Eton Park Capital Management may be closed for business, but don’t tell Argentina.
Months after Eric Mindich said he would begin winding down his $7 billion hedge fund in March, he remains locked in a legal battle with the country about its decision to nationalize the oil and gas company YPF in 2012. Eton Park claims Argentina violated the company’s bylaws by not buying out other investors when it took control, sending shares down 60%. Eton Park says in court filings it owned American depository receipts in the company worth $448 million when it went private, making it the third-largest investor. An official in the Kirchner-led government said at the time only “fools” would expect Argentina to follow the “unfair” bylaws.
American financial media has paid little attention to the proceedings, but the Argentinian press has dubbed Eton Park a “vulture fund” in the mold of Elliott Management, which famously fought a year-long battle with Argentina’s government over repayment of its sovereign debt. Argentinian press reports claim Eton Park seeks $500 million in damages, though the firm makes no such demands in court filings.
However much Eton Park demands from Argentina, the legal fight is an odd coda to Mindich’s meteoric rise from trading on Robert Rubin’s famed risk arbitrage desk at Goldman Sachs to turning away investors from Eton Park, which set records when it launched with $3.5 billion in 2004. It is also just one of many questions raised by the firm’s closure, the largest of any hedge fund this year.
But Eton Park’s exit also fits in a larger pattern that dates to Mindich’s time at Goldman. Merger arbitrage, a large piece of the bank’s risk arbitrage trading strategy, may have been fashionable when corporate mergers were frequently priced inefficiently, but has since been reduced to a so-called “risk premia.” Just a few deals per year are complicated enough to produce a spread of close to 10%, say investors in the strategy.
In response, Mindich and his cohort have been forced to find creative ways to manage the billions of dollars entrusted to them by investors eager to profit with Goldman’s best. The group’s approach has faltered in a post-crisis investing environment marked by surging markets in bonds and equities and, in Mindich’s case, has proved difficult to transfer to private investments.
The Goldmanites once dominated a corner of the industry. Seven American hedge funds run by former Goldman risk arbitrage traders have over time broken the $10 billion mark – Eton Park, ESL Investments, Farallon Capital, Och-Ziff Capital Management, Perry Capital, Taconic Capital and Axon Capital, formerly TPG-Axon Capital. In the middle of 2008 they together managed $128 billion, according to Absolute Return data.
The founders, who overlap at Wall Street parties, fundraising dinners and in the Washington policy world, have controlled a significant portion of the hedge fund industry while giving millions to predominately Democratic candidates and other political causes.
But in the markets, their influence has waned. Following years of meager performance and shutdowns at Eton Park and Perry, the group manages just about $53 billion, according to Billion Dollar Club data from midyear. The hedge fund industry has, by some estimates, expanded from less than $1.5 trillion to more than $3 trillion during the same period, shrinking the group’s share from nearly 9% to under 2%.
They also don’t make money like they used to. When Institutional Investor’s Alpha began tracking the personal gains of the wealthiest hedge fund managers in 2002, ESL founder Eddie Lampert, Perry Capital’s Richard Perry, Farallon founder Tom Steyer and Dan Och of Och-Ziff each ranked on the list, making a combined $666 million from their funds. This past year, none of the seven ranked among the 25 highest earners. Only Och has made the list in the past three – in 2016, for making $140 million the year before.
Several have recently suffered from bad investments. Perhaps no one more than Och, whose firm was forced to pay more than $400 million in total to settle charges it bribed officials in African countries to secure private deals. Lampert’s ESL has famously shrunk to about $2 billion under the weight of a large bet on Sears, where Lampert is also chief executive, leading the hedge fund to loan hundreds of millions of dollars to the struggling retailer.
They were once the vanguard of capital. Now, their wax wings have melted in the sun.Enjoying reading this article? Want to see more?
