A Hedge Fund Big Beast Is Killed by the Robots

(Bloomberg Opinion) -- It’s the end of an era. The fabled but controversial hedge fund trader Philippe Jabre is hanging up his boots. His self-named firm is closing the three funds he personally managed, and that will be that. While he was subject to a hefty fine back in 2003 related to trading on inside information, he will still be remembered for kick-starting the career of plenty of aspiring investment bankers.

It also signals the end of the arbitrage heyday. Never again will we see the likes of hedge fund swashbucklers making decisions on the hoof by snapping up huge chunks of stock and new placements. Jabre was famed for making instant decisions, often when woken in the night, and would take the rough deals with the smooth — so long as it meant he’d get bigger allocations on the juicy deals. He was a one-man commission-generating machine, and the brokers and syndicate desks revered him for it, despite the fall from grace in 2003.

From his early days at GLG Partners, where he became the driving force, he blazed a trail through the capital markets. His penchant was the convertible bond market, though this was by no means his only preference. The confluence of where equity, credit and derivative markets amalgamate into one product — with a lot of moving parts — was perfect feeding ground for a trader like Jabre backed by big resources.

His downfall with the U.K. regulators in 2003 is well-documented. He was fined 750,000 pounds ($946,500) after being accused of trading on inside information, although the authorities stopped short of calling his actions intentional. This ultimately prompted a move to Geneva where he set up his own fund. It was far from a happy transition.

Losing a major investor relatively early on after that move set back his asset-building momentum. And the markets changed fundamentally in the aftermath of the financial crisis, and the depth of liquidity that he relied upon shrank with it. The regulatory mindset had hardened, clamping down on the flexibility of investment banks to facilitate large clip trades (where massive bundles of stocks or bonds are bought in one go rather than working an order over a day). And there was much less new issuance to game. A low-volatility bull market is no hedge fund playground.

Having made a fortune by swooping in after the 1995 earthquake in Kobe and buying Japanese equities, he tried to replicate the same technique after the March 2011 Tohoku earthquake. It didn’t pan out in the same fashion because of the Fukushima nuclear accident that followed Tohoku.

And a bad year ruins the track record, which is crucial to investors where stable returns are paramount. It effectively stopped his fund ever reaching the critical mass required to be sustainable on management fees alone. 2018 has been “especially challenging,” he said this week, with the perhaps inappropriately named “global balanced fund” down more than 40 percent year-to-date. His convertible bond fund is down nearly 20 percent, illustrating how tough it is to arbitrage volatility in thin markets.

But what really seems to have sucked the life out of a hedge fund model reliant on the street smarts of big beast traders is the rise of the machines. Though Jabre’s in-house models were sophisticated, the environment has altered irrevocably. As his letter to investors states: “Financial markets have significantly evolved over the last decade, driven by new technologies, and the market itself is becoming more difficult to anticipate as traditional participants are imperceptibly replaced by computerized models.” Enough said.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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