After 15 years, Nevsky Capital, a London-based global long/short equity hedge fund led by Martin Taylor and Nick Barnes, is shutting down, according to an investor letter posted by ZeroHedge.
The fund isn’t closing because of bad performance. In fact, Nevsky did just fine in 2015, finishing the year up 0.39%.
In comparison, the average fund fell 3.49%, according to Hedge Fund Research. Nevsky has also posted annualized returns of 18.4% since inception.
Nevsky said it made the “difficult” decision to close because there are “certain features of the current market environment” that are inconsistent with the fund’s goal of “producing satisfactory risk adjusted absolute returns.”
Specifically, Nevsky says that both the macro and micro data coming out of countries such as China and India is flawed. From the letter [via ZeroHedge and emphasis ours]:
- Data releases have become much less transparent and truthful at both a macro and a micro level. At a macro level the key issue is the ever increasing importance of China and India. China is the world’s second largest economy, but already much larger than the US in a broad swathe of sectors. India will be the world’s third largest economy within a decade. Unfortunately their rise is increasing the global cost of capital because an ever growing share of the most important data they produce is simply not credible. Currently stated Chinese real GDP growth is 7.1% and India’s is 7.4%. Both are substantially over stated. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast macro and hence micro as well, for an ever growing share of our investment universe.
- At a micro level corporates have also responded to greater market scrutiny since the [Global Financial Crisis] to disclose less not more, on the basis that the less they reveal the less often they can be proved wrong by regulators, investors or law courts. This means the cost of capital relating to holding large company specific exposures has risen as the ‘headline’ risk of being proved wrong with regard our earnings projections is now commensurately higher.
Nevsky also went on to blame politics trumping economics and the rise algorithmic trading. From the letter:
- At the start of our careers we spent much time being forced to try and decipher the indecipherable — the moods and subsequent decisions of Boris Yeltsin. This ‘Kremlinology’ was truly the definition of banging your head against a proverbial brick wall. Fortunately this and similar masochistic macro-analytical tasks then gave way to the logical joy of the Washington Consensus which was adopted almost without exception across the Emerging World following the multiple devaluation crises in the mid-1990s. Unfortunately though the Washington Consensus, having been severely wounded by the GFC is now stone dead. Kremlinology, with an additional nationalist twist, is back — and it is now the norm, not the exception, for most countries in the Emerging World. We are not convinced that knowingly continuing to bang our heads against these newly erected brick walls would be a sensible decision.
- Equity markets are also less transparent
- The unintended consequences of those new regulations introduced as a result of the GFC, which have largely removed the market making role of investment banks from global equity markets, has coincided with the recent massive increase in market share of both ‘dumb’ index funds and ‘black box’ algorithmic funds to create a situation where equity market volumes have fallen sharply and individual stock volatility has risen dramatically. An initially badly executed order can now inadvertently create a price trend (because there is no longer the cushion to price moves which was in the past provided by market maker inventories) that, as algorithmic funds feast on it, can create a market event even if the initial order was a simple innocent error. Truly — to mix metaphors — butterflies flapping their wings now regularly create hurricanes that stop out fundamentally driven investors who cannot remain solvent longer than the market can remain irrational.
- In such a world dominated by index and algorithmic funds historically logical correlations between different asset classes can remain in place long after they have ceased to be logical. More butterflies.
- Index and algorithmic fund [maneuverings] also make it very hard to ascertain what the markets ‘clean’ positioning is at any given time. All of which pushes up the cost of capital.
All of this has made the fund managers’ jobs “no longer enjoyable.” From the letter:
“In summary, all of the above factors now mean that it is more difficult than ever before for us to accurately forecast macroeconomic and corporate variables. This pushes up our cost of capital and substantially increases the risk of us suffering substantial capital loss on individual positions either because of a forecast error or simply because we could be caught up in an erroneous market trend, which could then persist for far longer than we could take the pain. This has made what we enjoy most — the thrill of analysing economic data releases and company accounts — no longer enjoyable. It is therefore time to accept that what we have done has worked brilliantly for twenty years but does not work anymore and move on. We are confident our process will eventually work again — for the laws of economics will never be repealed — but for now they are suspended and may be for some time; an indefinite period involving indeterminate levels of risk during which we think it would be wrong for us to be the stewards of your money.”
Nevsky is the first high-profile closure of 2016. More are expected to come.
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