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A Hedge Fund’s Fatal Bet. And the Consulting Firm Tied Up in the Mess.
Fund Evaluation Group channeled endowment and foundation money into now-defunct Malachite Capital.
The largest hedge fund yet to go out of business in this market crash got the stamp of approval — and a good portion of its assets — from Fund Evaluation Group, which advises or directly runs portfolios for many charities, universities, and other institutions.
Malachite Capital Management is dissolving its once-$600 million fund after bets on market volatility went awry, Bloomberg reported Tuesday. (Malachite and FEG failed to respond to repeated requests for comment.)
A significant portion of Malachite’s money came at the direction of FEG, and the losses may likewise concentrate among its client roster.
FEG’s consultants recommended Malachite as a “diversifying strategy” to institutions — including Utah’s public educational trust — as recently as October 2019, a confidential FEG report shows.
The trust doesn’t appear to have put money with Malachite, unlike other clients. The University of Toledo Foundation had $3.6 million with the hedge fund as of late last year, and the University of Illinois system dropped an AQR fund to invest over $20 million in Malachite, its latest annual report states. (Illinois no longer has any money with Malachite, a spokesperson said Thursday.) Both were clients of FEG as of late 2019.
Malachite represented 5.6% of a pool of hedge fund investments that FEG built for clients — called a fund-of-funds — as of year-end 2019, regulatory filings show. Called the “FEG Absolute Access Fund,” this is one of several such vehicles that the firm channels money into from institutions whose portfolios the firm controls.
“The Funds were designed to provide investors the opportunity to gain exposure with a smaller minimum investment than would be required to invest directly with institutional quality hedge fund managers,” a 2016 FEG disclosure explained. “The Funds capitalize on the experience of the FEG’s principals with evaluating and recommending to clients, non-traditional investment funds (i.e. hedge funds) by creating a fund of funds product.”
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Hedge funds frequently go bust, underperform, or shut down. Industry watchers have been waiting for the inevitable fatalities to surface after disastrous recent days in the stock market.
But for FEG — whose business is sage investment expertise and exacting due diligence for staid nonprofits and pension funds — a handpicked manager imploding may leave a black eye.
Malachite’s founders came out of Goldman Sachs, giving them a credible pedigree. Derivatives, leverage, and complex financial products made up the core of their investment strategy. They pitched investors “U.S. equity-like returns with lower volatility” and less risk of loss than a simple S&P 500-style index fund, according to SEC filings.
Malachite “seeks to capture short‐term volatility risk premium within the global equity markets while diligently monitoring risk and adhering to a strict risk management process,” the firm told the SEC in a March 2019 brochure. “Malachite invests a significant portion of its time focusing on risk management across all investment vehicles.”
But Malachite failed to protect investors when volatility spiked and stocks cratered.
“Due to the extreme adverse market conditions of recent weeks and the resultant funds’ performance, the current and projected assets will not justify or support the current structure of the funds,” founders Jacob Weinig and Joe Aiken reportedly told Bloomberg in an emailed statement. “It is in the best interests of the funds and their investors to dissolve the funds immediately pursuant to their governing documents in order to commence an orderly wind-down.”
It is unclear how much of investors’ money — if any — is left.