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Hedge fund pioneer Louis Bacon’s retreat spells end of era

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Via Financial Times

When Saddam Hussein’s tanks rolled into Kuwait in 1990, even the CIA was blindsided. But one young trader wasn’t — and made a fortune.

Louis Bacon, a 34-year-old former Bankers Trust and Shearson Lehman Hutton trader, had earlier that year founded a small hedge fund, helped by a $25,000 inheritance from his mother. One of his first moves was a prescient bet on an Iraqi invasion that would send oil prices soaring and stocks tumbling. 

Nailing both sides of the trade netted Mr Bacon’s fledgling Moore Capital Management a whopping 86 per cent return in its first full year, and helped catapult him into hedge fund history. A succession of other big, successful trades on geopolitics and economic trends made him one of the most well-known faces of the hedge fund style known as “global macro”. 

Indeed, along with other prominent global macro investors such as George Soros, Stan Druckenmiller, Bruce Kovner and Alan Howard, Mr Bacon helped shape the popular concept of hedge fund managers: seemingly omniscient buccaneers who surf the undulations of the global economy and can make and break the fate of nations — profiting handsomely along the way. 

This week it emerged that a long and pioneering career is drawing to a close. Mr Bacon, 63, announced plans to close his flagship hedge funds to outside investors and return their remaining money. The move follows years of underwhelming performance and a drop in Moore’s assets to $8.9bn at the end of last year. 

Mr Bacon said in a letter to investors that it “has not been an easy decision”, adding that it would give him “the space to step away for significant periods of time when my other interests abound without the ongoing weight and responsibility of looking after public investors’ capital”.

His four-decade career spans the hedge fund industry’s shift from the swashbuckling days of the 1980s, when a handful of star managers catered for high-net-worth individuals, to the post-2000 period when the rise of institutional money has diminished risk appetite and put downward pressure on fees.

Mr Bacon’s retreat coincides with the 30-year anniversary of Moore’s launch. The less hospitable market environment was an important catalyst: “One part of the macro toolbox is missing — volatility,” he told the Financial Times on Thursday.

He is one of the most high-profile managers to date to step back and follows moves by other prominent macro names such as Mr Druckenmiller’s Duquesne Capital and Michael Platt’s BlueCrest Capital to scale back operations or throw in the towel.

Like his mentor Mr Kovner and his friend Paul Tudor Jones, Mr Bacon cut his teeth at what was arguably the first global macro hedge fund: Commodities Corporation, in Princeton, New Jersey. The trio went on to set up their own firms. Thus for many in the industry, this week’s news marks the end of an era.

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“It’s a sad day. People use the word legend a lot, but he really is,” said Raoul Pal, a former hedge fund manager who previously worked on Goldman Sachs’s hedge fund desk, where he witnessed first-hand Mr Bacon’s prowess. “He’s one of the best traders I ever saw.”

A former Moore Capital colleague concurs, describing Mr Bacon as “by far the best foreign exchange trader in the world, period”. 

Indeed, when George Soros was struggling to find new ways to bet against sterling in 1992 — culminating in perhaps the most famous global macro trade of all time, when Mr Soros “broke” the Bank of England — he called Mr Bacon for ideas on how to increase the size of the trade, according to Sebastian Mallaby’s book, More Money than God

Although Moore’s returns have been poor lately — its three main funds are up “low single digits this year” — they have still posted average annual returns of 17.6 per cent since its founding, the firm said. LCH Investments, which invests in hedge funds, estimated that Moore had made $18.3bn for investors since its inception.

Yet the move by Moore to give back client money and the withdrawal of its founder from the frontline of trading are emblematic of a dismal spell for once-imperious global macro hedge funds.

The post-crisis era of low interest rates, muted economic growth and subdued market volatility has proven difficult for these funds. At the same time, the ascendance of algorithmic “quantitative” hedge funds that systematically mine even the faintest of profitable signals has eroded the opportunities further. 

