9 June 2010 – The Wall Street Journal
Even the biggest of star investors suffered as global markets tumbled.
Louis Bacon, who has scored annual gains of about 20% on average over the past two decades, shouldered losses of 9.2% in May in his biggest hedge fund, according to investors.
That’s the fund’s weakest one-month performance in its history; it makes him one of the higher-profile investors recently snared in the European debt crisis.
Bacon’s fund, Moore Global Investments, underperformed the industry’s average decline in May of 2.3%, and the Dow Jones Industrial Average’s 7.6% loss for that month.
May was the worst month for hedge funds since November 2008, according to Hedge Fund Research. Nearly every strategy lost money. Big funds managed by SAC Capital, Paulson & Co and Third Point Management lost between 2.3% and 5.6% in the month, say people familiar with the funds. Their woes ranged from concentrated bets on consumer companies to financial-company wagers. With markets in flux, performance could snap back; Bacon, for example, has scored big gains in the past after periods of weakness.
The average hedge fund was up 1.3% for 2010 through May, compared with a 6.4% decline for the big Moore fund.
Bacon, who earlier in the year had a bleak outlook regarding European markets, stumbled in dialling back his pessimism, according to investors. He also was too bearish on US Treasurys, they say.
Also distinguishing the recent slump for Moore: Bacon’s own trades went awry in the past month, rather than those of others at the firm, according to people close to the matter, leading to the bulk of the recent losses.
The losses come as Bacon’s firm, Moore Capital Management, has been responding to regulatory scrutiny. The Commodity Futures Trading Commission recently fined Moore $25m (€21m) to settle accusations that a former portfolio manager at the firm tried to manipulate futures prices, and that Moore failed to supervise the manager. Moore neither admitted nor denied wrongdoing.
In March, the UK Financial Services Authority accused a London-based execution trader working at Moore, who’s now on administrative leave, of participation in an insider-trading ring. The accusations don’t involve funds managed by Moore, and it is cooperating with the probe, the firm has said. Lawyers for the trader said he’s “working to clear his name.”
Bacon built Moore Capital into a $14bn powerhouse thanks to savvy “macro” investments, or trades in global currency, commodity and other markets based on anticipating political, economic and market shifts.
The trading difficulties are generating buzz on Wall Street because of Bacon’s track record, and cautionary notes he sounded this spring about the European debt crisis.
In a mid-April letter, Bacon warned his investors of a “potential breakdown” of the European Monetary Union. He predicted “long-term disastrous consequences” for the union and Europe resulting from Europe’s efforts to help Greece, and equated the efforts to “socialising their ills and taxing once again the prodigious northern European workers.”
But Bacon, who urges his traders not to become too closely attached to investment positions, soon adjusted his own view, according to people familiar with the matter.
When European Union countries and the International Monetary Fund in early May announced a $955 billion effort to prop up Greece and other eurozone governments facing debt troubles, Bacon began eliminating some hedges on Moore’s positions, these people say. He also became more worried about US Treasurys, laying some bets against them.
European and global markets were crushed in May. Investors quickly flocked to Treasurys, seeking safety, sending prices higher and hurting Bacon’s bearish wagers.
The losses caught his investors by surprise. The secretive billionaire, who mostly resides in London but spent $175 million in 2007 to buy the 171,000-acre Trinchera Ranch in Colorado from the Forbes family, is known for limiting trading losses and keeping a lid on his portfolio’s volatility.
Some say they’re sticking with Bacon, and there aren’t signs of a rush to the exits by clients, according to people close to the matter.
Bacon, a native of Raleigh, NC, was a literature major at Middlebury College. He experienced early tragedy when his mentor, commodities trader Philip Hehmeyer, shot himself at 37 after a wrong-way stock bet. Bacon started Moore Capital Management in 1990 with a $25,000 inheritance from this mother, lending the firm his middle name, which also was his mother’s maiden name.
He built an impressive early track record and attracted money. During the past 20 years, the firm suffered just three negative years – 1994, 2002 and 2008, when Moore Global lost 14%, 4.4% and 4.6%, respectively, according to investors.
In 2008, as markets collapsed, Bacon told clients that the firm was hurt by its losses in stocks and emerging markets, but Bacon’s own macro wagers were profitable.
In recent years he has hired industry stars, including Greg Coffey, a former GLG Partners heavyweight, to augment his trading staff.
This year started well for Bacon, an intense trader who doesn’t often directly deal with investors. Moore scored gains of about 2% the first quarter.
In the April letter, Bacon told clients that he and Moore’s traders were finding “fertile area for profits,” despite the global turmoil. The firm was making wagers connected to different recovery timelines for various countries and regions, he wrote.
Other Moore traders also lost money in May as markets turned. Coffey’s emerging-market fund dropped about 2% in May and is down 7.5% in 2010. Another billion-dollar fund run by Bacon fell 10.4% in May and is down 7.6% in 2010. A $3bn fund Bacon runs, Moore Macro Managers, is up almost 4% this year.
For his part, Bacon isn’t letting the brutal period change the way he trades. He continues to spend more than 15 hours a day working, say people close to the matter. And while some rivals are cutting their exposure to markets on the heels of last month’s results, Bacon has told traders not to reduce their appetite for risk, these people say.
That is partly because many of his colleagues’ trades have been working. Bacon, by contrast, has exited his own losing trades in recent days to avoid deeper losses, say people familiar with the matter.
By GREGORY ZUCKERMAN and JENNY STRASBURG
Write to Gregory Zuckerman at email@example.com and Jenny Strasburg at firstname.lastname@example.org