Search the phrase “Red Sox” + "immortal" and Google (NASDAQ:GOOG) helpfully pops up 182,000 references, more than a few pointing in the general direction of the late slugger Ted Williams, today safely nestled in an Arizona cryogenic facility.
Now, Red Sox principal owner, and investment manager—in that order, these days—John W. Henry has his own interests in the life extension business as the largest shareholder in Sirtris Pharmaceuticals (SIRT), according to a recent Boston Globe article.
But on the life extension front, Henry’s real concern should be with John W. Henry & Co, his famously volatile commodity trading advisor, now confronting the biggest gut-check in its gut-check checkered 25-year history. Hedge Fund Alert reported Apr. 11 that Merrill Lynch Alternative Investments had ordered its financial advisors to stop putting their clients into JWH products.
It’s not like John Bogle decided that conventional index investing is a silly idea. But it’s close. Merrill Lynch has been a key contributor to JWH’s asset base since the 1980s. Its recent call almost certainly reflected two-years-and-counting of brutal performance, possibly compounded by this year’s round of senior management changes, apparently triggered by efforts to address those performance concerns [JWH general counsel and spokesman David Kozak did not respond to an email message (Apr. 13), or a telephone call (Apr. 20) by pixel time].
It’s never a good time for an asset manager to get cut off by Merrill, and this moment was spectacularly inopportune. Perhaps for Merrill and its customers, because JWH’s current decline—near 40 percent in its flagship Strategic Allocation program—is in the neighborhood of an historically reliable buy signal.
But definitely for JWH, where some familiar storm flags—performance issues, management turnover, the owner’s flash toys, all early chapters in Due Diligence for Dummies—are flapping loudly. Together.
Two years of losses, and counting
The great amorphous Red Sox Nation celebrated the World Series win in 2004, which ended an 86-year drought and the legendary ‘Curse of the Bambino.’ But the curse didn’t leave; it simply infected the team’s current ownership.
Seven of JWH’s eight active programs are already down double-digits for 2007, through Mar. 31, with the one-time flagship Financial & Metals dropping almost 20 per cent. Over three years, the portfolios are all in the red, by as much as almost 18 percent, annualized. The Strategic Allocation program, which has in recent years accounted for the bulk of JWH’s assets, is down almost 12 percent, after losing 13 percent in 2006 and almost 25 percent in 2005.
The declines are one thing. Their duration is extraordinary. SAP’s decline, through Mar. 31, has run 27 months and is now just a whisker under 40 percent. F&M is off more than 40 percent over more than three years.
Intriguingly, if only coincidentally, stock in The New York Times Co (NYSE:NYT) is also off by around 40 percent since Dec. 2004. The Times has 20 percent of the Henry-controlled New England Sport Ventures, which owns the Red Sox and 80 percent of the New England Sports Network regional cable television channel.
Inevitably, the performance has taken its toll on JWH’s assets under management, which have dropped to roughly $1.3 billion at Mar. 31, down from $1.7 billion at Dec. 31 2006, and less than half of the $2.8 billion it managed in Dec. 2005. Of course, market conditions have been far from ideal for JWH’s relatively long-term trend-following style. As Ken Webster, recently promoted to president, put it in the firm’s 2006 Year in Review newsletter, in Jan. 2007:
...an unfortunate coupling of historically low volatility and trendless markets plagued by strong and sharp reversals…were fueled by the uncertainty surrounding the economic health of the majority of the world’s industrialized nations. This uncertainty led to a year of negative performance in the JWH programs. Market conviction and direction were replaced by doubt and ambiguity in 2006 as markets overreacted to any and all possible economic precursors. We look forward to a return to trending market cycles in 2007...
The proximate cause, according to Mark Rzepczynski, Webster’s recently-departed immediate predecessor explaining the miserable 2005, and the eternal test of long-term trend-followers:
…the extent and number of trends were below what we have encountered historically. Additionally, the markets that did have strong moves were coupled with significant reversals along the trend path. This reduced our profit potential as we adjusted to changing risk or hit stop-loss levels…In between the rough first quarter and the last month of the year, monthly returns showed a relatively good pattern of small gains, but those cumulative gains were not enough to offset the extreme reversal months.
Those conditions have also affected JWH’s competitors, but to a much more limited extent. FME Large, the flagship of Baltimore-based Campbell and Co, was down 6.3 percent through Mar. 31, or just over half SAP’s year-to-date loss. But the program was profitable in both 2005 and 2006, when it made 11 percent and 5.5 percent respectively.
