Nevsky's Taylor Blames Algos in Closing $1.5 Billion Hedge Fund

  • Fund's 18.4% annual gain since 2000 more than 10 times peers
  • Fund expects to liquidate portfolio by the end of January

Are Equity Market Algorithms an Unfair Advantage?

Nevsky Capital’s $1.5 billion hedge fund is shutting down, part of a growing trend among money managers following weak returns in 2015. What’s unusual is the reason the managers gave for folding: navigating markets driven by computers and index funds.

“We have come regretfully to the conclusion that the current algorithmically driven market environment is one which is increasingly incompatible with our fundamental, research orientated, investment process," Martin Taylor, the firm’s chief investment officer, said in a statement. “The bear market in emerging market equities, which began in 2011, may eventually engulf developed markets too.”

The London-based firm managed by Taylor and Nick Barnes makes bets on rising and falling share prices in developed and emerging markets. The fund returned 18.1 percent in 2013 before losing 1.4 percent the following year. In the first 11 months of 2015, the fund was up 0.9 percent, according to data compiled by Bloomberg.

Nevsky Capital joins hedge-fund firms such as billionaire Michael Platt’s BlueCrest Capital Management, Doug Hirsch’s Seneca Capital, and Scott Bommer’s SAB Capital Management in returning money to clients and adding to an accelerating pace of hedge funds shutting down globally.

The firm’s move comes amid a strong interest among investors for equity long-short hedge funds. These funds had net inflows of $31.5 billion in the first 10 months of last year, accounting for almost 42 percent of the money put into hedge funds, according to data from Eurekahedge.

A total of 257 funds were liquidated in the third quarter, up from 200 in the previous three months, according to Hedge Fund Research Inc. That brought the number of closures for the first nine months to 674, compared with 661 during a year earlier.

“If your business model can’t beat index trackers, then you’ve got trouble,” said Andrew Clare, Professor of Asset Management at Cass Business School. “If your business model is trying to compete against computers that can make decisions a billion times faster than humans and having taken in a billion times more information, then you are basically going to go the way of dinosaurs.”

Taylor started the current version of the fund in 2011 and aimed to manage no more than $800 million after deciding to step away from the “intensity” of running the original $3.3 billion hedge fund that was started in 2000. The fund returned 14.6 percent in 2012.

Nevsky expects to liquidate the portfolio and move into cash by the end of January. The fund’s 18.4 percent annual gain since 2000 is nearly 10 times more than returns generated by average peers as measured by the HFRX Index, Nevsky said in the statement.

Taylor and Barnes started the original fund while working for London-based Thames River Capital. Both previously worked at Baring Asset Management.

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