Convexity Capital Management LP, the $12.6 billion fund run by Harvard University’s former endowment head Jack Meyer, told clients it had a “disappointing” first quarter as it missed benchmarks by 1.5 percentage points amid falling volatility.
The Boston firm, whose strategy works best in choppy markets, saw “lots of smoke, not much fire” in the first three months of the year as fixed-income markets moved little, Meyer wrote in a letter to clients last month.
“It’s been a while since we have had a negative quarter,” Meyer, 65, wrote in the letter, a copy of which was obtained by Bloomberg News. “After careful consideration we have decided we do not like it. It will never happen again. OK, ignore that last statement. Of course it will happen again. But we are confident that we can continue to add value over the long term and that these bumps in the road will be … well, just bumps in the road.”
The shortfall was the first in two years. Meyer exceeded a group of market indexes by an annual average of 7 percentage points since he began trading in February 2006. Over the past 12 months, the fund beat the benchmarks by 2.8 percentage points. Meyer ran Harvard’s endowment, the world’s biggest, for 15 years before leaving in 2005 with more than 30 employees amid an outcry over pay.
The firm, which reported performance versus benchmarks rather than absolute gain, takes its name from a term used by fixed-income traders in measuring a bond’s sensitivity to interest-rate movements. Investors stand to win more than they can lose in trades with “positive convexity.”
Meyer declined to comment.
The Chicago Board Options Exchange Volatility Index, a gauge of U.S. stock-market swings known as the Vix, was little changed from 17.75 on Dec. 31 to 17.74 on March 31. The benchmark has plunged from a record high of 80.86 on Nov. 20, 2008, amid the global financial crisis.
“While we are disappointed with our performance for the quarter, we are not discouraged,” Meyer wrote. “We work to construct trades that put the odds on our side and protect the downside. But there will be periods, such as this past quarter.”
Convexity seeks to track the returns of indexes selected by its clients while providing an additional gain, known as alpha, of about 4 percentage points a year at each investment pool. Investors can pick from a mix of 15 indexes, using different asset classes for diversification.
‘Cheap’ Forward Options
The firm is buying “cheap” forward options, while simultaneously trading “to exploit the steepest part of the forwards and the relatively flatter longer-term rates,” Meyer wrote.
Meyer employs 10 strategies centered on options trading and asset swaps, seeking to take advantage of different market climates. His team used a similar approach in quintupling assets at Harvard between 1990 and 2005. The firm, which attracted a record $6.3 billion from endowments and foundations as a hedge- fund start-up, got net deposits of $507 million in 2010.
Meyer’s former employees at Harvard Management Co. who joined him at Convexity included bond traders Maurice Samuels and David Mittelman, the school’s highest-paid endowment managers in 2003, earning $35.1 million and $34.1 million, respectively. Members of the class of 1969 wrote a letter to then-President Lawrence Summers, saying the money would be better spent on scholarships.
Meyer averaged annual gains of 16 percent in his last decade at Harvard. The endowment rose to $25.9 billion in 2005 from $4.7 billion 15 years earlier, when he became chief executive officer of Harvard Management. Investments at the $27.6 billion fund, run by Jane Mendillo since July 2008, gained 11 percent in the past year, rebounding from the record 27 percent loss of 2009 spurred by the bankruptcy of Lehman Brothers Holdings Inc. a year earlier.
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