Hedge fund profits fall as instability unsettles investors

Profits at some of London's top hedge funds have taken a hit after they were caught out by the global shocks of last year. Photo / AFP

Profits at some of London's top hedge funds have taken a hit after they were caught out by the global shocks of last year.

Cheyne Capital endured a 31 per cent drop in revenues in the 15 months to the end of March, while its profits dropped by more than half to 21 million ($37m).

The fund has branched out in search of fresh sources of profit, teaming up with construction firm Kier to build homes on council land and revamping its US$1 billion ($1.44b) bond fund, which invests in debts that are close to junk-rated.

The flagship bond fund returned 46 per cent during 2016, performing vastly better than the 15 per cent yearly return since it was launched in 2002. Similar credit funds with longer-dated debt also delivered returns of more than 20 per cent.

The hedge fund industry as a whole returned a healthy 5.72 per cent in the November year, according to figures from Preqin. This compared to just 2.02 per cent during 2015, when a series of failed mergers in the drugs industry, wobbles in the Chinese economy and delays to interest rate rises around the world caught many hedge fund managers off-guard.

At the same time, more hedge funds closed than opened in the first 11 months of the year since the financial crisis, according to Hedge Fund Research. Large investors such as pension funds are sticking with the sector but demanding lower fees or more consistent returns, squeezing the industry's 2 per cent annual fee and 20 per cent performance levy.

Some of the decline in Cheyne's performance before March 2016 was caused by a temporary drought in client fees, which are not paid until the end of a fund's lifespan in two-thirds of the firm's strategies. Despite the slump in earnings, Cheyne managed to maintain its 44.5m payment to its owners, dipping into its cash pile to bridge the shortfall in profits. However, the money set aside to pay members in future years has fallen to pounds 21m.

Members of rival firm Sloane Robinson saw a slight drop in their payout for the year to March, sharing 11.6m between 17 former and current staff, down from 12.3m. The highest-paid member, thought to be a subsidiary company that pays employees, took 4.66m.