Rising to the top
Eric Mindich’s rise through the ranks of Wall Street is by now well known: Attended Harvard College, interned at Goldman Sachs’ commodities arm, moved to the risk arbitrage desk in 1998 after graduating Phi Beta Kappa and quickly advanced up the ladder.
Taconic Capital co-founder Frank Brosens, who ran the division at the time following a promotion for Rubin at the bank in 1986, remembers the time fondly. He oversaw a team that also included Lampert, Och and Perry, while Steyer had left the desk earlier that year to found Farallon. Brosens later hired Dinakar Singh, who would go on to found TPG-Axon, and Amos Meron, now the head of Empyrean Capital Partners.
Brosens also took on roles outside the arbitrage desk, including in equity derivatives, stock options and Japanese warrants. When running each became too difficult, Brosens made Mindich de facto head of the risk arbitrage business in 1991, handing over the title officially a year later. Mindich was 25 at the time, a fact Brosens says mattered little.
“One, he was extraordinarily thorough in terms of analysis,” Brosens says in an interview at the Taconic offices. “Two, a very creative thinker, both in terms of understanding potential risks others might not see but also understanding potential opportunities.”
Two years later in 1994, Mindich famously became the youngest partner ever at Goldman Sachs. “He’s 27, single, and rich,” the Wall Street Journal wrote in an article marking the occasion. After a series of promotions up the ranks of the bank, he unexpectedly announced his retirement in 2003.
“I was hoping to find a burned-out, weathered-looking guy, beaten down by years toiling in Goldman’s salt mine,” Fortune’s Andy Serwer wrote after an interview with Mindich following his departure. “But, maddeningly, Eric Mindich doesn’t look a day over 29!”
Mindich cut his retirement short, founding Eton Park in 2004. He pitched the firm as a combination of liquid investments and private deals in South America and other emerging markets that comprised up to 30% of the capital. The rest would go to bets on mergers, distressed companies and global assets trading at attractive prices.
The pitch drew money from endowments, including Harvard Management Company, and a collection of other high-profile investors under strict conditions to commit the money for at least three years. In some cases, Mindich turned down investors that he thought would not stay with the fund, which charged 2% for managing money and took 20% of profits. At the time, Eton Park was the closest thing to a consensus investment.
Instead, the 13 years that followed produced mixed results for investors. Eton Park made consistent returns early, gaining about 13% in its first full year of trading in 2005 before making returns of 42% in 2007 from subprime mortgage bets. Mindich appeared on Alpha’s rich list for the first and only time after adding an estimated $290 million in wealth that year.
Eton Park then fell 8% when the financial crisis hit in 2008, more than the 6.95% drop in the Absolute Return Composite Index. The fund gained 5% the next year and about 10% in 2010 when others benefited from the performance of distressed credits and stocks that had sunk with the broader markets. Firmwide assets peaked at $14 billion the following year.
Still, 2011 was for some the first sign things were not right at Eton Park. Losses of about 11.5% at the fund forced a reevaluation of its entire mandate. The firm’s emerging market equity investments faltered as macroeconomic events shook markets, while “in other cases” the bets “were simply wrong,” the firm wrote in a letter to investors. Investments in large U.S. banks also soured, with the two areas together contributing a loss of 8.1%, according to the letter.
The next year, following a rush to the exits limited by the fund’s strict redemption conditions, Eton Park said it would allow investors to take out 20% of their money each quarter and begin selling its private investments, giving investors the chance to exit the deals altogether. The firm also stopped investing in public companies in emerging markets after losing more than 200 basis points of returns on YPF, the nationalized Argentinian energy company.
“It became a little more of a struggle to put risk back on following the crisis,” says an early Eton Park investor who began redeeming in 2012.
“…The return premium, or expectation, that you had relative to the restrictive liquidity terms – it stopped being overly compelling in peoples’ minds.”
The main fund recovered the losses with gains of more than 12% in 2012 and 22% in 2013, though investors with private investments made closer to 9% and 17%, respectively. Profits largely came from long/short equity and credit positions, according to investor letters from the time.
