Bet on Cambridge Brain-Box Fund Goes Awry as GAM Takes Hit

(Bloomberg) -- GAM Holding AG slumped the most in almost two years after a $217 million bet on a volatile quant hedge fund with links to the University of Cambridge went awry.

First-half earnings at the Swiss asset manager will be hit by a $59 million impairment charge related to a worse-than-expected performance at Cantab Capital Partners, acquired in 2016 as interest in algorithm-driven funds boomed. The charge relates to lower assets under management and cash flows than had been forecast at the time of the acquisition.

The charge is an unwelcome setback for GAM Chief Executive Officer Alex Friedman, who had been focusing on a turnaround of the independent asset manager, spun off from private bank Julius Baer Group Ltd. nine years ago. Last year he saw off a challenge from local hedge fund RBR Capital, led by Rudolf Bohli, which had tried to push through a more radical overhaul of the firm and agitated for management change, including the ousting of Friedman.

The stock dropped as much as 10.8 percent -- the most since August 2016 -- and was trading 10.8 percent lower at 11.93 francs as of 1:18 p.m. in Zurich. Analysts at Baader-Helvea downgraded the stock to hold from buy.

“While the two flagship funds at Cantab were struggling year-to-date, the size of the one-off charge definitely surprised us and the market," David Hart, an equity research analyst at Kepler Cheuvreux in Zurich, said by phone.

Flagship Funds

Cantab was founded in 2006. It manages two flagship funds and employs about 60 people. It has close links to the University of Cambridge, with partners at the firm having funded the Cantab Capital Institute for Mathematics of Information. The fund was co-founded by Dr Ewan Kirk, a former Goldman Sachs Group Inc partner who managed the American bank’s Quantitative Strategies Group in Europe and is now Cantab’s chief investment officer.

Cantab’s CCP Quantitative Fund-Aristarchus lost 18.6 percent during the first half of the year as sudden spikes in volatility led to losses for computer-driven hedge funds, according to an investor letter seen by Bloomberg News.

The fund had slumped 10.6 percent in February alone, a month that saw hedge funds betting on market trends suffering their biggest one-day loss in 11 years as volatility surged and stocks tumbled, erasing trillions of dollars from global equity markets. Still, the fund gained 31 percent in 2017. GAM Systematic, the asset manager’s quant offering which includes Cantab, manages about $5 billion.

‘Key Driver’

“We continue to see GAM Systematic Cantab as a key driver of future growth for our company," Friedman said in a statement on Friday. “While the developments in assets under management since the acquisition have been below expectation, they have been in line with industry trends as investors have turned more averse toward high volatility hedge funds."

The non-cash impairment charge of approximately 59 million Swiss francs ($59 million), net of taxes will drive GAM’s first-half profit down to about 25 million Swiss francs. That compares with 67.7 million francs a year earlier.

The impairment charge undermines the credibility of GAM’s management, Baader-Helvea analyst Tomasz Grzelak said in a note Friday. It also suggests “lower performance fee potential in the coming years as Cantab has been expected to be a major contributor of those,” he said.

GAM also said it expects to pay around 30 million francs less than expected for Cantab in the first half of 2018. It had agreed to pay $217 million in cash upfront for the company in 2016, which then had $4 billion assets under management, and the rest in deferred installments.

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