Pelham Capital's drastic asset erosion

AIBC Forex: Pelham Capital’s drastic asset erosion

Posted by Lea Hogg Posted: Oct 10, 2023

Pelham Capital, once at the pinnacle of London’s equity hedge fund sector, has been faced with a severe decline in its assets over the last three years. The combination of dismal performance, investor exodus and key team departures has led to a staggering depletion of assets, reducing the firm’s holdings from a substantial US$ 4.5 billion in October 2020 to a mere US$ 1 billion today.

Pelham’s performance

The firm’s flagship fund, in particular, has been on a rocky road, registering an 11.8 percent decline in 2021 followed by a drop of 29 percent in the subsequent year. While it has made a modest recovery of approximately 5 percent this year, it still lags far behind – a crucial threshold for charging performance fees. As investors always say – assets leave when performance is bad and this illustrates investors’ reaction to Pelham’s periods of underperformance.

Long vs short equity funds

Pelham’s struggles mirror the broader challenges faced by long vs short equity hedge funds, a strategy that bets on the rise or fall of individual stocks. In recent years, these funds have fallen out of favour with investors, as many have struggled to achieve returns comparable to blue-chip equity indices, despite the extended bull market that followed the 2008-2009 financial crisis.

The volatility in stock markets last year, driven by surging global interest rates, offered only a marginal respite, with long/short equity funds experiencing a 13.5 percent decline—6 percentage points less than the S&P 500 index’s drop. This year, an index tracking such funds has risen by 5.58 percent, while the primary U.S. equity benchmark has surged by 12.5 percent.

Implications for broader market

The downturn in Pelham Capital and similar hedge funds indicate the ever-evolving nature of financial markets. As these once-mighty giants are challenged with diminishing assets and investor dissatisfaction, it sends a ripple effect throughout the broader stock market. The loss of confidence in such funds can lead to increased market volatility and a shift in investor sentiment. In an industry where performance is paramount, the fate of Pelham Capital serves as a stark reminder that even well-established players can falter and the repercussions of their struggles can reverberate across the financial landscape.

Background

Pelham Capital employs a dynamic long/short investment strategy that centres on establishing enduring positions in enterprises boasting stable cash flows and robust growth prospects, all the while identifying opportunities for short-selling. This strategic approach has yielded impressive results. The fund achieved a remarkable 39 percent return in 2017, and over the period from 2015 to 2017, it consistently delivered an average annual return of 27 percent. In 2018, Pelham Capital earned a notable fourth-place ranking among the top 100 hedge funds.

Pelham Capital is an asset management company based in St James’s Street, London W1. It is backed by Goldman Sachs’s publicly listed Petershill fund.