JWH cut the leverage in SAP in Jan. 2007, reducing “existing positions by 25 percent and limiting by 25 percent new positions as they are established…for the foreseeable future,” according to its latest disclosure document. It’s not the first time the company has tweaked its leverage, but the decision wasn’t unanimous and had consequences.
Shuffling the deck chairs
Rzepczynski, who joined the company in 1998 and became president in 2001, left on Jan.12: “It was an amicable separation in terms of the decision by the company to pursue the development of lower leveraged programs and strategies going forward,” said JWH general counsel David Kozak, according to the UK-based HFM Week. In other words, Rzepczynski lost a fight over the firm’s future direction.
Others shown the door at much the same time as Rzepczynski included long-time marketing executive Ted Parkhill; Bill Dinon, head of sales; and Andrew Willard, director of technology. Webster, with JWH since 1995, added the president’s title to his chief operating officer role, while head trader Matt Driscoll was named chief investment officer, a title formerly on Rzepczynski’s business card.
Most recently, long-time Henry aide Mark Mitchell cut his ties with the investment operation, where he was vice chairman, for a role with New England Sport Ventures.
Like those stomach-churning drawdowns, management turnover is nothing new at JWH. Before Rzepczynski’s record tenure ended in January, past holders of the president title included Verne Sedlacek, now president and chief executive officer of Commonfund; Bruce Nemirow, now a principal of Capital Growth Partners, a third-party marketing company; and Ken Tropin, who, after a distinctly less than amicable split with Henry, went on to found Graham Capital Mgt Inc in 1994. That firm’s assets passed JWH’s several years ago.
Between Nemirow and Sedlacek, Peter Karpen, a former chairman of the Futures Industry Association; and David Bailin, now head of alternative investments at US Trust, held similar responsibilities, without the title of president.
It would seem a stretch to compare Henry—usually described as polite, softly spoken, press-shy, modest and similar terms—with the once impatient, headline-demanding, bombastic and eternally meddlesome New York Yankees owner George Steinbrenner. After all, in his hey-day, Steinbrenner never broke down in public when he lost a general manager, as Henry famously did when the Red Sox briefly parted ways with Theo Epstein in 2005.
But even Henry concedes, euphemistically, an inner Steinbrenner never seen in public: according to a profile published in Institutional Investor in 1996:
“For his part, Henry readily admits that he demands a lot of his employees. ‘We’re driven to excel,’ he says, ‘and that’s necessarily going to occasionally create differences of opinion.’”
Since Tropin—the last person to hold the chief executive title—left some 15 years ago, and despite the lengthening list of distractions, nobody’s been under any illusion which differing opinion will out.
It’s not exactly last week that Henry started enjoying the fruits of his investment prowess, and he’s hardly the first investment manager to have time-consuming interests away from the golden goose. According to the JWH disclosure document: “Since the beginning of 1987, [Henry] has devoted, and will continue to devote, a substantial amount of time to business other than JWH and its affiliates.”
His heavy-duty distractions did not begin until he became involved in major league baseball, although he had earlier owned a minor league franchise and was involved in a failed venture to secure an NHL expansion franchise in Florida.
Henry bought the Florida Marlins in 1998. After losing a bruising political fight over public financing for a new stadium for the Miami-based team, he upgraded to the Red Sox in 2002. His sporting interests expanded again last year, when he bought a 50 percent stake in the Jack Roush NASCAR team. Among his other ventures, apart from the Sirtris Pharmaceuticals stake: iRacing.com, set up to “create the world's most authentic, most sophisticated, most accurate PC-based racing simulations and grow a new branch of motor sport through real-time, online competition.”
Despite these distractions, he still keeps a close eye on the goose.
According to the disclosure document,
Henry oversees trading program design and composition, reviews and approves research and system development proposals prior to implementation in trading, reviews and approves of decisions involving the strategic direction of the firm, and discusses trading activities with trading supervisors.
That’s a lot of hand on the helm for an owner who spends “a substantial amount of time” not merely off the bridge, but on different ships in far oceans. An obvious due diligence concern, and given Henry’s past achievements as one of sector’s great innovators, probably a substantial contributor to another longstanding question in JWH’s record.
Falling behind the crowd
Even before its current sustained performance decline, JWH had largely missed out on the asset eruption in managed futures, specifically, and hedge funds, generally. The 25-year-old business comes from the same generation of managers as Bruce Kovner’s Caxton Corp, Paul Jones’ Tudor Investment Corp and Louis Bacon’s Moore Capital Management, all of which, despite regularly returning capital to investors, now have assets in the $10 billion range.
