DragonBack Capital CEO Robert Lance has expressed his disappointment at having to close its two hedge funds after heavy redemptions.
Lance notes, ironically, that market conditions this year had become more favourable for its funds, which traded volatility, but that the company had been unable to take advantage as investors continued to ask for their money back.
“When you continue to lose AUM, you can’t put your skill-sets to work,” he tells AsianInvestor. “It hampers your ability to build out the portfolio the way you would like to, and the way your remaining investors would expect you to.”
At its peak, DragonBack Capital managed close to $600 million in assets under management, having launched the DragonBack Asia Pacific Equity Multi-Strategy fund in March 2007.
That fund started with $7 million from the partners but closed to new investment with $588 million in August 2008, having attracted 50 institutional investors.
In May of that year, DragonBack Capital won AsianInvestor’s award for best new hedge fund launch for its multi-strategy fund.
The company subsequently launched the DragonBack VolAsia Fund in September 2008 with $4.3 million in assets from friends and family. But the fund topped out at about $12 million after its launch coincided with the bankruptcy of Lehman Brothers.
Faced with losses in their own portfolios, institutional investors began redeeming their holdings as fast as they had allocated them. DragonBack Capital saw redemptions begin in the first quarter of 2009 and intensify throughout last year.
However, Lance argues that performance wasn’t the central issue. Its multi-strategy fund returned 4% in 2008, when most hedge funds lost money, and was down just 5% last year after market volatility dried up. It was down about 3% in 2010.
Unlike many large hedge fund managers, DragonBack Capital didn’t impose a gate or restrictions on redemptions during the financial crisis. In fact, its highly liquid strategy and holdings made it a popular redemption target.
“It’s obviously disappointing,” reflects Lance. “The reality is, everybody wanted their money back and this is where they could find liquidity.”
The Hong Kong-based hedge fund manager has now shed its investment-management team of eight, including chief investment officer Matt Barnett, and returned $20 million to $30 million, the last of its capital, to its remaining investors in August.
“We have said our farewells to Matt and the investment team, having enjoyed the past three years together, so ongoing support and friendship amongst us all very much remains,” the company wrote in a letter to its shareholders announcing the closure of the funds and the restructuring.
DragonBack is now in the process of recasting itself as a company that supports fledgling hedge funds with risk management services and middle- and back-office support, on what it plans to call the DragonBack Management Platform.
Its operational staff of 10 remains and will provide the backing for the new platform.
Hedge funds have become increasingly institutionalised, although smaller players typically struggle to raise money unless they have strong procedures for risk management, compliance and investor relations in place. However, the cost, manpower and software requirements are often difficult for them to muster.
“To go to the next level, they need to institutionalise their infrastructure,” Lance says. “It is becoming increasingly difficult to do.”
Having built those systems for its funds, DragonBack now hopes to offer them to other funds, whose investment management teams can then concentrate on managing money. The company will focus on putting risk management systems in place, tracking not just risk but also portfolio compliance. It will, for instance, check that its client funds stay within their investment parameters and are able to de-leverage them if necessary.
DragonBack will charge hedge funds up to 50% of the management fee they receive from investors for its services, with the proportion falling as the fund gets larger. It will also charge a fee of around 25% of a hedge fund’s performance.
Lance, who left Lehman Brothers in 2006 as managing director for Asia ex-Japan equity sales and also spent 11 years with Deutsche Bank, continues as DragonBack’s CEO.
Phil Tye, meanwhile, stays on as chief operating officer. Previously he was chief financial officer at hedge fund manager PMA and prior to that director of prime brokerage at Credit Suisse.
Other key staff members who remain with the operations team include head of operations Katheryn Quinn, financial controller Emily Hackney and head of investor services Carlotta Foo.
DragonBack says it is in talks with several hedge funds and hedge-fund backers to move their operations on to its new platform. It hopes to be working with a handful of hedge funds by the end of this year. “Our investor base appreciated our transparency and honesty through the process,” Lance adds. “That’s what particularly bodes well for us.”