By Nick Evans
It is usually not a great idea to extrapolate events at
individual hedge funds into industry-wide themes or trends. In
this most idiosyncratic of activities, what makes one fund or
firm succeed – or fail – rarely applies more
generally, in what is essentially a business about people.
But the shutdown of Edoma Partners, the London-based
event-driven fund launched amid much fanfare two years ago by
Goldman Sachs prop trading star Pierre-Henri Flamand, does seem
to be one of those rare moments that illustrate some generic
The demise of the firm, which had been running more than $2
billion at its peak with a team of some 20 people, was not
surprising in itself. Edoma had struggled from the start, with
the fund being down by about 7% since inception by the time
that Flamand and his partners decided to throw in the towel at
the start of November.
The view of one day-one investor that the
fund’s performance was "crap" might be a little on
the harsh side. Event-driven investing has been difficult over
the last two years or so, to be fair, and other funds have also
But Edoma’s large and apparently experienced
team never really seemed to get any positive momentum going,
pretty much from the get-go. And Flamand’s view
that "unprecedented market conditions" were responsible for the
firm’s failure – and for the decision to
shut down as soon as the two-year lock-ups, to which many
investors were subject, expired – seems somewhat lame
at a time when all sorts of other hedge funds are continuing to
battle away on behalf of their investors.
Flamand is not the first manager to conclude that he is
unable to make money in the current environment. And he will
not be the last either, with longstanding long/short European
equity boutique OMG also deciding to call it a day this month
for similar reasons.
But, as our initial nominations for this year’s
EuroHedge Awards show, a great many funds are continuing to do
a great job of producing strong risk-adjusted returns for
investors in conditions that certainly are not easy –
but which, as these excellent performers and many others
besides them have been demonstrating, are not exactly
And the pity of the Edoma shutdown is that it would seem to
confirm some of the negative points about hedge funds at a time
when hedge fund investing is under fairly intense scrutiny
– and can only make it even harder for other new hedge
funds to launch at a time when the industry needs new blood,
new energy and new ideas.
The whole saga raises questions about the ability of prop
traders to make the transition to asset managers; about
managing capacity and size; about industry fee structures;
about long-term commitment and alignment of interests; and
about the pros and cons of investing with people who are new to
the asset management game.
The shutdown comes at a time when the flow of new launches
from other former bank prop traders is running at a high level
– with the potential for the hedge fund industry to
take on many of the roles and opportunities previously
undertaken by the investment banks themselves.
That ought to be a good thing, both for the industry and for
investors. But the Edoma episode will harden the view of many
people in the industry that early-stage investments in funds
led by traders whose previous experience is in running bank
prop capital, and in a very different operating environment,
are often bad bets.
Although some of the most successful European hedge funds
are run by former bank traders – notably Brevan Howard
and BlueCrest – and despite the fact that several of
the world’s largest and best-regarded hedge funds
over the years have been founded by former Goldman executives,
many other bank spin-outs have failed to live up to
expectations as standalone hedge fund operations.
Moreover, Edoma’s decision to take more money
than it had said it would do – peaking at over $2
billion against an indicated cap of only $1 billion –
laid the firm open to charges that it was more interested in
asset-gathering and management fee generation than in
performance, while also making life more difficult for itself
by having more money to invest than it could handle.
Ultimately the reasons for the firm’s failure
are probably more down to individual mistakes than to
industry-wide issues. But anyone who believes that new funds
that start with too much money are more likely to fail than to
succeed – of which there have been many examples over
time – now has another perfect piece of evidence to
support their view.
And anyone who has been paying management fees to Edoma for
the past two years while receiving a stream of negative returns
will probably think at least twice before giving capital to the
next 'hot-thing’ investment banker who wants to
reinvent themselves as a manager of other people’s