Once $4.3 billion, DKR falls to $40 million

By Rob Copeland

Wed Oct 5, 2011

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The firm says operations will continue. Two quantitative funds remain.

DKR Fusion Management, which once managed $4.3 billion in multiple strategies, is down to $40 million after nearly $500 million in redemptions this summer.

This year’s asset drop marked just the latest setback in DKR’s long, slow decline. The firm was founded by Drexel Burnham Lambert alumni Gary Davis and Barry Klein in 1992 as part of the AIG Trading Group, which bought Drexel’s trading platform when the junk bond powerhouse imploded. Known as DKR Capital, the company was first run as a traditional fund of funds before bringing its own traders in-house in 1994. In 2000, Davis and Klein bought DKR from AIG and quickly became known for giving their managers wide latitude to manage their own funds.

Several representatives of the Stamford, Conn., firm declined repeated requests for interviews. Reached by telephone, DKR President Daniel G. Rizzuto would not comment on the company’s plans. Antonio Peguero, the company’s chief operating officer and general counsel, issued a statement via a spokesman that "DKR continues to operate as usual and has no plans to shut down."

As DKR jumped in and out of other strategies during the past decade, its quantitative unit dubbed Fusion became a mainstay. Founded by Pascal Magnollay in 2001 with $50 million, Fusion was staffed by at least half-a-dozen Ph.Ds. The platform attempts to seek out market anomalies through so-called underreaction strategies, which reflect the tendency of stock prices to underreact to specific events. The DKR Capital website now redirects to the Fusion page, and a spokesman said the two names can be used interchangeably.

Though DKR was mostly successful at managing a variety of hedge fund strategies and its oldest funds produced solid returns, some critics assailed the firm’s structure, comparing it unfavorably to that of FrontPoint, a similar incubator dealt with similar problems in managing multiple teams (see the AR September cover story, The fall of FrontPoint). In 2005, the University of Missouri System pulled its $32.5 million from the firm, singling out the company’s loss of two trading teams and the disappointing performance of several new ones.

Nonetheless, with at least fifteen separate products in 2006, DKR was a constant presence in AR’s Billion Dollar Club. Assets peaked in January 2008 at $4.3 billion after several years above $3 billion. During those years, a number of the firm’s funds earned steady returns. The multistrategy DKR International Relative Value fund, for instance, made money every year from 1995 through 2007, including seven double-digit annual percentage gains.

The financial crisis of 2008 marked a major change. Davis decided to liquidate the International Relative Value fund (which lost 18.86% in the first 11 months of the year) and two related funds, which held about $520 million at the start of 2008. Other DKR funds quickly followed, including the Saturn Event Driven Program, which was down 19.58% for the year through August 2008 when DKR stopped reporting returns (the fund closed in October 2009). More DKR strategies closed over the subsequent years. This May, the Strategic Currency Program, down 17.34% for the year in October 2008 (when the firm stopped reporting returns) officially shuttered, having fallen an additional 12.55% in 2011.

Davis blamed the collapse of Lehman and the ensuing broad retrenchment by prime brokers that had provided less restrictive financing to hedge funds for his firm’s pullback. "We believe it is unlikely that lenders will be rushing back to provide the leverage necessary for a number of relative value strategies to function profitably," Davis wrote to investors in 2009. Davis did not return a call seeking comment.

In 2010, DKR fell beneath $1 billion and was cut from the Billion Dollar Club. As recently as June, the firm managed $530 million in two quantitative funds running the same strategy (one fund employs more leverage). DKR’s Quantitative Strategies 2X managed futures fund was up in the beginning of the year but fell 13.89% from March through the end of August, bringing it down 8.79% for the year, compared to a 0.44% loss for the AR Managed Futures index.

DKR was a fixture in the AR Billion Dollar Club before falling off the list in 2009.
(Source: AR Billion Dollar Club, reporting)

See also:
DKR rolls out leveraged quant fund
DKR snags ex-Quarry Point, Goldman exec
DKR's new fund seeks out market anomalies

ISSN: 2151-1845 / CDC10004H

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