But those firms have diversified far from their ‘managed futures’ roots, into equity markets and a plethora of other financial strategies. A more valid comparison is with Baltimore-based Campbell & Co Inc, which, like JWH, has stayed true to its roots of trading global futures markets using medium- and long-term trend-following strategies. Like Henry, it has a long-standing relationship with Merrill Lynch. But Campbell now runs over $12 billion—nearly 10 times Henry’s current assets—with $10.3 billion of that in its long-running FME Large portfolio.
Campbell offers other contrasts. Its senior leadership has been stable since founder Keith Campbell began withdrawing from day-to-day involvement in the mid-1990s. Bruce Cleland was named president in 1994, and chief executive in 1997; when forced to step aside earlier this month to battle a recurrence of cancer, he was replaced by Terri Becks, chief financial officer for 16 years.
It has also, like other quant-oriented managers with long records of admirable performance—Jim Simons’ Renaissance Technologies and Man Investments’ AHL spring to mind—invested heavily in research, and aggressively promotes those efforts as a key component in its success. While their mileage has varied, with Renaissance a clear leader in the pack, none has come close to inflicting the kind of pain JWH has imposed on its faithful.
By contrast with its peers and competitors, the firm seems almost complacent.
JWH generally has not changed the fundamental elements of the portfolios due to short-term performance, although adjustments may be, and have been, made over time. In addition, JWH has not changed the basic methodologies that identify signals in the markets for each program. JWH believes that its long-term track record has benefited substantially from its adherence to its models during and after periods of negative returns; however, adherence to its strategy may lead to prolonged periods of market losses and high risk, according to its current disclosure document.
History supports that contentment. But the magnitude, and especially the duration, of the current decline now leaves JWH at a crossroads where the Mints and the Trendstats and other once-proud names diverge from the Campbells and the AHLs.
The putative buy signal
“It’s different this time” are the four most expensive words in investment history. And if it is exactly the same, Merrill Lynch Alternative Investments did its clients no favor by ordering its financial advisors to stop putting their clients into JWH products. The old saw was “Buy Henry when he’s down 20 percent, and buy some more when he’s down 40 percent, because there’s a new high coming.”
That buy signal is here. At Mar. 31, the 27-month decline in the Strategic Allocation program had reached 39.4 percent; its previous peak to valley drawdown, between May 2003 and Aug. 2004, was 31.7 percent (emphasizing JWH’s volatility, that program was profitable in both those years, making 8.4 percent in 2003 and 13.7 percent in 2004).
Financial & Metals, down almost 20 percent so far this year, is off more than 40 percent in a decline that began in Mar. 2004. Since inception, in 1986, it has returned almost 25 percent annualized despite having beaten that number just once since 1996; its largest decline was 43.6 percent, incurred over 15 months between Jul. 1999 and Sep. 2000.
Of course, it’s always tempting to take the other side of any Merrill call, especially one targeting its retail investors. But JWH faces a tough climb back.
Merrill’s decision will likely trigger additional redemptions as its financial advisors churn their clients out of JWH products. And, without those same brokers pounding the phones, that money won’t be easily replaced.
JWH’s principal response—“to pursue the development of lower leveraged programs and strategies”—has come late in the day. When markets do turn in its favor, the leverage cuts will slow the slog back to the new high that, historically, arrived so reliably. It’s also a trick that’s been tried before, with mixed results, when the firm turned down the volatility volume in an unlikely, and largely futile, bid to attract institutional assets.
Webster, for one, remains confident. Reviewing Mar. 2007, he said that “turmoil has the potential to be a positive development” as short-term market dislocations “can be a harbinger of a major shift in trends.” And April has surely, to date, been relatively kind, with the steady ramp in stock markets worldwide, and dollar weakness, providing conditions in which JWH can, in fact, excel.
Henry’s place in investment history is secure. A member of the Futures Industry Association’s Hall of Fame. A Lifetime Achievement Award from Alternative Investment News. When traders talk about the pioneers and the performers, his name still resonates, even if its long-term performance record speaks louder of past glories than recent realities.
But one month—and one that’s not over yet—is not going to answer the questions about whether Henry’s drive to excel still includes his investment business. Another round of blood-letting? Another leverage tweak? Not enough, it seems, to have satisfied one of JWH’s most important customers, and certainly not enough to restore the firm to its once undisputed place in the investment firmament.
John Henry’s Longtime Lieutenant Is Out
Hedge Fund Alert Apr. 11 2007
John Henry’s bid to manage the future
by Michael Peltz
Institutional Investor Aug. 1996 (via streetstories.com)