Odey Asset Management’s fight for survival

Odey Asset Management is in new and dangerous territory after JPMorgan Chase served notice on its agreement to safeguard assets for the hedge fund’s clients as its custodian.

Having a custodian — banks that hold customer securities to prevent them being lost or stolen — is a legal requirement for a hedge fund to operate in the UK, and Odey Asset Management would be in breach of the Financial Conduct Authority’s rule book if it attempted to operate without one, according to one person familiar with the regulator’s position.

The FCA’s rule book also requires the outgoing custodian to find a substitute, something market sources say could be challenging in this case: most of Odey Asset Management’s business partners have severed ties in the wake of allegations of serial sexual assault committed by the firm’s founder, Crispin Odey, which were detailed in a Financial Times investigation last week. He strenuously denies the allegations.

“Now it’s a three-way game between Odey [Asset Management], the regulator and the service provider,” says a former regulatory official who has previously overseen winding downs.

“If there are no providers who are going to support Odey [Asset Management], the outcome is pre-determined, which is they’re in wind-down, but you do need the regulator to play referee here and make sure it doesn’t get messy,” explains the former regulatory official.

In such situations, the FCA will focus on ensuring that the hedge fund’s underlying investors are protected, which means having a custodian for their assets, as well as having their funds serviced and managed in the normal way.

A fund administration expert said in the event of a wind-down, funds would likely be liquidated to return money to investors, although unlike the situation with Neil Woodford — the former star manager whose equity fund was frozen and trapped £3.7bn of investors’ cash — it would probably not result in a fire sale of assets.

The FCA declined to comment on whether it would force JPMorgan to stay in place if no other institution steps up. The Wall Street bank declined to comment on whether it had found a replacement custodian to take on the business.

Odey Asset Management did not immediately respond to requests for comment on whether it would be forced to wind-down if a new custodian does not come forward.

The fact that JPMorgan served its termination notice after the hedge fund firm’s partners voted to remove its founder at the weekend hints at the troubles ahead for Odey Asset Management.

JPMorgan is also one of Odey Asset Management’s biggest prime brokers, lending the hedge fund money so it can make bigger bets, and selling it derivatives to manage the risk of investments. JPMorgan has also served notice on its prime broking relationship with the firm, the FT reported on Wednesday.

Morgan Stanley, Odey Asset Management’s other big prime broker, began cutting ties last week and has so far not softened that stance. Goldman Sachs’ international chief executive, Richard Gnodde, told Bloomberg that the bank was still “in the process of moving away” from Odey Asset Management.

The partners who now control Odey Asset Management have moved to impose order on the situation. On Sunday night, they announced plans for the future stewardship of the funds that Crispin Odey ran, including the Odey Europe Inc fund and Odey OIE Mac funds, both of which were handed to Freddie Neave.

To shield investors and the firm from large withdrawal orders, Odey Asset Management has closed one fund and gated others. The firm this week sent letters to investors saying the €117mn Odey Swan fund would be liquidated and money returned to clients. It also stopped withdrawals from its Brook Developed Markets and Absolute Return funds, following a surge in redemption requests from investors.

Ryan Johnson, head of Lloyd Expert Consultancy, which advises the fund administration market, warns more Odey funds could face gating and closure. “The managers all have credible pedigree that should lead to them managing alternative funds or even their own fund range if all the Odey and Brook funds are to close down,” Johnson said. Odey declined to comment.

Still, significant hurdles remain, even if Odey Asset Management can find new prime brokers and a replacement custodian. Untangling the firm from its founder is not straightforward. Odey personally managed around $1.2bn of assets, about half of which is his money. Before this week, he owned a majority of Odey Asset Management’s holding company and subsidiaries.

The partnership had already taken some steps to distance Crispin Odey from the rest of the fund managers in 2020 when it created the Brook subsidiary to house some of the firm’s biggest funds ahead of his criminal trial on a charge of indecent assault of a junior banker. He was found not guilty. Others of the firm’s fund managers, including James Hanbury, had their products rebranded with the Brook moniker.

Odey Asset Management will now be controlled and owned by the remaining partners, they said, although they have not yet released details of its new ownership structure. “You can’t change all the ownership in hours,” said one person familiar with the firm’s inner workings.

The firm also remains under investigation by the FCA, which was looking at corporate governance issues and is considering broadening its probe in light of last week’s allegations of sexual assault and harassment against Odey, the FT previously reported.

A former Odey partner said questions had to be asked of the firm’s current management. “We all left because of our integrity [ . . . ] The simple question is: why did you stay when others left?”