02/09/2011

Shumway Shut-Down Galls Funds of Funds

Chris Shumway's announcement last week that he's shutting down his $8 billion hedge fund operation infuriated fund-of-funds managers who had vouched for him.

Shumway Capital's investors had been on edge since November, when he surprised the market with news that he was relinquishing the title of chief investment officer and elevating a portfolio manager to the post. As investors lined up to withdraw billions of dollars, Shumway went into damage-control mode, promising to postpone the management changes for at least three months.

Based on Shumway's reassurances, a number of fund-of-funds managers that invest with him decided to stay put, telling their investors that Shumway could be counted on. But on Feb. 4, Shumway announced he was calling it quits, leaving the fund-of-funds executives with egg on their faces. “They look stupid, like they don't know what's going on,” said a consultant who advises pension plans on hedge fund investments.

Shumway Capital's closure also is a potential embarrassment for Goldman Sachs, whose Petershill Fund acquired an 8% stake in the New York firm just 13 months ago. The buzz among market players this week was that Goldman's private equity vehicle looks bad for investing in Shumway at what was likely the firm's top valuation.

Word has it that Goldman executives learned of Shumway's decision only slightly ahead of other investors. It's unclear how Goldman plans to respond, though industry insiders said the bank's lawyers presumably structured the Petershill Fund investment to protect Goldman investors.

Shumway had long been considered one of the industry's top portfolio managers. After a successful run at Julian Robertson's Tiger Management, he launched Shumway Capital in 2002 with five employees and $70 million of capital. Over the next eight years, Shumway provided investors with a 17% average annual return. At the time of Shumway's Feb. 4 announcement, the firm had a staff of 95.

On Nov. 15, Shumway surprised the market by announcing that he was stepping down as chief investment officer and turning over the job to portfolio manager Tom Wilcox. The plan was for Shumway to concentrate more on the management of the business in his role as chief executive. But the decision immediately backfired, with investors threatening to withdraw en masse.

By early December, Shumway was backtracking, offering to put off the restructuring for awhile. But by then, the damage already had been done.

In a Feb. 4 letter, Shumway told investors he would return their capital by March 31 and, from now on, concentrate on managing his own money. “I fully understand this complication was brought on by the changes that I chose to make, and as such I feel responsible to correct this mismatch of investment style and investor needs,” he wrote. “The right decision for all of us is to return investor capital.”

One market player said the debacle is a case study in how not to execute a succession plan. “From where we are, it appears that the firm unwound simply as a result of a series of bad PR moves,” he said. “Astonishing, really.”

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