Big hedge funds raise money to capitalise on market turmoil

DE Shaw is raising $2bn in the first fundraising for its flagship vehicle in seven years, joining rivals Baupost Group and TCI Fund Management in a bid to capitalise on opportunities thrown up by market turmoil. 

When markets sold off this month the New York-based quantitative group started approaching investors about raising $1bn for its $13bn Composite fund, which has been closed to new investments since 2013.

A person familiar with the situation said the fundraising cap when it reopens on April 1 had been increased to $2bn because of investor demand and the number of opportunities thrown up by moves in the market. DE Shaw declined to comment.

Blue-chip managers such as DE Shaw, Seth Klarman’s Baupost and Christopher Hohn’s TCI can be closed to new money for many years, making them very difficult for investors to access. The selective reopening illustrates how the large drop in asset prices driven by the coronavirus pandemic has left fund managers preparing to replenish their firepower and capitalise on what many see as a historic buying opportunity not seen since the aftermath of the 2008 financial crisis. 

“We’re hearing from a lot of managers that they’re setting up new vehicles to take advantage of the dislocation,” said Patrick Ghali, co-founder of Sussex Partners, which advises institutions on investing in hedge funds.

Baupost has started approaching its existing investors about raising more money for the first time since 2011, said people familiar with the matter. Accepting new investors — which it has not done since 2008 — is also under consideration by the $29bn Boston-based manager, the people said.

Its founder Mr Klarman, a value investor who is sometimes compared to Warren Buffett, is known for his willingness to return capital to investors when he thinks opportunities are sparse. In January he warned in an investor letter that stock market prices were stretched and said that “full exposure in this environment seems dangerous, given prevailing lofty valuations”.

However, Baupost recently told investors it had deployed about $1.5bn in the three weeks from the end of February to mid-March, lowering its cash holding from about 31 per cent of its assets at the start of the year to 27 per cent. Bloomberg first reported Baupost’s investments and plans to raise more capital. 

Meanwhile, TCI is also looking to reopen, said a person familiar with its plans. The London-based fund invests in a concentrated portfolio of stocks and gained about 40 per cent last year. This year it has suffered large falls in performance but has still been approached by investors wanting to increase their allocations.

Also opening up to new money is Bob Treue’s $640m Barnegat fund, which arbitrages tiny mispricings in the bond market. The 20-year-old fund has a long-term annualised return of about 14 per cent, and is down nearly 10 per cent this year. It has been closed to new investors for two years, and is opening up next month.

Meanwhile, Ken Griffin’s Chicago-based Citadel is launching a new “relative value” fixed-income fund to take advantage of the recent bond market volatility.