Money managers under the microscope
As if RAB Special Situations’ woes weren’t enough already (investing in Northern Rock before its collapse, putting a high percentage into illiquid assets, 70 percent loss in 2008, locking up investors), the company told me yesterday of more bad news.
Explorer Falkland Oil and Gas, whose shares more than halved on July 12 when it revealed it hadn’t found any oil at the part-owned Toroa well, accounted for an amazing 24 percent of Special Situations’ portfolio before the fall (and presumably rather less now).
Of course, concentrated bets are great if they work (and would go some way to making back the losses suffered during the credit crisis).
But, as RAB is probably painfully aware, supposedly the only free lunch in economics is diversification. It will be interesting to see how Special Situations’ portfolio looks 6 months from now, and whether caution over further losses has outweighed the temptation to keep on big bets in the hope of big returns.
The firm, whose assets stood at more than $7 bln two years ago - but later saw them slump due to outflows and performance losses - saw a recovery in H2 of $100 mln to $1.37 bln.
RAB Capital’s struggling Special Situations fund looks to have recorded a positive return in 2009, but after a bumper year for the industry it is still paying the price for the investments it made in illiquid assets before the credit crisis.
Having seen their investment lose around half its value in 2008 while much of the fund’s money was in hard-to-sell assets, the fund’s investors agreed in autumn ’08 to lock up their money for 3 years in return for a cut in fees.
It was the outcome most commentators were expecting.
But the defeat for hedge funds RAB Capital and SRM Global and other former shareholders claiming damages for the loss of their holdings in Northern Rock when it was nationalised last year is nevertheless a hard blow to bear.