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Echo Street Quits ‘Soul-Sapping’ Hedge Fund Business

“This was very unexpected and out of left field,” an institutional allocator says.

Echo Street Capital Management has called it quits as a hedge fund — despite maintaining a strong track record and investor interest — according to informed sources and a client letter obtained by Institutional Investor.

The firm is shutting down its roughly $2 billion equity market-neutral hedge fund and plans to return 90 to 95 percent of investors’ capital by the end of September. 

“This was very unexpected and out of left field,” an institutional allocator and category specialist said. “The hedge fund has an excellent track record,” despite about 15 percent losses in March and being down 10 percent year-to-date, per the allocator. 

Typically, hedge funds liquidate, go out of business, or euphemistically “transition to a family office” after underperformance begets clients pulling money and prevents the firm from raising new capital. (Their goodbye letters rarely say so, however.)

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Echo Street had a waiting list of interested investors, two sources said. 

The firm will live on via its established long-only strategy, “GoodCo,” which manages about $6 billion, and a new version, called Echo Street Select Plus, according to the letter. Slated to launch November 1, the new product will invest in the same portfolio of long positions, but also have “hedge-fund style” tools and latitude, such as shorting. 

As for actual hedge funds, Echo Street told investors it’s done with that business.

“Why is the environment for hedge funds getting harder?” the September 9 letter said. “Managers live inside the box defined by their risk constraint. They can do whatever they want, as long as they stay inside that box…If that box includes a need to ‘smooth the ride,’ then that box gets tighter and smaller every year. As the techniques we use to smooth the ride get discovered, they no longer smooth.” 

The workflow involved in finding investment ideas is “joyful,” the firm went on. “The workflow involved in smoothing the ride is increasingly a soul-sapping one.”

As such, “I have decided that the benefit of avoiding temporary capital hits” — hedge funds typically lock up investors’ capital far more strictly than do long-only managers — “is no longer worth the cost imposed by the various risk management remedies.” 

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