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July 27, 2016  

MKP: Managers Have Been "Slow to Adapt'

In his first performance report as chief executive of MKP Capital, Rich Lightburn offered a candid explanation for the lackluster returns of many of the industry’s top players — his own firm included.

All three of MKP’s funds lost money in the first half. MKP Credit Fund, which had $11.7 billion of gross assets at yearend 2015, was down 12% at the end of June, following a 6.6% decline last year. Industrywide, the asset-weighted version of Hedge Fund Research’s composite index dropped 1.1% during the first six months of the year, after being flat in 2015.

In a July 21 letter to investors, Lightburn suggested part of the problem is that the industry grew too quickly in the years following the financial crisis, with too much money chasing too few opportunities. But he also blamed managers for failing to adjust investment strategies that no longer seem to work.

“Hedge funds have been slow to adapt to the new realities of the market,” he wrote. “A global landscape of negative interest rates across a large percentage of sovereign bonds, ultra-accommodative central banks and declining liquidity, coupled with an unprecedented amount of capital investment in hedge fund strategies, have proven to be a challenging environment for managers. A focus on short-term returns, tactical trading and loss aversion have also stunted potential upside in many strategies.”

He suggests, too, that in many cases fund operators have been slow to adapt to technological changes. “Trading is becoming ever more automated and algorithmic, and new sources of data sprout up every day,” he wrote. “Managers need to continue innovating in their investment processes . . . or we risk being passed by.”

MKP promoted Lightburn to chief executive in April to give founder Patrick McMahon more time to focus on investments. In his previous role at MKP, Lightburn oversaw trading of agency-mortgage securities and interest-rate instruments.

The New York firm, which McMahon founded in 1995, runs about $7 billion overall.