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The Morning Brief: Citi Study Says Hedge Fund Profits Cut by a Third in 2014

The hedge fund industry earned $21.9 billion in 2014, down about one-third — or $10 billion — from the previous year, according to a new annual study from Citigroup. The bank cites “poor performance in 2014” for the sharp decline. The annual survey is based on detailed responses from 149 hedge fund firms that account for a total of $581 billion in assets under management, or 19.8 percent of total industry assets.

According to Sandy Kaul, global head of business advisory services at Citi, management-fee revenues have become an increasingly critical source of industry profits. The study found that management fees are nearly 2.5 times performance-fee profits in years when returns are mediocre, as they were in 2014. “Lower institutional return targets and concerns about excessive volatility make it more difficult for managers to earn outsized performance fees,” he says.

Citi also found that in 2013, hedge fund firms’ $31.2 billion in profits accounted for 34 percent of the profits generated by the entire global asset management industry. Citi says the average hedge fund operating margin from management-company fee revenues was 67 basis points in 2013—compared with just 12 basis points for asset management overall—up 7 basis points in 2014. The study also reported that small hedge funds are unable to cover their operating costs on management fees. Several decades ago the rule of thumb was that management fees would support overhead.

The study, however, did find the break-even for firms hoping to cover overhead from management-fee income dropped from $330 million in 2013 to only $310 million in 2014.

“Poor performance will be most acutely felt by small hedge fund firms,” Kaul says in a press release. “These organizations were able to use their performance-fee profits in 2013 to cover management-fee operating shortfalls, but as a group, these funds simply did not generate enough performance-fee revenues in 2014 to cover their gap.” The upshot: Citi expects a $615 million shortfall in this group of small funds, which will cause more more of them to shut down.


A Venezuelan who headed a hedge fund in Connecticut was sentenced to 13 years in prison for running a Ponzi scheme that caused $382.2 million of losses, according to Reuters. In fact, one of the victims was Venezuela’s state-owned oil company. Francisco Illarramendi pleaded guilty in March 2011 to five criminal counts including securities fraud, wire fraud and conspiracy to obstruct justice and defraud the Securities and Exchange Commission, according to the report. Prosecutors were seeking 12 years in prison while Illarramendi was hoping for no more than six months of home confinement plus time already spent in jail and under house arrest. According to the report, his lawyer Stephan Seeger told Reuters the sentence was calculated incorrectly and most of the losses “have been or can easily be” recouped. Illarramendi, who worked for Credit Suisse from 1994 to 2004, in 2006 founded Michael Kenwood Group, in Stamford, Connecticut. He was accused of lying to investors, bribing Venezuelan officials who helped invest $100 million of the oil company’s money in his firm and pursued what the government called “Hail Mary” transactions to hide his growing losses, according to the Reuters. He also used $20 million to finance a lavish lifestyle, according to the report.


BlueMountain Capital Management closed on the first portion of a hybrid-style investment fund, BlueMountain Summit Opportunities Fund II, which received a total of about $1 billion in capital commitments. The New York firm, which has $20 billion under management, including collateralized loan obligations, describes the new fund as an opportunistic multi-asset class fund that will concentrate on high conviction investments across asset classes including corporate credit and equity, mortgage and asset-backed securities, real estate and private capital. “It will focus on positions with excess risk premium associated with lower liquidity and heightened complexity,” it says in its announcement. According to sources, it has a three-year lock-up and a four-year harvest period. So far 7.5 percent of the capital has been called.


Shares of hedge fund favorite Apple jumped more than 3 percent on Thursday after it reported strong results and sales of iPhones in the most recent quarter.


Credit Suisse raised its estimates for Facebook and lifted its price target slightly, by $2 to $104, noting the social media company reported better-than-expected results in the most recent quarter. In a note issued to clients, UBS maintained its $92 price target.


Credit Suisse raised its price target on CACI International to $89 from $80 despite lowering 2015 estimates. The investment bank told clients in a note it thinks the company can do slightly better than the company’s guidance next year. Earlier in the week, we reported that Clifton Robbins’ Blue Harbour Group cut its stake in the professional-services and information-technology company to 4.9 percent, the second time it has sold stock since November.

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