Hotshot hedge fund continues to struggle to outperform the market
Jeremy Weisstub, the founder of Aryeh Capital Management, has an impressive resume:
- He is the grandson of Louis Rasminsky, the Bank of Canada’s Governor from 1961 to 1973.
- He previously worked as an analyst for David Einhorn’s Greenlight Capital, where he “contributed meaningful profit in both equities and credit and was the senior most professional responsible for distressed debt” for six years and claims to have contributed more than $1 billion in gains.
- Jeremy Weisstub has also worked for prestigious firms such as Perry Capital, Blackstone, and Oak Hill Capital (the vehicle of the billionaire investor Robert Bass)
- At Stanford, he graduated in the top 10% of his MBA class, and at Yale, he graduated in the top 5% of his class.
- He was able to secure the support of an Ultra High Net Worth individual who committed not one, not two, but $75 million over a seven-year period.
- He also has the support of numerous other prominent business people.
- His office is just down the street from Scaramouche, a celebrity hangout and widely regarded as Toronto’s best French restaurant.
As astute as you are, you’re probably wondering how much he underperforms the S&P. That’s a little unfair; we’re still in the midst of a bull market. Aryeh began in 2018 and has a few shorts.
More importantly, we must identify the wealthy individual who is so staunchly supporting Aryeh. Andrew Dunin is his given name. He is a businessman who made approximately $260 million by selling his half of an auto parts company in 2000.
The buyer was private equity firm Oak Hill Capital Partners, where Jeremy Weisstub was an associate at the time. Myron Garron, Andrew Dunin’s auto parts business partner, has donated tens of millions of dollars to various hospitals.
Andrew Dunin’s foundation alone has $36 million, so investing $75 million to anchor Aryeh’s fund is within his means. The fund’s total AUM is around $300 million. Or maybe $400 million – something in that ballpark.
Aryeh’s advisory board includes Andrew Dunin. Nelson Heumann, an early Greenlight Capital partner, is another advisor. Jeremy Weisstub left Greenlight Capital in 2015, after working there for six years. Greenlight Capital founder David Einhorn is the poster child for the wide performance gap between growth and value stocks.
His fund still requires a 25% gain to return to its 2015 level, owing primarily to his ill-advised idea of shorting glamour growth stocks. Because Greenlight does not allow their employees to run their own books, Jeremy Weisstub was able to raise a large sum of money despite the lack of a formal P/L track record.
The plan is as follows:
- concentrated portfolio consisting primarily of US securities
- fundamental, value-driven approach to investing across the capital structure, with an emphasis on misunderstood or dislocated securities.
- portfolio includes 15 core longs and up to 20 shorts
- “vigilant about capital preservation via rigorous research, portfolio stress testing, and a robust sizing framework”
In practise, Aryeh uses mid-cap names like Dollar Tree, Valvoline, Progressive Corp., Liberty Broadband, Comcast, and others.
The Ostensible “edge”
They list their location, “time arbitrage,” and “judgement and experience” as advantages. Where does that logic ultimately lead you if Toronto is an advantage because New York is too noisy? Bhutan is, indeed, the next great hedge fund centre. Anyway, the PowerPoint then devolves into a series of statements that I would describe as the state of the art in conventional thinking.
The conventional wisdom varies by generation and is influenced by what was hot in finance when you arrived and what traumatic events you have witnessed. As a 40-year-old, Jeremy Weisstub has witnessed two major crises: stocks that failed in his formative decade and the golden age of hedgies. As a result, he uses phrases like “factor hedges,” “a private equity approach to public markets,” and “time arbitrage” to reflect this. A younger generation would be obsessed with long-lasting quality compounders.
A younger generation may argue that the best way to invest is to make yolo-bets – a venture approach to public markets.
Despite the fact that they claim time arbitrage, their investment horizon is still only 2-3 years. I also don’t see the type of concentration and specialisation that I would like to see. It’s more of a mish mash of purported market inefficiencies like “fallen angels”, spin-offs or “inflection opportunities”. Aryeh claims expertise in distressed credit, which could be his salvation when the cycle turns. We must maintain an open mind. And a wallet that is closed.
By the way, many people don’t know this, but “aryeh” is a Hebrew word that means “performance fee without a hurdle rate”. The fee structure explains a lot of Aryeh’s poor performance. The performance fee is only 15% if you lock up your money for three years. However, as I previously stated, charging performance fees by a startup manager is short-sighted.
Jeremy is the sole portfolio manager and sole owner of the firm. He owns about 7% of the company’s assets. Aryeh employs a Cadillac hedge fund structure that can accommodate Canadian, American, and international investors.
They also use well-known service providers as administrators, such as Morgan Stanley, JP Morgan, and SS&C. So Sharon Grosman isn’t good enough? Their nominal minimum investment is $5 million, but I doubt that is a hard rule.
They already have 8 employees, which is quite a large number for such a small fund. Sorry, Mr. Fancy Pants, but this is not how we do hedge funds around here. In the United States, you’ll occasionally see a hotshot manager raise a billion-dollar fund, then close it after three years because it’s too small. That’s mainly because they can join some bigger mega-platform and get better economics even if they don’t own the shop.
However, for the past 20 years, some of Canada’s biggest stars have managed around $80 million with two guys, a Bloomberg terminal, and a dog. I’ll give you Jemekk as an example.
Pedigree is a dog food brand that invests in results.
Slick PowerPoint charts and high pedigree must occasionally be pitted against the harsh reality of ever-increasing competition among active managers. So far, there’s no evidence of any skill in the investment results of Aryeh. While underperformance of the S&P 500 is to be expected for a hedge fund in a bull market, I’m not sure the hedges are working.
The fund was down 16.5% in March 2020 (vs. 12.5% for the S&P), so it’s difficult to say that taking less risk explains its underperformance. I’m being slightly unfair, because even if he did outperform the index, I’d say it’s statistically insignificant.
My favourite boss is the son of a truck driver who studied history at Wales’ third oldest university. So I’m not biassed in either direction when it comes to credentials, but it’s always useful to consider the calibre of the competition. What faith can you have in some of the palookas you find in Canada if someone like Jeremy Weisstub struggles to beat the market? I still believe in active management, but I am becoming increasingly sceptical.