It’s no longer surprising when hedge funds close their doors. According to a website that tracks hedge fund “implosions,” since late 2006, aptly-named The Hedge Fund Implode-O-Meter, at least 117 major funds at 71 fund families have shuttered.
The sponsoring fund families are some of the best-known in the business. They include Citigroup, Carlyle, Russell Investments and ING.
Nevertheless, the closing of Emrys Partners, a hedge fund launched just more than two years ago, has real significance for investors. Here’s some relevant background.
Steve Eisman and”The Big Short.” The founder of Emrys is Steve Eisman. Eisman was anointed one of the market’s stock “gurus” after being profiled by Michael Lewis in his book, “The Big Short: Inside the Doomsday Machine .” Eisman previously served as a fund manager for another hedge fund firm, FrontPoint Partners, which he joined in 2004.
He made millions of dollars betting against subprime mortgages in 2007. Assets under management at FrontPoint had doubled in size to $1.5 billion by the end of that year. His investors reaped returns estimated to be more than 80 percent according to a 2011 Insider Monkey article by Renee Ann Butler.
He left FrontPoint in 2011, following allegations that a co-manager of the firm’s health care portfolio traded on inside information. Eisman was never accused of any wrongdoing, but these allegations caused significant withdrawals from FrontPoint.
The hype surrounding Emrys Partners. Given his track record and celebrity status, Eisman had little difficulty raising almost $23 million from friends and family to start Emrys. This quote, published in a 2012 Bloomberg article and attributed to Jay Rogers, president of Alpha Strategies Investment Consulting Inc., was prescient: “From his history of shorting subprime, people want to see that he’s not a one-trick pony and that he can do it again.”
Emrys was a long-short fund that could invest in stocks and bonds across industries. That’s a very broad mandate.
Eisman put together a dream team of fellow stock market gurus as co-founders. They included Jon Kalikow of Rocwood Capital Management, Ed Cabral of Goldman Sachs Group Inc. and Mark Weiner of JAT Capital Management LP.
If you were offered the opportunity to invest with Emrys, it would have been difficult to resist. After all, someone with the expertise to short subprime mortgages at just the right time must have special insight into the market, right?
Eisman’s track record at Emrys. Investors who were expecting Eisman to repeat the stellar track record he had at FrontPoint must have been bitterly disappointed. In stark contrast to the 81 percent return he achieved at FrontPoint in 2007, Emrys badly underperformed broad market indexes in 2012, returning only 2.6 percent according to a FINalternatives article. In 2013, Emrys returned 10.8 percent, again lagging the broader markets. The fund was in negative territory this year.
Prior to closing his fund, Eisman had attracted assets of approximately $185 million.
Reason given for the shutdown. Eisman’s reason for closing Emrys is illuminating. He wrote: “Making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy.”
The term “fundamentals” is generally understood in investing to mean the economics of the business. An analysis of fundamentals can include a review of the balance sheet, the income statement, management and cash flow.
How Eisman’s conclusion should affect your investing. Much of the financial news is based upon the opinions of self-styled financial gurus concerning the fundamentals of a particular company. For example, Jim Cramer recently analyzed the fundamentals of Visteon, an automotive supply firm. According to Cramer, the breakup of this firm might value the company’s stock at $132 a share. Visteon’s shares closed on Sept. 12 at $105.83 a share.
Apparently even Cramer disagrees with Eisman’s conclusion that looking at fundamentals “is no longer a viable investment philosophy.”
But instead of basing investment decisions on fundamental analysis, you should be focusing on factors you can control, such as costs and fees, your asset allocation and tax efficiency