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Clinton Group’s Quant Meltdown

George Hall’s latest comeback strategy has hit hard times, with one fund down 22 percent over the past 12 months.

  • Michelle Celarier

Hedge fund pioneer George Hall appears to be on one of his nine lives. His firm, Clinton Group, survived regulatory probes in 2004 and a mortgage-backed securities meltdown in 2008, but now a quantitative fund it manages looks to be one of the first such funds to suffer a big drawdown this year, at a time when many once-hot quants have had lackluster returns at best.

In recent years, Clinton has developed a well-regarded quant strategy, which breathed new life into the long-beleaguered firm. But its European-domiciled stat arb fund, which is a UCITS (Undertakings for Collective Investment in Transferrable Securities, a type of mutual fund for European investors), is down to about $138 million, after performance losses of 22 percent over the past 12 months, according to a Deutsche Asset Management report.

That contrasts with a high of about $633 million in gross assets at year-end, according to the firm’s latest Securities and Exchange Commission filings. The UCITS strategy is similar to Clinton Group’s equity strategies hedge fund, which had $964 million at yearend, making it the firm’s largest fund. It, too, has also suffered sizeable performance losses. Clinton Group declined to comment for this story.

Last year Clinton Group’s assets — which once stood at more than $5.5 billion — had reached their highest level in a decade, as the firm sought to come back from an earlier valuation scandal and problems associated with the financial crisis. At the end of 2016, it reported $2.79 billion in regulatory assets under management, though that number also includes leverage.

The recent decline is a combination of redemptions and performance losses. Investors say a big chunk of these redemptions occurred in May, when the UCITS fund lost more than 5.17 percent, bringing its year to date loss to 7.2 percent, according to the Deutsche report. Last year it lost 11.9 percent. Its only winning year was in 2015, when it was launched. The UCITS fund was launched in May of 2015 and gained 8.66 percent that year. Most of its holdings are European stocks.

It’s unclear how much leverage compounded the woes, but the UCITS’ gross leverage was “not expected” to exceed 1000 percent of the value of the fund, according to Deutsche Bank. While the U.S quant fund’s composition is similar to the UCITS, investors can’t sell their shares as easily as in the UCITS, which has daily liquidity. The U.S. quant fund, which has been around much longer, has produced annualized returns of 16 percent since inception in 2006, according to the Deutsche report. Still, that is down from about 20 percent last September.

Even before the latest troubles, Clinton was a shadow of its former self. Hall was one of the more flamboyant figures in the hedge fund world more than a decade ago. He even merited a mention in a 2004 New York magazine story about hedge funds that wrote about his 115-foot yacht anchored for a time in Chelsea Piers.

Clinton, which opened its doors in 1991, was once one of the biggest hedge fund firms in the business, focusing on convertible bonds and mortgage-backed securities. By 2004 it was running about $5.5 billion. Then an ex-employee sued the firm, charging it with mismarking its asset-backed securities. Both the Commodities and Futures Trading Commission and the Securities and Exchange Commission investigated but declined to bring any action against Clinton, but assets fell to about $1 billion despite the clean bill of health. 

In early 2008, Clinton’s assets fell to a new low of $600 million, after its multistrategy fund fell 45 percent due to bad bets on mortgage-backed securities, according to a Bloomberg report. Total assets in that fund declined by almost 80 percent, due to redemptions.

Since the financial crisis Clinton fashioned a comeback with its move into quants, a strategy run by Yong Lu, a physics Ph.D. who joined Clinton as senior portfolio manager in 2006 from Citadel.

Separately, in June the 57-year-old Hall put his Manhattan townhouse on the market, asking $37.5 million for his 6 East 69th Street pad, according to city records reported by real estate website Luxury Living NYC. He paid $11.5 million for the home, which has seven bedrooms and more than five bathrooms. Hall bought the house in 2002, when he was one of the top hedge fund moguls in the U.S.