Meriwether Said to Shut JWM Hedge Fund After Losses

Date: Wednesday, July 8, 2009
Author: Katherine Burton and Saijel Kishan, Bloomberg

John Meriwether, who roiled global markets when Long-Term Capital Management LP collapsed in 1998, plans to shut his current hedge fund, according to a person familiar with the matter.

JWM Partners LLC is closing its main Relative Value Opportunity II fund after losing 44 percent from September 2007 to February 2009. Meriwether, credited with generating billions of dollars of revenue at the former Salomon Brothers in the 1980s through so-called relative value trades, returned an average of 1.46 percent a year with his new fund since opening in 1999, compared with 2.4 percent for the Credit Suisse/Tremont Hedge Fixed-Income Arbitrage Index.

Long-Term Capital, which assembled a team of top Salomon traders and Nobel laureates, lost more than 90 percent of its $4.8 billion of assets in the weeks following Russia’s currency devaluation and bond default. The Federal Reserve orchestrated a $3.6 billion bailout by the fund’s 14 banks to calm fears that the firm’s lenders and trading partners would be dragged down.

“For many investors, John Meriwether is by now just another hedge-fund manager,” said Tammer Kamel, president of Toronto-based Iluka Consulting Group Ltd., which advises clients on investments in the private pools of capital. “LTCM’s infamy was a big story in 1998, but the events of 2008 might finally relegate LTCM and 1998 to footnote status.”

JWM Partners, based in Greenwich, Connecticut, managed about $1 billion at the beginning of 2008. Meriwether, 61, joins hedge-fund veterans Art Samberg, James Pallotta and William von Mueffling in closing funds this year. He didn’t return a telephone call and an e-mail seeking comment.

London Chief Departs

Adrian Eterovic, who ran the JWM Partners’ London office, plans to start his own fund, according to the person, who asked not to be named because the information is private.

Eterovic, 46, ran the quantitative strategies within JWM’s funds, according to the person. Eterovic registered Episteme Capital Partners (U.K.) LLP with the U.K.’s Financial Services Authority, according to the market regulator’s Web site. Eterovic didn’t immediately return calls to his office today.

Long-Term Capital relied on borrowed money to enhance returns. The average leverage at the beginning of 1998 was about $28 for every $1 of net assets.

‘Too Big to Fail’

When the New York Federal Reserve Bank organized a rescue of Long-Term Capital in 1998, Federal Reserve Chairman Alan Greenspan defended the bailout to Congress on Oct. 1 as necessary to prevent the “seizing-up of markets.” Critics said the rescue extended a policy designed to protect financial firms that were “too big to fail” to include hedge funds.

JWM Partners was more conservative than LTCM, aiming to produce returns of 15 percent a year and borrowing $15 or less for every dollar of net assets.

Before Long-Term Capital, Meriwether worked at Salomon Brothers, where he was vice chairman and built its proprietary trading desk. His team, with at least a half-dozen Ph.D’s, used computer models to make money from small price differences in related bonds. His group was responsible for as much as 60 percent of Salomon’s revenue in some years, and Meriwether was featured in Michael Lewis’s 1989 bestseller “Liar’s Poker” about his experiences at the firm.

He lost his job at the firm following the 1991 government bond scandal. Regulators ruled that he’d failed to supervise traders who violated bond-auction rules.

‘When Genius Failed’

A native of Chicago, Meriwether started buying stocks in high school, and stood out in his neighborhood for his love of golf, according to Roger Lowenstein’s 1998 book “When Genius Failed: the Rise and Fall of Long-Term Capital Management.” He attended Northwestern University in Evanston, Illinois, on a scholarship for caddies, according to the book.

Meriwether is closing JWM as the hedge fund industry recovers from its worst year. A record 1,471 funds, or 15 percent of the total, shut down last year after managers posted unprecedented losses, according to Hedge Fund Research Inc.

Hedge funds rebounded this year with an average 9.8 percent return through May after losing 19 percent in 2008, Hedge Fund Research estimates. About 150 new funds started in the first three months, the highest rate since the second quarter of 2008, according to the industry researcher.

Fund assets may increase by more than 8 percent this year as clients led by pension plans and rich families invest $50 billion of cash they held while markets fell, Barclays Plc said in a June 2 report.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net