When a Hedgie Throws in the Towel

In the full teeth of a bear market, hedge fund deaths are many. Few carry any larger, systemic meaning. By now, everyone is losing money: long term investors, retail, venture capital — so many of the strategies and vanities that made sense in an endless era of easy money, suddenly seem absurd. Or, to quote Warren Buffett:

Only when the tide goes out do you discover who’s been swimming naked.

Which brings us to Benjamin Fuchs. There is no reason that you would have heard his name, or anything about the sinking fortunes of his hedge fund. He is one of those sub-tidal creatures that occupy the financial ecosystem when markets are robust. He runs a modest pot of money out of Hong Kong and is full in on risk and all its varieties — specializing in, as he describes on his Linked In page, extracting value across the capital structure. Our strengths include Credit, Volatility, and Convertible Bonds.

Every now and again he will pop up on Bloomberg TV — explaining, yet again to the bored interviewer, why he remains bullish on the battered bonds of Chinese real estate developers. No one really cares. Bloomberg’s 24 hour channel needs the content and if anyone does take note of him on the screen — fresh faced, Air pods in his ears, nattily dressed in a brown suit and matching tie — Fuchs is likely on mute.

A few days ago, Bloomberg ran a story highlighting his troubles. His hedge fund, once sized at $5 billion, is now half that amount — and shrinking by the day.

In a region dominated by stock pickers, BFAM invested across asset classes, with Asian credit, particularly Chinese real estate companies’ debt, becoming a key part of the portfolio. In the boom years, trading Chinese high-yield bonds was a big money-earner, but the downturn in the property market caught Fuchs — and many others — by surprise.

When China introduced its “three red lines” policy in 2020, which capped the debt that developers could take on in an attempt to reduce excesses in the sector, the move was seen as a way to make growth more sustainable, but observers such as Fuchs still fully expected the government to step in and support the industry when necessary, like it had done in the past. It didn’t happen. In December, China Evergrande Group defaulted on its borrowings, as did Kaisa Group Holdings Ltd., another major developer. A string of other defaults followed. China’s property firms were in crisis, and the government did nothing — because it was now focused on reducing debt and speculation and narrowing the nation’s wealth gap.

And here is the kicker:

“I don’t think any of us appreciated that pivot until it was really too late,” Fuchs said.

If there is one thing that last week’s downdraft taught us is that there are no more bailouts. Not for Benjamin Fuchs — and not for the rest of us either. In the back of our minds we all thought that somehow, someway the Fed would figure out a way to turn the taps back on, as it has been doing since the early days of Alan Greenspan. Which is why stocks sold off so sharply on the inflation news. Inflation is here to stay, after years of loose lazy money, the Fed’s credibility as an inflation fighter is nil — there is only one direction for rates to go and that is upward.

As the Wall Street Journal put it, Powell is going full Volker, even if it took him some time to get there.

It’s a brutal reality, not least for this last generation of swing for the fences hedgies who, for the better part of a decade, minted money on the notion that there would always be a buying of the dip — because the Fed would always be there to provide a bottom.

Chase Coleman, another fresh faced lad who once presided over tech assets of $80 billion, continues to see his portfolio disappear. In this year’s third quarter, his publicly traded portfolio decreased in value from $26 billion to $11 billion. There are others too.

Per the Wall Street Journal.

And then there is Marcho Partners a tech-focused fund founded by a onetime deputy of tech investor Chamath Palihapitiya. The London-based fund, which had over $1 billion in assets under management at its peak, was down nearly 84% through June 30, according to a summary Marcho sent to its investors, marking one of the worst-known performances for a hedge fund so far in 2022.

Behind the dismal results: a leveraged bet on a relatively small number of highflying growth stocks that have plummeted in value, such as Shopify Inc. and British online used-car retailer Cazoo GroupLtd.

What makes Fuchs interesting is that he actually admits that his strategy — despite all the fanciness about credit, volatility and the long term housing trends in China — was based on the Chinese government bailing him out. Even in private, most investors will not actually say as much. After all, their identities, professional and personal, are wrapped up in the notion that they can outsmart the market, and charge a pretty penny to clients in the process.

There are some amusing tidbits in the piece. Fuchs’ first job in finance was at Barings where he was on the same futures and options team as Nick Leeson, whose renegade trades blew up the bank in 1995. Then he became a prop trader at Lehman, until its end in 2008.

So what did he do next? Start his own hedge fund of course — or Benjamin Fuchs Asset Management to be precise.

His timing was perfect and he rode the China liquidity wave for as long as he could.

Back to Bloomberg:

By the end of May 2021, BFAM was overseeing $5.03 billion, up more than 15-fold from June 2012. It manages about $2.9 billion today. At its peak, the company employed 99 people (that’s now in the 70s), and traded everything from credit default swaps to Lebanese rates and securities tied to swings in the Turkish lira.

“We definitely got caught on our back foot,” Fuchs, who is 53, said. “I would be lying if I said it’s not massively stressful.”

He goes on to say that the fund will remain extant, pared down albeit.

I would tend to doubt it.

Sometimes the music really does stop.