Hedge fund Element to slim down after $1bn hit in rally

Jeffrey Talpins’ Element Capital, one of the world’s biggest macro hedge funds, is planning to shrink its asset base in an effort to improve performance after a run of poor returns, including losing more than $1bn in last month’s market rally.

New York-based Element, which manages around $12bn in assets and has one of the sector’s best long-term track records, suffered a 9.6 per cent loss last month, according to people who had seen the numbers, as equity markets rose strongly on hopes that interest rate rises were almost done.

Element will now let investors exit its fund more easily than usual by temporarily relaxing its redemption terms, the people said. The move, which has not previously been reported, is aimed at reducing the firm’s assets in order to make it more nimble and able to respond quickly to market moves, the people said.

Element declined to comment.

January proved a tough month for some hedge funds as equities rallied, led by more speculative stocks that were hard hit last year, and bond markets also gained on hopes that central banks were finally succeeding in taming inflation. Those market moves inflicted heavy losses on funds that had been positioning for higher rates, including some computer-driven funds betting on falling bond and equity prices.

Element’s loss follows two years of negative returns, the first annual losses in its 18-year history. It suffered an 8.9 per cent drop in 2021 after taking a roughly $1bn hit in the bond market tumult of October that year.

Last year it lost a further 3.4 per cent, after betting that inflation would prove more transitory than it eventually did. That decline came even as rivals such as Caxton, Rokos and Brevan Howard were making big gains from the huge sell-off in global government bonds and the rally in the US dollar as interest rates were hiked sharply to combat inflation.

Element will now relax its redemption terms that allow investors to withdraw only 25 per cent of their money each quarter, and instead permit unlimited exits before the end of March. It will also allow clients to give less notice before pulling their money out.

The move highlights a growing concern among hedge fund managers that becoming too large can potentially hurt their performance by making them slower to react to big market moves. 

Size was widely seen as a factor in hurting returns at Brevan Howard, whose assets grew to around $40bn in 2013 before tumbling to around $6bn as performance sagged.

While losing assets reduces the amount that firms can earn in management fees, many believe that it is more important not to damage their performance track record. Firms such as Millennium and Citadel are among those to have returned some capital to clients in recent years.

Element has been closed to any new inflows for nearly five years, during which time it has already handed back more than $5.5bn to investors, but the firm nevertheless feels it needs to shrink further as it looks to prosper in the current market environment.

In late 2020 the Financial Times reported that Talpins’ firm had made a highly prescient call that the results from Pfizer’s phase 3 coronavirus vaccine trials would stun the market by having a higher efficacy than had widely been expected.

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