Burbank’s Passport Suffers Another Sharp Drop in Assets

John Burbank III’s Passport Capital, one of a handful of hedge fund firms that minted their fortunes during the financial crisis by correctly calling the housing market collapse, has lately seen its assets shrink to less than $1 billion after investors pulled hundreds of millions of assets from the firm in the second quarter.

The San Francisco-based multistrategy firm suffered $565 million in net outflows in the second quarter, including $480 million in its Passport Global Fund, according to the firm’s latest letter to Passport Global investors, dated July 31. This is after the firm endured $387 million in outflows firm-wide in the first quarter. As a result, the firm now has just $900 million in assets under management, while Passport Global has a mere $275 million. The news was first reported by Business Insider. Passport declined to comment.

[II Deep Dive: Assets Fall at Passport as Performance Plummets]

The second-quarter outflows do not account for the liquidation of the firm’s Long Short hedge fund strategy, which was effective April 30. It had $636 million when the planned closure was announced earlier in the year. Altogether, the firm had $2.3 billion as of the end of the first quarter.

The recent round of redemptions took place even as Passport Global posted a 1.6 percent gain in the second quarter. That still left the fund down 6.8 percent for the first half of the year, however, after it lost 17.4 percent in 2016.

Passport Special Opportunities was off nearly 10 percent through May after losing more than 26 percent last year, according to an HSBC document that tracks hedge fund performance. Passport Global has posted a 5 percent annualized loss over the past three years and a 1.6 percent annualized gain over 5 years, according to the firm.

Burbank and Passport rose to prominence in 2007 after the firm’s bet against the housing market paid off in a big way. Burbank had felt as early as 2005 that the subprime mortgage market was a bubble that would inevitably burst and began to heavily short subprime mortgage pools and riskier, heavily leveraged collateralized debt obligations. In 2007, the firm’s Passport Global Strategy fund surged 219.6 percent.

As a result, he was one of three people to make their debut on Institutional Investor’s Alpha’s annual Rich List of the highest-earning hedge fund managers that year. Burbank made at least $370 million in 2007, tying for number 23 on the list.

Not surprisingly, the firm’s assets soared from $1.2 billion to $4 billion at the time. The firm also raised its management fee at the time to 2 percent from 1.5 percent, but kept the performance fee at 20 percent.

In any case, in the second quarter of 2017 Passport Global made all of its money on its short bets, after losing more than 12 percent on its shorts in the previous quarter. Burbank tells clients that in the most recent quarter he lowered the fund’s gross exposure to between 160 percent and 170 percent, reduced portfolio turnover, and halved the number of holdings since the first quarter.

“Despite higher concentration, with risk diversification of the long book, lower gross exposure and maintenance of risk limits, we have maintained realized volatility at the low end of recent historic averages,” he emphasizes in the letter.

Passport reduced its directional macro bets, especially related to the U.S., noting that the dollar has fallen sharply this year while the bond market and certain sentiment indicators suggest growth in the U.S. will not be as great as previously anticipated. On the other hand, Burbank thinks a weak dollar could be good for commodities.

Meanwhile, Passport continues to have a strong bet on Saudi Arabian equities, anticipating a surge in inflows to that market over the next year or two as several global indexes move toward including its markets. Passport’s largest Saudi holding is National Commercial Bank, which is planning its first-ever international road show for investors, Burbank points out in the letter. Passport also has a strong position in technology and Chinese internet stocks, including Alibaba, Alphabet, Facebook and Amazon.com.

On the other hand, Passport is bearish on oil. While the market is currently slightly undersupplied, Burbank expects the market to “flip into an oversupply” during the first half of 2018. The big question, of course, is how many of Passport’s investors will still be hanging around by then.