The announcement that veteran European hedge fund manager Talal Shakerchi is to liquidate his flagship Meditor European fund after 15 years leaves a significant hole in the European long/short equity landscape.
The decision, which took most industry players by surprise, will mean the disappearance of a fund that has been a core long/short equity allocation for many investors over the years – who will now need to find new places to re-allocate their money, thereby creating opportunities for other managers to see new inflows of assets as a result of the Meditor shutdown.
In a letter sent to investors, Shakerchi said he had decided to recommend the liquidation of the fund after concluding that the multi-portfolio manager system that the fund had been running had not been working.
“The decision was precipitated by a review of the carve-out system – including performance, investment idea contributions and economics,” he said. “The conclusion of the review was that, subject to required staff consultations, we should cease operating the carve-outs.”
A consequence of this decision, he said, was a reduced AUM capacity. One of the largest European long/short equity funds over the years, peaking at around $3-4 billion, the Meditor European fund was recently reported by investors to be running about $1.6 billion in assets.
“This is exacerbated by recent trends in European markets such as more transaction taxes and less liquidity. With our strong emphasis on individual shorts, we have also found the new short position rules constraining. These rules disadvantage larger managers who actively short like Meditor. In summary, we are no longer confident that we can continue to offer good value to our clients on our current scale,” he added.
Shakerchi had carved out a very specific niche with Meditor over the years, taking on board macro views and adding alpha via individual short positions. The firm, based in lavish offices in Tower 42 in London, also ran a carve-out portfolio management structure – whereby individual managers have direct responsibility for parts of the fund, similar to US managers like Millennium or Balyasny approach but relatively rare among European funds.
Its long-term track record was very impressive: the annualised compound, since September 1998, was 13% net. The fund was also well known for its defensive capabilities: it was up 15.85% in 2008, and saw only two losing years, dropping 5.1% in 2001 and giving up 6.7% in 2010.
Although returns for the last few years had been relatively underwhelming, 2013 had marked a return to form: to the end of November it was up 15.8%. Investors say that longs in the healthcare sector contributed significantly to performance this year.
In his letter, Shakerchi said he remained “proud of our investment achievements over the 15-year life of the funds” – pointing out that around 85% of gross returns had come from alpha on both sides of the book, with average annual alpha of 9% on longs and 6% in shorts, and that the fund had demonstrated strong capital protection through the most challenging market environments and a lack of correlation with indices and other funds.
“I am also proud of the client-orientated business approach we have maintained throughout, including rigorously capping AUM (putting investor interests above fee flows), treating all investors equitably and providing consistently high transparency, including a high degree of relevant detail in every monthly letter,” he said. “There have been no dealing suspensions, price restatements or redemption deferments.”
As a reflection of what Shakerchi called the firm’s “client-first attitude” and the fact that a small minority of the portfolio may take some time to liquidate, Meditor is offering an accelerated redemption option to investors – whereby the manager will retain substantially all of its holdings until such redemptions are met, thus facilitating early liquidity for those investors who chose it.
The manager anticipates that the vast majority of the portfolio, which is concentrated in large liquid equities, can be liquidated in an orderly way within a few weeks – although the portfolio has a short tail of less liquid and unlisted positions, which will take longer to liquidate and where the firm is keen to avoid a “fire-sale”.
Despite the long-term success of the flagship funds, Meditor also had a fair number of smaller funds that failed to gain traction, such as the short-biased Meditor Bear, the healthcare fund Cobra, and the Bermuda-based ‘D program’, an analysts’ best ideas fund that operated along the lines of Marshall Wace’s TOPS system.
Shakerchi, who began his career at Old Mutual Asset Management, said he intends to increase the time and focus he dedicates to charitable activities – once the orderly implementation of the fund liquidation and capital repayment process is complete.
“I warmly thank our investors for their outstanding long-term support and encouragement. We have never forgotten the importance of that support for the existence of the firm and have always sought to act accordingly,” he signed off in his letter.
“A good proportion of you have been investors since Meditor’s early days and have developed solid long-term relationships of trust and mutual respect with us. I wish all of you, at both a personal and institutional level, good fortune in the future.”