Exclusive - Perry's TeamCo is latest hedge fund industry casualty

NEW YORK (Reuters) - David Perry plans to end the main operations of TeamCo Advisers LLC by early 2018 and ultimately shut the firm, he told Reuters in an interview, making his San Francisco-based business the latest casualty in the struggling fund of hedge funds industry.

David Perry, Principal of TeamCo Advisers LLC, poses for a photo in the firm’s headquarters in San Francisco, California, U.S. in 2015 and released on September 21, 2017. Courtesy of TeamCo/Handout via REUTERS

Firms like TeamCo that manage portfolios of hedge funds for wealthy individuals and institutional investors have come under pressure as the performance of their underlying investments has lagged, making it harder for them to justify their extra layer of fees.

The number of funds of funds peaked at nearly 2,500 in 2007 with around $800 billion under management according to data tracker HFR, but has plunged to around 1,482 as of June with $631 billion under management.

TeamCo, which manages about $1 billion, has started laying off staff and unwinding or transitioning its positions, Perry said. Its customised portfolios and a fund of funds together had peaked at around $1.72 billion in 2015.

The decision to close comes after David Perry’s brother, billionaire Richard Perry, said last year he would shut his 28-year-old hedge fund firm, Perry Capital LLC, following a period of poor performance.

Nephews of former Bear Stearns chief executive Jimmy Cayne, both brothers entered the hedge fund industry when double-digit annual returns were common.

But single-digit profits or even losses have become the new normal, hitting the industry’s reputation and pushing some investors into low-cost index funds or other alternatives like private equity and niche credit funds.

Richard Perry’s New York-based Perry Capital, launched in 1988, became one of the industry’s best-known hedge fund managers, with double-digit annual returns and around $15 billion under management by early 2008.

TeamCo’s hedge fund investments produced a composite return of 3.4 percent net of fees from July 2007 through July 2017, with a gain of 4.8 percent this year through July, David Perry said.

That topped the HFRI Fund of Funds Composite Index return of 0.96 percent over the same period, but underperformed the benchmark U.S. S&P 500 stock index’s 7.1 percent return with dividends.

“Whether it’s an anomalous period or not, the last 9 years has been brutally challenging for hedge funds of virtually all styles and strategies,” David Perry, 64, said.

“People have had it. They don’t want to pay those fees for returns that are nowhere near as good as they expected from an absolute return basis.”

Funds of funds add a layer of fees, up to 1 percent of assets under management and 10 percent of gains, to already pricey hedge funds. TeamCo’s fees were lower than average, Perry said, including management fees closer to 0.5 percent.

TeamCo invested with larger firms such as Eton Park Capital Management LP, Viking Global Investors LP, King Street Capital Management LP, in addition to smaller managers like Moon Capital Management LP and Empyrean Capital Partners LP.

The firm helped institutional clients including Kroger Co and Kaiser Permanente invest in hedge funds and make so-called special situations bets.

David Perry said most hedge funds had struggled since the 2007-2009 financial crisis as ultra-low interest rates reduced market volatility and the trading opportunities it provides. The prolonged bull market for stocks also benefited passive index funds, which charge much lower fees than hedge funds.

His brother had similarly cited “industry and market headwinds” when shutting his own investment firm last year.

TeamCo prided itself on using both qualitative and quantitative factors to choose and manage its investments. One example was analysing non-verbal behaviour of hedge fund managers, such as posture and facial expressions, to better predict their chances of success.

Perry said he was appreciative of support from clients and staff even though his goal to grow and ultimately sell TeamCo, as he had with $7 billion Certus Asset Advisors to Mellon Bank in 1995, failed.

“As Mick Jagger once sang,” he said, “‘you can’t always get what you want.’”

Reporting by Lawrence Delevingne; Editing by Carmel Crimmins and Meredith Mazzilli