In an unusual move, Caxton Associates, the behemoth hedge fund shop founded by Bruce Kovner, will outsource some of its assets to a commodity trading adviser.
Optimation Investment Management of Potomac Falls, Va., says it signed an agreement with Caxton to manage a "significant" allocation of the global macro manager's funds.
Why would Caxton, one of the largest U.S. hedge funds, cede oversight of client assets to an outside entity? The main reason is capacity constraint, which, over time, can kill healthy returns.
Peter Matthews, Optimation's managing partner, declined to specify the amount of the allocation he brought in from Caxton last month, other than to say that it is below $1 billion. But he said that Caxton's decision was prompted by its size. The fund manager has about $10 billion under management.
"They're looking for someone to trade these large amounts of assets," he said. At a later stage, Caxton may open a new fund and give Matthews the responsibility to manage it, he said.
"I have not really seen those types of deals," said Chris Jackson, president of a $110 million fund-of-funds in San Francisco. "Lots of funds that have outgrown their initial strategy have become multi-strategy funds."
At Caxton, just under $9 billion is invested in the Caxton International fund, which pursues a global macro strategy. So the move may also be a way for Caxton to broaden its scope, especially in relation to funds-of-funds that fight with hedge funds for the same assets. "It is getting very competitive out there," said Matthews. Funds-of-funds invest in a diversified pool of underlying hedge funds. They typically appeal to institutions and high-net-worth investors for their diversified structure.
"I have heard that it is happening at some of the bigger funds," said Matthews. "Because they've reached their own limits, their own staff, they have to find talent in a way that they become more like a fund of funds."
Matthews said that investors will not be charged a double layer of fees. Caxton will simply give Matthews a cut of the performance and management fees it collects from investors who have assets in the allocation that's separately managed. It may be easier for Caxton to redistribute a part of its payout to an outside trader, as it has one of the highest fee structures in the industry, having recently raised its management fee to 3% from 2%. A 2% management fee is standard among hedge funds.
It is unclear whether this is the first time Caxton has outsourced assets. "It is my impression that they've done it before, but in a smaller kind of allocation," said Matthews.
Monique Miller, director of Caxton's strategic quantitative division, said in a news release, "We are very happy to have concluded this deal with someone of Peter Matthews' reputation, track record and proven quantitative skills." She did not return a call seeking further comments.
Optimation was created at the end of 2003 by Matthews, a hedge fund pioneer with 20 years experience in the industry. Matthews was a founding partner of Mint Investment Management, a CTA that was 50% owned by the Man Group.