But the fund also faced setbacks when both Anand Desai, head of U.S. long/short equities, and Isaac Corre, head of event-driven strategies, left in 2013. The two, who were well-respected by Eton Park’s investors, later accumulated about $1 billion each for their own funds in their first years of trading. Mindich’s firm announced further concessions that year, reducing management fees from 2% to 1.5% and creating a new share class that allowed full redemptions within 12 months rather than the previously required seven quarters.
By 2016, Eton Park had shrunk to $9 billion following steady gains of about 6.5% in 2014 and 7.5% in 2015, excluding negative returns on private investments. The onshore fund had most of its money in long/short equity investments, with almost 19% of that in Asian companies outside of emerging countries, according to a fund document from January that year. Mindich had said in 2015 that Japan was the “market we’re most excited about,” and at the end of the year he held more than $500 million in call options on an exchange-traded fund that would rise with Japanese equity markets.
But that bet proved incorrect as Japanese companies floundered in 2016, with the Nikkei 225 index losing as much as 20% through June before finishing about flat for the year. Eton Park’s main fund lost more than 9%. At the end of the year, the onshore fund kept about 15% of its total assets in cash, according to a financial statement.
Down to managing $7 billion following investor redemptions, Mindich faced a difficult decision, according to people close to him: shut the fund or cut staff and investment areas in a bid to stay afloat. Mindich debated reducing foreign investments, which constituted about 60% of the fund’s money, and losing some of the infrastructure he pitched to investors as typical of larger firms, according one of the people familiar with his thinking.
Like other hedge fund managers with mixed returns compared to passive investing alternatives, he also faced pressure to cut fees. The fund made an annualized return of 7.7% through 2016, or 6.25% for those with the private investments, according to a person familiar with the matter.
In March, Mindich sent a one-page letter to investors announcing Eton Park’s closure, citing recent performance, market conditions and “industry headwinds,” a phrase Perry also used when it announced its closure in 2016. The letter said partners and employees were the largest investors in the funds.
“I believe from his standpoint, he had to be quite large to give him the macro insights that he really wanted to be able to create differentiated returns,” Brosens says now. According to the person familiar with his thinking, Mindich and others at the firm now say that many of their positions would have paid off this year.
Private investments have this year generated losses of 12.41% for onshore investors through August, according to a fund document. The more than $200 million that remained included investments in Ashmore Energy International, the international arm of Enron prior to its bankruptcy, and Chilean renewable energy company HydroChile, along with cash waiting to be returned to investors.
The firm has sold about two-thirds of its private stakes since the beginning of the year, while 95% of public investments have been liquidated, said the source. It is unclear when it plans to return all the money to investors, including a potential distribution from the YPF lawsuit.
Mindich declined to be interviewed for this article.
With Eton Park winding down, Mindich now has more time to indulge his other interests and consider next steps. He recently attended the Lincoln Center Theater premiere of “Junk,” the play about Michael Milken-era greed that has debuted to positive reviews, as chair of the theater’s board. In a photo from the event, Mindich stands next to his former boss Brosens, flashing a wide smile.
Mindich also has his wealth to manage. Long before Eton Park’s closure, he set up a private office called Everblue Management in the same building to exclusively invest his family’s money. He gives to hospitals, his alma mater Harvard and arts institutions like the Lincoln Center Theater through a foundation he runs with his wife, Stacey, a musical producer who helped bring Dear Evan Hansen to Broadway.
His money has also allowed him access to Democratic leaders, including former president Barack Obama. Acting as a collector of donations for Obama and other Democratic candidates, Mindich raised a total of $559,200 between 1990 and 2012, according to data from OpenSecrets. (Brosens bundled together almost $590,000, and Steyer close to $1.3 million.)
