Opinion  

Why this fund’s new year resolution bodes ill

Dan Jones

A new year brings hopes of a fresh start. After the past week, investment advisers could be forgiven for looking forward to 2017.

Amid the slump, one fund house, at least, did get its timing just right – emerging market-focused Nevsky Capital, which announced its closure on January 4.

Nevsky, spun out of Thames River in 2007, uses a process that employs both top-down and bottom-up research. So far, so conventional. What’s notable is that the firm claimed last week that this process, in short, is no longer well-equipped to work properly.

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Why should we pay attention to this hedge fund manager? Because Nevsky was among the very best, returning an average of 18.5 per cent per year since the turn of the century. In 2008, when emerging market indices lost more than half their value, Nevsky fell by just 17 per cent. Last year, in the face of a 15 per cent drop for EM benchmarks, the fund posted a small positive return.

Among the main charges in the firm’s final investor letter: the quality of data has declined, most pertinently in China and India; economic logic is in particularly short supply due to resurgent nationalism; and index and algorithmic trading make it difficult for fundamental investors.

The argument could be taken for special pleading. For one thing, when was Chinese data ever reliable? For another, political risk is exactly what a macro hedge fund is designed to combat. Plenty of fund managers also suggest the rise of indexing has created inefficiencies for long-term active products to exploit.

But there’s no doubt the letter has struck a chord with the investment industry, and not just because it arrived amid a particularly tumultuous start to the year. Nor is its relevance confined to emerging markets. Nevsky admitted concerns over the outlook for markets also played a part in its decision – specifically, worries over the global economic cycle as a whole.

This is where the firm’s argument coalesces into something meaningful. It’s not just the global outlook, or muddied decisions and data, or increasingly dysfunctional markets. It’s all of them put together, at the same time.

Nevsky’s Martin Taylor is, after all, not the only investor to call it a day of late. I’m sure some of the retail fund management retirements seen over the past 18 months are based on similar rationales.

The managers who remain put on the brave face of those whose livelihoods depend on doing so, and of course there will always be opportunities with a long enough time horizon. But that’s little solace when fund buyers’ underlying managers keep changing. I’d wager selectors will have their hands full again in 2016.