Lessons From Shumway’s Shutdown

Shumway Capital Partners founder Chris Shumway’s announcement that he will return all capital to outside investors took a number of people by surprise.

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It was just in November that Chris Shumway, the former Tiger Management senior managing director, stunned his investors when he announced that he would no longer serve as chief investment officer of Shumway Capital Partners, which he founded in 2002, and would serve the more managerial role of chief executive officer. He said Tom Wilcox would run the daily operations, calling him the “single most profitable individual in our firm’s history and has been critical to our success.”

But it was Shumway’s announcement that he will return all capital to outside investors that took a number of people by surprise. It also underscores the difficulty for the founder of a hedge fund firm to relinquish control of day to day activities.

Under Shumway’s key man clause, the move to step down triggered an opportunity for investors to immediately redeem their stakes. And redeem they did. Shumway received $3 billion of redemptions, or 37.5 percent of the firm’s $8 billion in assets.

Rattled by this development, Shumway spent the past two months trying to quell concerns. One investor who says he spoke with Shumway a month or so ago says Shumway seemed excited and invigorated. However, the investor said he did think it was weird when Shumway made the initial decision to dial back from pulling the trigger at his own hedge fund firm.

In his letter to investors on Friday, Shumway acknowledged that the earlier changes upset and unnerved investors and that they led to Friday’s decision. “I fully understand this complication was brought on by the changes that I chose to make and as such I feel responsible to correct this mismatch of investment style and investor needs,” he said in the letter.

In a late November letter sent to investors to explain the initial decision to allow Wilcox and others to run the portfolio, Shumway also stressed a very sensitive issue that many hedge fund managers have thought about and talked about greatly—the idea of creating a firm that outlives the founder.

“I have always viewed SCP’s strategy as less founder driven and more team driven than many traditional hedge funds,” Shumway told investors. “It is my view that the success of a hedge fund relies on its ability to attract, train, identify and retain the best in the industry. We work hard each year to push our people to improve with the understanding that at SCP, improved capabilities will drive increased responsibility. As such, I have always envisioned that SCP would be a partnership.”

Alas, Shumway’s investors think otherwise, underscored by the $3 billion that had been redeemed.

Talk to any hedge fund manager in their 60s or 50s, and they will tell you about how they are building an institution that they can eventually leave, and intact. But, Shumway’s plight is a reminder of how difficult this is to do.

For, in the end, if your name is on the door, the funds will always be identified with you. Investors trusted Shumway with their money because he was Chris Shumway, ex-Tiger, someone whose vision they shared. Indeed, Stan Druckenmiller and Dan Benton closed their funds rather than think they could continue without them, and their firms didn’t even have their names on the door.

Sure, Highbridge is thriving even though it is now owned by JPMorgan Chase and one of its founders—Henry Swieca—has moved on. It was Swieca, by the way, who knew not to call the firm by the boyhood friends’ previous company name—Dubin & Swieca. He knew back in the 1990s it was not a way to create a lasting firm.

But, Highbridge is a unique situation. Co-founder Glenn Dubin is still running the firm. Also, Dubin and Swieca almost never were the ones to actually pull the triggers on individual investments at the multi-strategy firm. Investors knew this.

Even D.E. Shaw, the other firm some people hold up as an example of a hedge fund firm that has been successful since its founder relinquished day-to-day control, is struggling these days.

Back in September it laid off 150 people and assets have shrunk by more than one-third, to $19 billion, from the peak of $30 billion. Performance at its two main funds have been mediocre for the past two years, although in 2008 the firm did avoid the large losses suffered by many other firms. But it did anger investors when it erected a gate.

Certainly many hedge fund managers are well aware of the difficulties other firms have been having handing the baton to the next generation.

They include Caxton’s Bruce Kovner, who three years ago ceded day-to-day control of investment activities to Andrew Law, Chief Investment Officer.

And although Paul Tudor Jones II is committed to remaining with Tudor Investment for at least five more years, there are questions swirling around about what happens after that.

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