Paul Tudor Jones: “This Market, Which Is Reminiscent Of The 1999 Bubble, Is On The Verge Of A Significant Change”
Just hours after Neil Chriss announced that his $2.2 billion Hutchin Hill hedge fund is shuttering due to underperformance and admitted that “we fought hard, but did not deliver the performance that you expected from us”, another legendary hedge fund announced it was undergoing a significant restructuring as a result of relentless investor withdrawals: citing a November 30 letter, Bloomberg reported that Paul Tudor Jones’ Tudor Investment Corp, which lost 1.6% YTD, was closing its Discretionary Macro fund “and letting investors shift assets to the main BVI fund as of Jan. 1” with the letter clarifying that “Jones will also principally manage Tudor’s flagship BVI fund, which will be the firm’s only multi-trader fund next year.”
The restructuring took place as clients pulled half a billion dollars from Tudor in the third quarter, leaving the firm’s assets at $7 billion, roughly half the level it managed in June 2015, Bloomberg News reported previously. As part of the sweeping overhaul, Andrew Bound and Aadarsh Malde, formerly co-CIOs of the Tudor Discretionary Macro Fund, would depart. In a move reminiscent of George Soros’ recent return to more active management, Jones, who ran the BVI fund with a team of managers, would now have a smaller team and will assume a more dominant role in the fund.
“I will be the largest risk taker and will manage a notional capital account equal to the AUM of the Tudor BVI strategy itself,” Jones said in the letter, referencing assets under management. “This means that my results will have a one-for-one performance impact on Tudor BVI. I relish this challenge.”
Jones and other Tudor partners are the largest investors in the BVI fund, which unlike the soon to be shuttered TIC, is up 0.8% through Nov. 3. More details from Bloomberg:
The firm opened the Tudor Discretionary Macro Fund in 2012 with $500 million. It had 14 portfolio managers and was seeded with $150 million from the firm. At the time, funds that bet on macroeconomic themes were a big draw for investors who expected the strategy to benefit from events such as the European sovereign debt crisis.
Those expectations were dashed as the strategy has produced lackluster returns in recent years. Hedge funds betting on macroeconomic themes climbed an average of 3.8 percent this year through October on an asset-weighted basis, to rank as the worst strategy globally, according to Hedge Fund Research Inc.
Yet while the internal reorganization of multi-billion hedge funds are hardly of material interest to ordinary retail, or even institutional, investors, PTJ’s outlook on the market always is, and it was concerning: frustrated by the collapse of market vol as a result of record central bank monetary easing, Jones said “the environment is on the verge of a significant change” and that the current market is reminiscent of the bubble of 1999.
“That was a year in which Tudor BVI’s macro book was basically flat while U.S. equities experienced one of the greatest bubbles in history,” Jones, 63, wrote. “The termination of that bull market kicked off a three-year macro feast.” adding that “the plot is much the same today but we can substitute Bitcoin and fine art for the Nasdaq 100 of 1999.”
Of course, critics will be first to point out that this is simply yet another prominent trader lamenting the end of markets as we knew them before the takeover by central banks, and Jones himself seems to partially agree, observing in a November 30 market note that the low volatility market environment has been an “anathema” to traditional macro funds and is becoming a “dangerous place,” lulling investors into a false sense of complacency.
“In the face of a shock, investors may be surprised to find themselves jammed running for the exit,” he wrote. However, as Howard Marks has repeatedly cautioned in the past 3 years, this will be a problem as “the amount and quality of liquidity is lower than people recognize”, and “hidden leverage in the market will make a mass exit even more challenging.”
At a loss how to trade a market that appears to have little logic to it, Jones, a pioneer in the industry, has recently turned to more computer-driven trading and hired scientists and mathematicians to help revamp the firm. As Bloomberg reported previously, Tudor raised $300 million for a new macro fund, which started trading in October, that uses machine-learning algorithms to help its manager make trades.
It is unclear if that particular fund has had more success than more traditional, “fundamental” investing approaches.
As for PTJ’s warning that a 1999-style blow up is imminent, while many of his macro peers would be the first to agree, the real question is how will central banks react: after all in the face of trillions in liquidity created out of thin air, if there is one thing the past decade has taught us is that fighting central banks is not only hazardous for one’s health, but destructive to one’s professional financial career. Then again, amid countless such warnings from the “legends of investing” crowd, this may finally be the proverbial moment when the broken clock is right…