Brummer & Partners to redeem investment from long/short credit hedge fund Observatory

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Mikael Spangberg, Brummer

Brummer & Partners, the long-running Swedish multi-strategy hedge fund firm, is withdrawing its investment in Observatory, one of the underlying funds in the flagship Brummer Multi-Strategy (BMS) vehicle.

BMS has allocated capital to Observatory – a trading-oriented long/short corporate credit-focused hedge fund – since January 2010. Brummer’s decision to redeem its entire investment comes despite Observatory, which launched in June 2004, currently hovering around an all-time high.

Commenting on the move, BMS portfolio manager Mikael Spångberg indicated that the strategy’s future-risk adjusted returns will likely fall short going forward.  bservatory’s return since launch is 299 per cent, with an average annual return of 8.5 per cent, but just 3.0 per cent over the past three years. Its Sharpe ratio over the last three years has been 0.24.

“All credit to Observatory, its CIO Shazad Ghaffar and his 30-plus years in the industry. He has performed well over a long period of time, with a market neutral approach and limited drawdowns,” Spångberg said.

“There are very few long/short credit strategies that have succeeded so well in generating alpha over time while maintaining high liquidity.

“Unfortunately, the annual absolute return over the past three years has been too low and the expected future risk adjusted return is not deemed to be competitive enough.”

According to a mid-month performance estimate, Observatory is down slightly so far in June, at -0.1 per cent, but remains in positive territory year-to-date at 1.7 per cent.

Spångberg added: “The decision is an undramatic one. We have had a constructive dialogue with Shazad Ghaffar about risk-taking, the portfolio and the strategy’s future opportunity set and have then decided to redeem our shares. The purpose of all investment decisions is to improve BMS and its conditions to be able to generate strong, risk-adjusted returns.”

The decision comes as Brummer & Partners unveiled plans earlier this month to add two new sector-specialist equity long/short market neutral strategies to BMS in the autumn.

BMS will redeem its investment in Observatory on 30 June and 31 July. Following the withdrawal, the Stockholm-based multi-strategy pioneer – which launched in 1996 - will remain invested in eight underlying hedge fund strategies: AlphaCrest, Arete, Black-and-White, Florin Court, Frost, Lynx, Lynx Constellation and Manticore.

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