DE Shaw shuts doors to new investors; Traditional hedge fund strategies not as profitable as before

Last updated: October 7, 2013 5:42 pm

Hedge fund DE Shaw shuts doors to new investors

By Sam Jones, Hedge Fund Correspondent

One of the most profitable hedge funds has closed its doors to new clients, calling time on the industry’s ability to square vast inflows of money with the promise of market-beating returns. DE Shaw’s move means that of the largest six hedge funds, only two, the UK’s Man Group and the US firm Och-Ziff, are still accepting cash into their flagship funds. Many traditional hedge fund strategies have become far less profitable due to quantitative easing, bank deleveraging and a tail-off in corporate dealmaking.Since 2009, the average hedge fund has eked out a meagre gain on its investments of only 15 per cent, according to data provider HFR.

Money has poured into the hedge fund industry regardless, as institutional investors such as pension funds try to source profits from beyond their volatile equity books and low-yielding bond holdings.

Total assets managed by hedge funds have grown from $1.4tn in 2008 to $2.4tn at the last count.

DE Shaw’s Oculus and Heliant funds were closed earlier this year and its flagship multi-strategy fund, Composite, was closed at the end of the summer, said people familiar with the matter.

Only a number of smaller bespoke funds, investing in specialist areas such as reinsurance or mortgage bonds, remain open to new money at the New York-based firm.

DE Shaw declined to comment. In spite of its size, the firm is one of the most publicity-shy organisations on Wall Street. Its alumni include Lawrence Summers – until last month the favourite to succeed Ben Bernanke as chairman of the US Federal Reserve – and Jeff Bezos, the founder of Amazon.

DE Shaw is mainly known for its style of using mathematical and statistical modelling to spot investment opportunities – a legacy left by founder David Shaw, a mathematician who resigned from the day-to-day running of the firm in 2002. Mr Shaw now focuses on research into computational biochemistry and is a scientific adviser to US President Barack Obama.

Since it was set up in 1988 DE Shaw has had little trouble in beating its hedge fund peers, but executives at the firm believe now is a prudent moment to curb its size.

Some of the markets in which DE Shaw trades such as asset-backed bonds are small and increasingly difficult to use leverage in, they have noted, while some trading strategies themselves such as seeking to profit from arbitrage in convertible bonds simply no longer work so well.

Oculus, DE Shaw’s flagship vehicle, made clients 20 per cent last year and 18 per cent in 2011. Performance this year at DE Shaw has been more modest, said an investor, who declined to give a precise figure because it is protected by confidentiality agreements.