The Observer, Sunday 21 October 2012
The Wizard of Oz, Greg Coffey, has clicked his heels together and said there's no place like home. He is bowing out of the London hedge fund world, retiring to his native Australia at the ripe old age of 41.
One of the city's best-known traders, the slick-haired investor who famously left his employer, GLG Partners, in 2008 after turning down a £156m "golden handcuffs" offer to stay, is the latest superstar hedge fund manager to leave the industry this year.
Rumours have circulated that he has fallen out with the founder of his current employer, Louis Bacon of Moore Capital, but the true explanation may be that after riding high during the boom years, like some of his fellow superstar traders, he's decided to bow out at the top. A £430m fortune probably helped his decision, but it has also been a tough few years for the married father-of-three, who was once named the second sexiest hedge fund manager in the world.
He has gone from generating around £200m of GLG's performance fees in 2007, capping an impressive annual return of 22% since 2004 (and ultimately leading to the massive golden handshake offer) to underperforming at Moore Capital, with two smaller emerging-market funds losing 16% and 2.3% respectively.
So could Coffey's departure mark the end of the big-name trader? Jacob Schmidt, head of analysts Schmidt Research Partners, thinks so. "I think we have reached the end of the trend of the last 10 to 12 years of relatively easy money. Up to 2008, we had a fantastic run in the hedge fund business, but since then it has become much more difficult. The guys like Coffey who have had an easy run are thinking: 'Why do I need this?' That's why they are leaving."
Mark Dampier, head of research at Hargreaves Lansdown, agrees. He says: "Investment is like fashion. One moment it's all flashy, the next it's not. They are all fallible and when they start to think they can walk on water, that's usually when it all goes wrong."
The best "hedgies" achieved exceptional returns in the build-up to the financial crash in 2008. They weren't alone in that: it was easy to make money in the boom years. However, what set the superstar traders apart was their ability to create the myth that they were infallible, tempting investors to put them in charge of billions of dollars.
Dampier explains: "The cult of celebrity in hedge fund managers came about because investors wanted to hang the decisions all on one person. The ones that tended to flaunt it started believing their own legend, which worked for a time, but won't work now."
And although Coffey tended to shy away from the spotlight, he wasn't afraid of spending his vast wealth. He owned homes across the world, including a west London mansion, a handful of Scottish islands and an estate on the Isle of Jura.
The 12,000-acre Ardfin estate is said to offer superb views across the Irish Sea and on a clear day it is said you can see Northern Ireland. Not that Coffey would know: according to locals he has only visited twice since snapping it up for £3.5m in 2010. Nevertheless, he has still managed to incur the wrath of islanders by closing the estate's previously public gardens and attempting to build a nine-hole golf course and shooting range.
But for Coffey it seems it was best to leave now, before his lacklustre run began to inflict more serious damage on Moore Capital, which he joined following a chance meeting with Bacon in the Mayfair car park they shared.
Others who have suffered recently include Fidelity star Anthony Bolton, who was humbled last year after his new China fund fell 28% in six months, and Bill Miller, once the most famous investment manager in the US, who retired after an awful performance over the past few years. John Paulson, who became the subject of the book The Greatest Trade Ever after staking billions of dollars on the collapse of the US sub-prime market, has also had an embarrassing few months after betting on a recovery in the eurozone.
Chris Rokos, 41, co-founder of Brevan Howard Asset Management, announced his retirement in August to "pursue other interests", and last month Driss Ben-Brahim, 46, former star at Goldman Sachs and one of the best-paid hedgies in London, left Man Group's GLG Atlas Macro fund.
Even Arki Busson – celebrity trader and father to children with supermodel Elle Macpherson and actor Uma Thurman (Rosalind Arusha Arkadina Altalune Florence Thurman-Busson was born in July) – has been on the receiving end of negative headlines.
One theory for the decline of the superstar trader is the rise of the analytical nerd and computerised algorithmic trading. Schmidt says: "The superstars are confronted with a changing market. The punting around is not working. You now need to be either a traditional long-term stock picker, a very short-term person working on algorithms, or a combination of both. There is no future for guys like Coffey.
"Ten, 15, 20 years ago you had an advantage with getting information before other people, but the internet ended that. I think the next superstars are the ones who combine gut feeling with proper analysis, really understanding the mid-term trends rather than short-term mindsets."
Coffey's short-term approach was perhaps most evident when he went on holiday. He would ask technicians at the office to ship trading terminals to his hotel so he could keep on top of his investments. Perhaps such a ferocious work ethic explains why he could retire at 41. But no matter how hard he worked, electronic dealing, taking just microseconds, would have the edge.
Clearly, there are some teething problems with algorithmic trading – Man Group's system has been heavily slated and the one-day "Flash Crash" of 2010, in which the Dow Jones fell and rose by 1,000 points in a matter of minutes, was caused by computers getting a little over-excited. Nonetheless, some believe investment houses now prefer mathematicians to buccaneers.
Novelist Robert Harris, whose book The Fear Index tells the story of a fictional hedge fund algorithm that gets out of control, said in a recent interview: "They don't hire anyone to work who has less than a PhD in the natural sciences or mathematics and that weren't peer-reviewed in the top 15%. They don't even want someone to come and work for them who's got a degree in economics. It's too soft."
The use of algorithms has become so popular it now accounts for 75% of all trades on US stock markets, with the average stock held for just 22 seconds.
Nonetheless, some are prepared to speak up for the ever-dependable long-term trader. Dampier cites Invesco Perpetual's Neil Woodford as a manager with staying power. He says: "He is in it for the long term and acts with confidence, not cockiness. I don't see him as flashy and flaunting it, and that's why he has the respect of the industry and has worked in it for so long."
Assets in hedge funds have increased recently and are now above pre-2008 levels, at around £2 trillion for the first time. But it seems the type of client is becoming more cautious: managers running pensions, council funds and university bursaries, not looking for a quick return but a more long-term approach. Instead of a flashy, charismatic trader following his hunches, they want security.
That could be another reason why the superstar era is drawing to a close. As Schmidt says: "Investors want less 'rock star' and more rock-solid institutions."