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January 29, 2020  

Elm Ridge Continues to Hemorrhage Capital

Elm Ridge Management is clinging to life, with Duke University now its only major investor.

Continuing a long decline from its $2.2 billion peak, the value-focused equity shop saw the net assets of its two hedge funds drop to about $40 million last year — with founder Ron Gutfleish and a few friends and family members accounting for most of the vehicles’ remaining capital. Beyond that, the Irvington, N.Y., firm’s sole mandate is a separate account it runs for a Duke entity known as Dumac.

That portfolio contained $101 million of gross assets at yearend 2018, down from $143 million a year earlier. Its size today is unknown.

One source said Gutfleish has been digging into his own pockets to subsidize Elm Ridge’s fund business.

Indeed, the flagship hedge fund had just $250,000 under management at yearend 2019. It had been running $43 million 12 months earlier. The reduction reflected the ongoing effects of a 61.6% drawdown that started in August 2014 and ended with a 15.4% drop in August 2019 — the entity’s worst month since its formation in 2000.

That also suggests losses for the Dumac portfolio, which Elm Ridge has been managing since 2014. Dumac, which runs $19 billion from capital pools including Duke’s endowment and retirement plans, adjusts the account’s leverage on its own. And while its returns are unknown, a source described its strategy as similar or identical to those of Elm Ridge’s commingled funds.

Elm Ridge aims to buy shares in deeply out-of-favor companies, employing a long/short strategy with a fairly low net exposure. A substantial amount of its hedge fund losses in recent years can be traced back to energy-related investments that went bad.

In a 2004 article on Elm Ridge, The Wall Street Journal quoted Gutfleish as saying, “We’re willing to get beaten up when we see we can make money.” But the firm has only lost money in recent years.

Despite strong profits in the last few months of 2019, Elm Ridge’s flagship fund booked a full-year loss of 5.4%. It also was down 26.2% in 2018 and 23.4% in 2017.

The declines left the vehicle down in six of the past eight years, with double-digit losses in four of those years. The entity has had some up years as well, including market-beating gains of 24% in 2016 and 22.1% in 2013. But its volatility is high, and its annualized return has dipped to a lackluster 4.6%.

As of Dec. 31, a limited partner who invested with the flagship fund in the fourth quarter of 2002 would have been flat on its position.

Sources added that Elm Ridge has experienced substantial staff turnover. Gutfleish, formerly a mutual fund manager at Goldman Sachs, founded the firm in 2000.