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Hedge Fund Flopped? Try Bitcoin

The volatile cryptocurrency is becoming the go-to second (or third) act for tarnished hedge fund managers.

  • By Michelle Celarier

Before the computer geeks at quant firms took over, hedge fund managers were considered the cowboys of finance. They wrangled with sovereign nations, bet against the American housing dream, and loaded up on energy futures.

Some of yesteryear’s boldest, alas, have lost big in recent times. Investors fled, leading these onetime mavericks to shutter previously high-flying funds. But now these very same adventurers have set their sights on a new gold mine: Bitcoin — what else?

Take Michael Novogratz, who might be considered the leader of the new group. His hedge fund gig at Fortress Investment Group ended in 2015 amid losses on everything from Brazil to China. But last year he resurfaced with bold plans to raise $500 million for a cryptocurrency hedge fund, which would have been the largest of its kind among close to 100 that have been launched in recent years.

When Bitcoin fell 47 percent after hitting about $19,800 in mid-December, he decided to delay the fund’s debut due to “market conditions.” But by January — after Bitcoin took another nosedive — Novogratz was back. The former Goldman Sachs trader said he now plans to start a crypto merchant bank and take it public in Canada through a reverse merger, something U.S. regulators would be unlikely to green-light, according to an individual familiar with his plans. Novogratz is in the midst of a $200 million private placement capital raise.

The former macro trader has been trading Bitcoin for five years and has 20 percent of his net worth dedicated to it, according to an individual familiar with the situation. Novogratz left Fortress with at least $255.6 million, the price the firm paid to buy back his shares.

His views on Bitcoin have been all over the place. “I think this [crypto] is going to be the biggest bubble of our lifetimes by a long shot,” Novogratz said at CoinDesk’s Consensus: Invest conference in New York last November. “There’s a lot of froth and fraud in something that’s exciting as this.”

A day earlier, however, he told CNBC that “Bitcoin could be at $40,000 at the end of 2018. It easily could.” Now that he’s raising money, however, Novogratz isn’t in a position to comment, according to a spokesman.

Novogratz’s Galaxy Digital, which it says is building a “best-in-class, full service, institutional-quality merchant banking business in the cryptocurrency and blockchain space,” might be a safer way to play cryptocurrency. It plans to be active in four areas: trading, principal investing, advisory work, and asset management — so there’s still hope for the hedge fund.

Investors thinking of buying up those shares, however, might want to consider Novogratz’s track record at Fortress. In 2015, when the macro fund he ran fell 18 percent, leaving it with an annualized return of 2.8 percent, Fortress was forced to shut it down. At the time, the fund had just $1.6 billion, down from the $8 billion it managed before the financial crisis. Meanwhile, shares in Fortress fell 74 percent since the close of their first day of trading in 2007 until December 26 of last year, just prior to the closing of its acquisition by Japan’s SoftBank Group Corp.

Novogratz, like many macro traders, had a hard time understanding how markets would trade after the financial crisis. Many blamed the outsize role of central bankers, and, perhaps not coincidentally, so do many Bitcoin aficionados.

Of course, it takes a certain wild streak to venture into Bitcoin. But Novogratz is a cowboy even by hedge fund standards, as the former Goldman Sachs partner’s sartorial tastes attest. His wardrobe includes diamond-studded belts, orange sport jackets, and cowboy boots. Another hint: Novogratz also once served as a helicopter pilot in the New Jersey National Guard.

But Novogratz is not to be outdone by John Burbank, the eccentric founder of San Francisco–based Passport Capital, which shut down its macro flagship fund last year after massive losses and redemptions. With his big beard and fleece vests, Burbank sports a Hemingway-esque burly lumberjack look that’s every bit as manly as Novogratz’s cowboy getup.

He is also another bigger-than-life manager. Burbank was an unknown before he gained fame shorting the subprime mortgage market ahead of the housing crash, making millions in 2007 — a 220 percent gain that year. After the financial crisis he joined many hedge fund managers in touting gold. Passport grew to $5 billion. But Burbank’s macro investing skills also fell short in the post-crash era, and he lost most of the firm’s assets to a combination of poor performance and big redemptions.

Now Burbank is dabbling in cryptocurrencies and has been doing so for some time, according to an individual familiar with his investments. So far, he does not have a dedicated fund but is said to be planning one. He gave some hints as to his desires in a letter announcing the closure of the flagship fund.

We want to “focus only on big transformative areas,” Burbank wrote. “I do not regard my job to do things as we did before or to conform to current investment industry norms. It’s my responsibility to make money, and willingness to change is my ally.” Burbank said he plans to add a new area of investment in the near future, and that is expected to be in cryptocurrency.

For the real deal, however, look no further than Texas’s own J. Robert (Bo) Collins Jr., the former New York Mercantile Exchange president and veteran commodities trader who is on his third bite at the hedge fund apple.

Collins made billions as a commodities trader for El Paso Corp. and helped take the Nymex public. But his most famous hedge fund, MotherRock, shut down in 2006 during a rout in natural gas that also took down a much bigger hedge fund, Amaranth Advisors. Collins then launched a second fund, called 1.618 Group, which he told II he shut down in 2008 after its only investor withdrew his capital due to separate problems stemming from the financial crisis.

Collins then returned to his Texas roots to co-found a Houston-based private investment company, Lone Star Capital. Although it mostly deals in energy, Collins says he is also launching a cryptocurrency fund through a fund manager called Morpheus Asset Strategies, named for a character in The Matrix, the dystopian sci-fi movie. He has been investing in Bitcoin since 2011.

But these days, Bitcoin “feels like a craze,” Collins told CNBC.

If so, these guys don’t want to miss out on it.

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