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 struggled.
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 impossible either.
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
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 money.