stepped off the fund at the end of 2014, was co-manager with Mr Davies. Mr Regis, 43, co-manages the fund but is technically deputy to Mr Davies. Some investors have queried whether this structure allows Mr Regis to challenge Mr Davies, 47, on his trade ideas.
“It’s a very flat structure,” said a person close to Lansdowne. “Both managers have authority to put on a position in the fund.”
Lansdowne is looking at ways to improve, for instance in how it uses data or market intelligence, the person said.
“It would be crazy to sit with heads in the sand and say everything is fine,” the person added.