Between 1990 and 2010, global macro funds gained an average of 14.4 per cent a year, according to HFR data. But since then they have been treading water. This year they have returned 5.6 per cent, and have even been outpaced by US government debt.

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“Central banks have compressed volatility, while quants have destroyed the shorter-term trading opportunities. That’s why macro has been hurt,” said Andrew Law, the head of Caxton.

The masters of macro

Stan Druckenmiller

Stan Druckenmiller established his reputation by breaking the back of the British pound in 1992 with his mentor George Soros. In 2010, Mr Druckenmiller stepped back from managing outsider money after three decades at Duquesne Capital Management.

Michael Platt

In 2015, the founder of BlueCrest said he was pushing out external investors, arguing that the industry’s fee model is no longer profitable enough to be worth the effort. BlueCrest is now a private investment partnership that manages the fortunes of Mr Platt, its other partners and employees.

Paul Tudor Jones

Paul Tudor Jones partly made his name predicting Black Monday in 1987, when he tripled his money because of large short positions. In 2017 he closed his Discretionary Macro fund as part of a wider restructuring of his Tudor Investment Corp, following “a frustrating several years for macro trading and for me especially”, he said.

Several of the industry’s biggest names are enjoying a tentative renaissance this year, raising the possibility that Mr Bacon has called it quits at the wrong time in the economic cycle.

Europe’s Brevan Howard Asset Management’s assets have slumped from $40bn to single-digit billions after a run of poor returns and investor withdrawals. However, it opted not to turn into a family office, and, helped by big profits from bets against Italian bonds last year, it is trying to grow again.

Brevan Howard incoming chief executive Aron Landy said he was “excited about the opportunities in the macro environment”, and added that the firm was “actively hiring portfolio managers”. Its flagship fund gained 12.4 per cent in 2018 and was up 8.1 per cent this year to the end of October, according to investors.

“The macro industry is going back to its roots, with a smaller share of total trading, which is where we were in the 1980s,” said Mr Law, whose fund is up about 17 per cent this year. While macro traders may no longer have an edge in trading short-term currency or bond movements, he said that the intricacies of politics and policy still needed a human touch. “Quants can’t price political risk very well.”

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Investors still need to be convinced. Global macro funds have suffered $23bn in outflows this year and now run $245bn, according to eVestment.

Against this backdrop, the surprise is perhaps that Mr Bacon didn’t call it quits before. “I thought he would have thrown the towel in much earlier if he didn’t have all these people that worked for him,” the former colleague observed. 

Mr Bacon has also faced distractions in the personal sphere, being dragged into the limelight because of a protracted, bitter legal battle with his Bahamian neighbour Peter Nygard. The hedge fund manager alleges that the Canadian clothing mogul is harming the environment around Clifton Bay and that he has engaged in a smear campaign against him. For a famously taciturn and private individual, the publicity it has engendered has been awkward.

An avid conservationist and hunter, Mr Bacon has over the years snapped up several big tracts of wilderness across the US, putting some into conservation easements to protect them from any future development, and funding a restoration of their natural ecosystem. 

“What I remember most as a child is being outdoors with my father and brothers,” Mr Bacon told Forbes in a rare interview in 2012. “Those were my formative experiences, and I’ve tried to create that for my family now.”

Mr Bacon’s legacy could also live on through some of his protégés, such as Kirkoswald Capital Partners founder Greg Coffey, whose fund has notched up strong returns this year. Moore has told potential investors at least one large client has signed on to a fund managed by Joeri Jacobs, one of the firm’s most profitable traders.

In time, it is possible that Mr Bacon himself makes a comeback. In this week’s investor letter he said the “privatisation” of Moore would allow him to spend more time with his family and philanthropic pursuits, but stressed that it would also give him the flexibility to “stay in the picture” should the market environment change. 

“Time will tell how eagerly I pry myself away from daily markets, or return if do,” he wrote.

Additional reporting by Miles Kruppa in San Francisco

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