Claren Road’s speed bumps are turning into a sinkhole. The credit-oriented hedge fund firm, which is 55 percent owned by private equity outfit Carlyle, may end up with only around $2 billion in assets under management by the end of September. A year earlier it boasted $8.5 billion. Its rapid shrinkage offers lessons for rivals.
Misplaced investments don’t help. A legal decision last fall thwarted a punt on securities of Fannie Mae and Freddie Mac, the U.S. government-chartered mortgage lenders that were bailed out in 2008. Bets on credits relating to the energy sector and Greece added to Claren Road’s woes, and it experienced its first calendar-year drop in assets – of about 10 percent – in 2014. That’s not disastrous. Set against positive, if anemic, hedge fund performance in general, though, it raised questions the fund hadn’t faced before.
The consultants used by hedge fund investors added to the pain. Like proxy advisers in the world of stocks, these firms can have outsized influence. One, Cliffwater, last month recommended clients take their cash out of Claren Road, according to the Wall Street Journal. Carlyle said on Monday that Claren Road had, by the Aug. 16 deadline for the firm’s Sept. 30 quarterly redemption date, received demands for $2 billion to be returned, nearly half the total. Carlyle is also taking a big writedown on the value of its stake.
There’s a certain herd mentality, too. Investors beyond Cliffwater’s clients may have been rattled by the consultant’s change of heart. Though Claren Road made gains in the first four months of the year, it lost money in May, June and July. No one responsible for allocating money wants to risk being the last one left in a troubled fund, especially when there are thousands of others to choose from.
The result has been a downward spiral for Claren Road’s AUM, even though it survived the financial crisis, handled redemptions along the way and retained the respect of investors. Moreover, there hasn’t been any generalized credit market upheaval to worry investors.
The four founders may yet regroup, perhaps at a smaller scale. One thing they and other hedge fund bosses will surely take on board, though, is that a scatter of small doubts can quickly erase many years of solid performance.