RAB blazes a cautionary trail

By Neil Wilson

Tue Jun 28, 2011

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After years of success, RAB ran into serious problems during and after the crisis.


It was a dizzying rise—and it has been an equally dizzying fall—for RAB Capital, the London-based and -listed hedge fund group.

From humble beginnings as a small partnership founded in 1999 by Michael Alen-Buckley and Philip Richards, RAB blazed a trail as a genuinely innovative player on the European hedge fund scene. But after years of huge success, the business ran into serious problems during and after the financial crisis in 2008, which led to a precipitous drop in assets under management—from a peak of about $7 billion to only about $1 billion now.

Most of the teams that joined in the wake of RAB’s initial public offering have now departed. And in recent weeks, what looks close to a coup de grâce was delivered with news that Gavin Wilson, manager of the RAB Energy fund and arguably the last top portfolio manager at the firm, was also leaving, even if it was genuinely for personal reasons. In late June, the company’s directors proposed a reorganization that would involve de-listing RAB and taking it private via a management buyout.

It might be tempting to view RAB as a poster child for the hedge fund boom in Europe of the past decade—and exemplar of everything that went wrong with it. In real life, the truth is more complicated than can be described in a few sweeping conclusions. But it offers some important lessons for the hedge fund managers and investors of the future.

After not making much impression as a mainstream European long/short equity player following its launch, RAB came to prominence in 2003 with its RAB Special Situations fund, which delivered astonishing returns of 1,000%-plus in its first year of trading and quickly attracted attention from investors. From the beginning, however, some were skeptical about the firm, largely because neither of the founding partners had an orthodox portfolio management background—which led some to see RAB as distinctly minor league. Alen-Buckley, who is well-liked by many in the industry, came from the sales and marketing side at ABN Amro Hoare Govett. Richards came from market-making firm Smith New Court, which Merrill Lynch had acquired.

But RAB seemed to revel in a reputation as the scrappy outsider. In a classic good cop/bad cop combination characteristic of many successful hedge fund boutiques, Richards was perhaps the less well-liked of the two founders, with a reputation for not suffering fools gladly. But those who knew him said that he was not to be underestimated.

The rise of the Special Situations fund appeared to confirm this. Richards hit upon, with perfect timing, the arrival of the so-called commodities supercycle, which led him to invest in a raft of early-stage energy exploration companies and commodity-related firms. The strategy not only produced stunning immediate gains, but also delivered sustained success for a prolonged period, with further returns of more than 49% in 2004, 25% in 2005 and 43% in 2006. The winning streak lasted until 2008, when the fund plummeted nearly 70%, a drop from which it has never recovered (unlike Wilson’s RAB Energy fund, which recovered all the way back to its high-water mark during 2010).

So what went wrong? When the financial crisis hit, the Special Situations fund was hit hard by a severe liquidity mismatch that afflicted many hedge funds when it was revealed that its redemption terms were not long enough to unwind a portfolio heavily invested in small cap and pre-IPO companies. That RAB was publicly listed, which had seemed such a trail-blazing move, also made the firm’s predicament much more public. And its rapidly declining share price burned away the currency with which it attracted teams to join the platform, with the result that those teams left soon enough.

But the most telling lesson—and the one that provides arguably the most important cautionary tale for any manager—is about the dangers of hubris. In late 2007, Richards took a big stake in Northern Rock, the stricken UK mortgage bank that was first in a long line to be propped up by taxpayers. In retrospect, it looks like a stupid decision, with Richards taking a sudden and apparently unconsidered plunge into financial services. In reality, he was no fool. His previous investents had proved stunningly successful, for a protracted period.

What that fateful decision from 2007 shows is that from a psychological perspective, if you are repeatedly correct for so long, you may start to believe everything you predict will prove correct. That is why the best managers are not only those who cope well with failure, but also those who cope best with success and keep doing the things that made them successful in the first place. It is important for managers to stay confident but not to succumb to hubris.

ISSN: 2151-1845 / CDC10004H