Citadel, Point72 Hammered by Monthly Losses in November Comedown

(Bloomberg) -- Billionaires Ken Griffin, Izzy Englander and Steve Cohen posted monthly losses in November that rank among their worst ever as stock hedge funds dumped holdings at a rate not seen since the financial crisis.

Griffin’s Citadel lost about 3 percent last month, its poorest showing since the first quarter of 2016. Englander’s Millennium Management slid 2.8 percent, its third-worst month on record. Cohen’s Point72 Asset Management dropped about 5 percent, largely wiping out its 2018 gains, according to people familiar with the firms.

Citadel, Point72 Hammered by Monthly Losses in November Comedown

Their performance is a comedown from October, when these multi-manager firms rode out a nearly 7 percent plunge in the S&P 500 Index with only minimal losses. The damage underscores a risk faced by firms that farm out money to dozens of managers and run their stock portfolios in similar ways: When other hedge funds cut and run, the multi-manager giants can get caught up in the havoc.

These firms market themselves as steady money makers because their stock managers tend to run portfolios with a roughly equal weighting of longs and shorts, or small net exposure in either a bullish or bearish direction. They also try to neutralize the market’s style, factor and sector biases. These tweaks can send the firms crowding into the same trades.

Risk Restraints

To control risk, individual portfolio managers are typically forced to sell positions after relatively small losses. To make money under those constraints, the firms employ heavy leverage. Citadel, Point72 and Millennium together hold less than $100 billion in net assets, but that sum swells to almost half a trillion dollars when borrowed money is included.

The great unwind began in the latter half of October, according to a report published by Morgan Stanley on Nov. 20. Traditional long-short funds, facing losses on the month and year as markets slumped, began selling long holdings and buying to close out shorts.

Over the next four weeks, funds sold out of their U.S. long stock positions at a magnitude not seen since the financial crisis, the bank said. Their trades eventually hit the multi-managers, who saw their longs drop while their shorts rose in value.

Selling Cycle

And thus began the cycle of liquidation at the multi-manager firms. Individual portfolio managers or teams hit their risk limits, forcing them out of various positions and beginning a cycle of losses and further sales.

Morgan Stanley said that while gross and net leverage for equity hedge funds had reached lows for the year last month -- around 179 percent gross and 43 percent net -- there was still room for them to fall more based on previous market dislocations. That could mean more selling and additional losses, especially because hedge fund managers traditionally cut their borrowings at the end of the year.

Balyasny Asset Management, another multi-manager firm, lost 3.9 percent last month in its Atlas Global fund. Dmitry Balyasny’s Chicago-based firm is down 5.3 percent for the year. The firm is cutting at least 125 people, or about one-fifth of its staff, after assets shrunk by about $4 billion in 2018, primarily from client withdrawals. It said in its October client letter that consumer and communication-services stocks were particularly hard hit as the sell-off began.

Multi-manager firms have rebounded from de-leveraging events relatively quickly in the past. Chicago-based Citadel slumped 8 percent in early 2016 but ended the year up 5 percent. Millennium, based in New York, slid 2.7 percent that February yet finished with a 3.3 percent gain.

This year, Citadel is still up 8.5 percent and Millennium has gained 4.2 percent, said the people, asking not to be identified because the information isn’t public.

Representatives for the firms declined to comment.

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