One of the most anticipated hedge fund launches of recent years has turned into a disaster. Two Citadel traders have lost approximately $300 million this year.
From a new report in Bloomberg:
Europe’s biggest hedge fund startup in 2021, founded by two former Citadel money managers Niall O’Keeffe and Tio Charbaghi, has suffered heavy losses.
Their FIFTHDELTA hedge fund that bets on rising and falling stocks lost about 13% in July, extending declines for 2023 to as much as 29% before paring year-to-date losses to 25%, people with knowledge of the matter said, asking not to be identified discussing confidential matter.
The fund began with about $1.3 billion, implying current losses of over $300 million.
This wasn’t supposed to happen. At the beginning, FIFTHDELTA was so hot it was closed to new investors.
Now, they’re raising money again and trying to claw their way out of a deep financial hole.
Citadel traders like O’Keeffe and Charbaghi are considered to be the best of the best. But markets don’t care what’s on your resume.
The fund’s abysmal performance is all the more shocking given this year’s bull market. The S&P 500 index is up over 18% in 2023 so far.
I captured that 18% return at the cost of just a couple basis points in fees to Vanguard. Meanwhile, most hedge fund investors pay a 2% management fee every year — often for far worse performance.
While FIFTHDELTA appears to be weathering the storm for now, it’s swimming against powerful tides in markets.
There are more hedge fund closures than openings these days. Institutions are putting their money with the big players, not upstarts like FIFTHDELTA.
A small, new manager like FIFTHDELTA is already a hard sell. Come into a pitch meeting with rotten returns, and you’ll never see a check.
Long term, I think the long/short strategy of FIFTHDELTA and so many other funds is a loser. The long-term trend in markets is upward — meaning you’ll lose money on your shorts.
What’s more, short positions are costly to maintain. You have to pay interest on the shares you borrow.
Even worse, your gains are capped at 100%. Meanwhile, your potential losses are unlimited.
As FIFTHDELTA teeters, I expect top traders will jump ship. When a fund is carrying big losses, bonuses may not come for years.
People join hedge funds for the money. If the money’s no longer there, they’re out.
What do you think the future holds for FIFTHDELTA and other hedge funds? Leave a comment and let us know.
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