Drake Management’s founders, Anthony Faillace and Steve Luttrell, have the pedigrees that go over well with investors. Both hail from BlackRock, and before that, Pimco. After a stellar 2006 for their largest fund, Global Opportunties, a global macro player, 2007 a large increase in assets under management was followed by a dramatic reversal, The fund is down 23.7% this year, and as a result, the managers have restricted redemptions.
Note that this is not Drake’s only fund; the firm manages $13 billion. But its multistrategy fund, the Absolute Return Fund, a os dpwn 11.5 percent in 2007 through November.
From Bloomberg:
Drake Management LLC suspended most redemptions from its largest hedge fund after losing 23.7 percent through November, according to a letter sent to investors of the New York-based firm.
Drake will meet about 25 percent of requested withdrawals from its $3 billion Global Opportunities Fund, which tries to profit from macroeconomic trends by trading bonds, stocks, currencies and commodities. The letter didn’t disclose how much investors had asked to withdraw at the end of the year.
“This decision was made only after we attempted to convince redeeming investors to voluntarily rescind their redemption requests,” said the letter, signed by Drake Management and sent out today.
The partial redemptions were made possible by an agreement with Drake’s banks, the letter said. The firm’s lenders would have been allowed to terminate transactions and seize collateral if net assets had fallen by 30 percent….
The firm’s assets more than doubled this year, after the Global Opportunities Fund advanced 41 percent in 2006. At the end of 2005, assets were $2.5 billion. This year Drake opened research offices in Miami, Sao Paulo and Istanbul.
The Global Opportunities Fund, managed by Faillace, has returned 13.4 percent a year on average since beginning trading on Nov. 30, 2002. That compares with a 13.1 percent gain by the CSFB/Tremont Global Macro Index.
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The downside of a focused strategy, combined with leverage and concentration is that when you get it wrong it’s near-terminal, if not compeltely so once the redemption cascade ensues. Of course no one complains when one is levered and one get’s it “right”, or when events inadervently make you right, but the Darwinian re-allocation process has to make one chuckle since – like evolution – survival rarely implies betterness, but merely greater fitness relative to conditions at an historical point in time, that may or may not persist.
But one shouldn’t shed a tear for Drake or their principals with $13bn under mgmt. For as Anthony Hopkin’s said to Alec Baldwin’s character in David Mamet’s “The Edge”: “Never feel sorry for a man with his own plane…”
Leverage is works in reverse too? We are seeing it in housing, we are seeing it in the banks/brokers and the hedge community is getting its comeuppance. Assuming a 4:1 ratio, there is no equity left. Sorry, closed for business. The great irony of the past five plus years is that the “smart” money – and its cheerleaders – got confused with a bull market. Sadly the prudent got punished. This gebs the question of what is smart money? The anwser is a mirror image of the American way, which looks increasingly unsustainable. Mish / Minyon have a great post up on the coming time of choices? It just feels like a new era is upon us. Lets hope this marks the end of Jim Cramer, AJC (GS) and the rest of that vintage. America will be a better place.
“Many of the things which hedge funds do…tend to refine the pricing system in the United Sates and elsewhere. And it is that really exceptional and increasingly sophisticated pricing system which is one of the reasons why the use of capital in this country is so efficient…there is an economic value here which we should not merely dismiss…I do think it is important to remember that hedge funds…by what they do, they do make a contribution to this country.”
–Alan Greenspan, 10/1/1998
Please send a card to Drake thanking them for refining the pricing system.