Hedge Fund Three Bays to Close After Poor Performance

(Bloomberg) -- Another disciple of value investing is biting the dust.

Hedge fund Three Bays Capital plans to shutter after years of weak performance, according to people with knowledge of the matter. The company, which was started in 2013 by former Highfields Capital Management money manager Matthew Sidman, will return capital to investors on Dec. 1, said one of the people, who asked not to be identified because the matter is private. Three Bays, which at its peak managed about $1.6 billion, has already liquidated the majority of its holdings, said the person.

Value investing, which was pioneered by Benjamin Graham and Warren Buffett, has struggled since 2015 as so-called growth stocks beat out their inexpensive brethren. Sidman joins a growing list of managers that have given up on the strategy. In the last week alone, Bloomberg has reported plans by both Chieftain Capital Management and SPO Partners & Co. to return client money. John Griffin closed Blue Ridge Capital last year. Another long-time value investor, Eddie Lampert, has been flailing after his bet on Sears Holdings Corp. went awry.

Performance at Three Bays, which now oversees less than $1 billion, has been flat for the last three years, and the fund fell about 4 percent this year through September, said one of the people. A representative for the Boston-based firm declined to comment. Stock-picking hedge funds gained 2.5 percent in the first nine months of the year on an asset-weighted basis, according to Hedge Fund Research Inc. They’ve lost about 5 percent in October amid the rout in equities, according to preliminary estimates by HFR.

Einhorn’s Lament

David Einhorn, who has lost about 35 percent in the last three years at his hedge fund Greenlight Capital, has repeatedly voiced his frustration with his poor performance. Though the practice of buying beaten-down stocks has largely fallen out of favor after a decade of historically low interest rates and the rise of passive investing and quant trading, Einhorn remains committed.

“This has been a frustrating environment for us and for value investing styles,” he said in August. “The market is cyclical and given the extreme anomaly, reversion to the mean should happen sooner rather than later, we just can’t say when.”

Value stocks perform better when the economy, inflation and interest rates are rising, while growth stocks are preferable when economic growth is moderate and inflation is falling, according to JPMorgan Asset Management strategist David Lebovitz.

Eli Weinberg, the co-managing partner at SPO, echoed Einhorn’s frustrations when he announced the closure of his firm after almost 50 years of managing money.
“SPO’s approach -- buying discounted dollars with embedded margins of safety to drive attractive returns -- is proving difficult to execute, and our recent returns bear witness to that,” he said in a letter to investors seen by Bloomberg. He said investors are suspending valuation discipline and paying up for companies, hoping that the stocks will rise.

Sidman started Three Bays with $500 million after 14 years at Highfields -- which announced its closure earlier in October. Three Bays’s largest publicly disclosed holding, construction materials company Summit Materials Inc., fell 26 percent this month. Another holding, cement-maker Eagle Materials Inc., declined 13 percent.

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