08/24/2011

Good Timing for Scottwood’s Perlman

In his parting letter to investors, Scottwood Capital founder Edward Perlman said in July that he wasn’t just exiting the hedge fund business — he was getting out of the financial markets altogether.

In the face of increasing volatility and risk, Scottwood had spent the previous 3-4 months “dramatically reducing exposures, raising substantial cash and, consistent with always trying to do the right thing, is returning investor capital,” Perlman wrote. He then made one of several “market calls,” pointedly advising his limited partners “not to be invested in the financial markets” at this time.

Within a couple of weeks, Perlman’s letter looked remarkably prescient. S&P’s downgrade of U.S. debt on Aug. 5 sent markets into a tailspin. Since the Greenwich, Conn., firm was mostly in cash by then, it still expects to meet its Sept. 30 deadline for returning investor capital. After that, Perlman plans to convert Scottwood into a family office.

It wasn’t the first time Perlman made a well-timed market call. In the third quarter of 2008, Scottwood scrambled to dial down risk, so that by the time markets were cratering in October, the firm was all in cash. Scottwood finished the year down 7.6%, compared to an industrywide loss of 19%.

The next year, the Scottwood fund gained a whopping 45%, then lost 6.6% in 2010. This year, it was up 1.5% through the end of July. Since its inception in 2001, the fund has delivered an 11.7% average annual return.

In his July letter, Perlman made another market call: Due to “big unwanted changes imposed on the hedge fund industry” — the Dodd-Frank Act, for example — many hedge fund firms “will simply go out of business.” Many other managers, he added, will quit the industry to focus on managing their own money.

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