Mindich has also opined on the 2008 financial crisis through his involvement in The Hamilton Project, a think tank at the Brookings Institution informally led by Rubin focused on government and financial markets, where he serves on the advisory council with Perry and Steyer.
Some have blamed so-called “Rubinomics,” a mix of tax cuts and fiscal cutbacks he implemented to spur economic growth while treasury secretary during Bill Clinton’s presidency, for precipitating the crash. During his time at Citigroup, Rubin also pushed for increased risk-taking that some say led the bank deeper into the structured fixed income markets that would ultimately contribute to America’s financial meltdown. Rubin’s colleagues have refuted this characterization.Enjoying reading this article? Want to see more?
A new investment era
If nothing else, Eton Park’s closure and cutbacks at other hedge funds run by Rubin protégés have raised questions anew about the value of expensive investment vehicles meant to make money in all markets. Though the specifics vary, each manager has been shaped by Rubin’s investment philosophy, which requires carefully weighing the probabilities of different events and bracing for all possibilities.
Rubin’s strategy also hinges on the nature of market cycles. When stocks are going up and debt is easy to obtain, companies seek deals, creating a rich environment for merger arbitrage. During downturns, companies go under, leading to opportunities to buy distressed assets on the cheap.
But is it possible Rubin’s philosophy is incompatible with this new investment era? Is attempting to arbitrage away risk at every opportunity still worth it?
Brosens thinks so. With markets in the middle of a sustained period of global growth, he says he is now worried about what would happen in the event of a downturn. Above all, he worries the rise in assets forced to sell volatility, including so-called “risk targeted funds” as well as managed futures and risk parity vehicles, could create further downward pressure. “Whether that substantial pressure is offset by fundamental buying is an open question to me, and that’s what leads to a greater risk of a dislocation today than I think has been present since 2007,” he says.
Brosens also acknowledges that markets have become more competitive since his time at Goldman. “The supply and demand mismatch in the risk arb area was so massive that you could do virtually anything and expected returns were going to be extremely high,” Brosens says about the 80s.
Now, not so much. A paper from 2010 estimated the merger arbitrage spread had declined by 400 basis points since 2002, erasing a source of essentially free returns for risk arbitrageurs. “There are times where merger arbitrage becomes kind of uninteresting, and if you’re stuck having to put capital into merger arb at those times, it can be pretty punitive,” says Brosens.
According to Wrug Ved, the head of event-driven strategies at hedge fund investor Pacific Alternative Asset Management Company (Paamco), this dynamic has forced the funds to increasingly shift capital between arbitrage and other strategies. Paamco’s internal data on multistrategy hedge funds shows the amount of money dedicated to merger arbitrage at the funds rose as high as $15 billion at the end of 2015 before decreasing to $3 billion the next year and $6 billion this year.
“They have a core skill set in arbitrage, but recently they play it more opportunistically and more selectively in the kinds of transactions they get involved in,” Ved says about the funds.
“Whereas before it was easier to hit their return threshold in safer deals, now they have to go much further out on the risk spectrum,” he says.
After lackluster performance in 2014 and 2015, when investors suffered from failed mega-mergers, returns have stabilized this year for a handful of the group’s members. Och-Ziff has disclosed gains of 11.66% through October, providing some relief to investors following the bribery scandal. Farallon, which is now run by Andrew Spokes following Steyer’s departure in 2012, gained 8.4% in its main fund through September, according to a person familiar with the matter. Axon, now managing less than $1 billion, rose about 10% through mid-November, according to a person familiar with the matter. Empyrean manages $2.7 billion and gained approximately 11% through October, according to a person familiar with the matter.
Paradoxically for the Rubinites, who feasted on investor capital in the run-up to the crisis, shrinking may be the key to success. “I’m not so sure you couldn’t just give Eric Mindich money and say, ‘go run it,’” says one former investor. “…Being surrounded by all this stuff and people – it’s not clear that this leads to a better outcome.”
* A previous version of this story quoted performance for Farallon Capital Institutional Partners