Exclusive: U.S. hedge fund Magnolia Road shuts down after struggling to raise capital

BOSTON (Reuters) - Jame Donath plans to shutter his Magnolia Road Capital, the latest casualty in the $3 trillion hedge fund industry where many small firms are struggling to attract and retain capital, according to a letter seen by Reuters.

Donath told clients he is liquidating his 5-year-old, New York-based firm which specializes in distressed debt investing. The bulk of capital will be returned by the end of the year, Donath wrote in a Feb. 26 letter.

The decision, Donath wrote, was not sparked by poor returns. Rather “our fund has had difficulty raising additional capital with which to scale our business.”

Donath declined to comment.

Magnolia started trading with roughly $45 million in capital in 2013 and more than doubled its assets to roughly $100 million now. Still, that is not enough to take advantage of future trading opportunities, Donath wrote.

Magnolia’s demise illustrates a trend where more hedge funds closed than opened in the first three quarters of 2017. Late last year distressed investor Archview Investment Group said it was shutting down and Bowery Investment Management is also shutting down.

Investors are more nervous about committing to smaller firms even though these are often said to be more nimble traders and able to score the big returns that made hedge funds famous.

At the same time, there is little appetite for distressed debt investing with assets standing at $198 billion last year, only slightly more than $183.6 billion in 2016, data from Hedge Fund Research show. The industry’s biggest distressed debt players include Marc Lasry’s Avenue Capital Group and Jamie Dinan’s York Capital Management.

“There are fewer sources of capital for new and emerging managers,” said Putri Pascualy, a managing director at PAAMCO, which invests with hedge funds. “And even managers with a strong pedigree and a long track record are having a difficult time raising money,” she added.

Donath had the pedigree investors want to see, with degrees from Yale and Harvard Business School. He also was a portfolio manager at hedge fund Karsch Capital Management and a managing director at Davidson Kempner Capital Management.

And his returns were solid with investors saying the fund gained 1.8 percent in January when the HFRI benchmark Distressed/Restructuring Index rose 1.3 percent. In 2016 the fund gained 14.2 percent and the index climbed 15.5 percent. In 2017, it returned 5.5 percent when the HFRI index climbed 6.64 percent.

But less than half of the 250 institutional investors surveyed for JP Morgan’s Capital Advisory Group 2018 Institutional Investor Survey said that distressed credit investments were interesting to them now. By contrast, long/short equity and event-driven funds topped their wish list.

Also pension funds, a favorite investor for many hedge fund managers, said they would not invest with a firm that has less than $250 million in assets, the survey showed.

Reporting by Svea Herbst-Bayliss; Editing by Lisa Shumaker