Larry Sapanski and Richard Schimel, whose previous hedge fund firm Diamondback Capital Management controlled a peak of $6 billion before closing its doors in 2012, are back with a new billion-dollar hedge fund firm.
Cinctive Capital, a long-short equity firm, has already attracted at least one big-name investor: it is the first investment of PAAMCO Launchpad, a joint venture launched last year between the Employees Retirement System of Texas and investment firm PAAMCO Prisma to seed and support emerging hedge fund managers. Cinctive announced Tuesday that it will employ sector teams to pick stocks using fundamental techniques, while incorporating proprietary quantitative investment tools. It has hired 11 portfolio managers so far, several of whom have worked with Schimel or and Sapanski at previous firms.
In an interview with Institutional Investor, Schimel noted that much has changed in the asset management business since he and Sapanski last ran a hedge fund firm together, including the growth of passive investing, the rise of quantitative techniques, and a 50 percent reduction in the number of publicly traded stocks. But he thinks those changes have resulted in the opportunity to build a differentiated platform.
“I think there is a white space out there, because of the asset growth of the larger platforms,” Schimel said in a phone interview. Given the new firm's structure, “We can invest in small and mid-cap stocks in addition to large-cap stocks,” he added. “We think the dispersion and risk profile is a little bit different with this approach.”
Schimel and Sapanski launched Diamondback in 2005 after working together at SAC Capital Advisors. Diamondback produced average annualized returns of 9 percent, net of fees, during its seven-year lifespan, including a gain in 2008, when the average hedge fund lost around 20 percent, according to a person familiar with the performance.
But the firm was one of several high-profile hedge fund firms raided in November 2010 as part of the government’s wide-ranging probe into insider trading at hedge funds. Former Diamondback portfolio manager Todd Newman was convicted of insider trading in 2012, but that decision was later overturned by an appeals court.
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Following the raid, Diamondback signed a non-prosecution agreement with the government and paid $9 million as part of the agreement. But in the wake of significant client redemptions, Sapanski and Schimel opted to close down the fund and return capital in 2012, deciding that the remaining asset base wasn’t sufficient to cover the expenses of running a multi-manager platform properly. The government later vacated that agreement and refunded the $9 million to Diamondback after Newman’s conviction was tossed out.
Schimel and Sapanski went their separate ways after the closure, but both continued to work in the hedge fund industry. Schimel most recently worked as head of Aptigon Capital, a unit of Citadel that traded equities. Before that, he launched Sterling Ridge Capital, another hedge fund. Sapanski was the founder and chief investment officer at Scoria Capital, a long-short equity investment firm that he later converted to a family office.
Schimel noted that what happened at Diamondback was “unfortunate,” but it played out about as well as it could have for the firm.
“Cinctive is the evolution of the experiences Larry and I had over the past two decades,” said Schimel. “With Diamondback, with everything we went through, it was still a good experience. We had a great firm and a great culture and gave our investors consistent risk-adjusted returns.”
That, coupled with Diamondback’s track record, has enabled Schimel and Sapanski to attract interest from institutional investors for their new venture, even as the hedge fund industry as a whole has faced waning popularity and increased scrutiny from investors over lackluster returns.
Schimel said the firm is seeing “tremendous demand” for its product, which seeks to offer a unique approach to the multimanager platform model. “Investors are very focused on a lower-net product with low correlation to the markets and high alpha content.”