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Tuesday, May 29, 2007
"It's very painful, one never gets used to poor performance periods and this has been our most prolonged," says Mr. Henry, the controlling owner of the Red Sox. "We've had clients withdraw during tough periods before and that is never an easy decision -- sometimes at the very bottom of our performance cycles."
Behind the problems: Mr. Henry is a so-called trend follower, meaning he looks for markets that are making significant moves and jumps in, betting that they will continue. Limited volatility and few extended trends have hurt these types of traders. This year, energy prices have been in a tight range, stocks have climbed only gradually and other markets have been too placid for his strategies to excel.
"Our returns are dependent on long-term trends that yield significant profits for a small percentage of trades each year," he says. "Long-term trends in currencies, for example, have been very profitable for us for more than two decades. But recently they have been the most difficult."
Mr. Henry is being lapped by rivals who focus on commodity and currency trading. Those players are merely flat this year, according to Barclay Group, which tracks these commodity trading advisers, or CTAs. Over the past three years, Mr. Henry's largest fund has dropped about 27%, while an index tracking the 26 largest CTAs is up 10%.
Earlier this year, Mr. Henry tweaked his trading systems to try to moderate the firm's returns and reduce volatility. The performance has improved a bit lately: the Strategic Allocation Program rose more than 2% in April, and some of his other funds have done a bit better, too.
He has seen the departure of a number of executives, including the firm's president and chief investment officer, Mark S. Rzepczynski. Mr. Rzepczynksi didn't respond to calls seeking comment. Another one that got away: Ken Tropin, who left a number of years ago to start his own hedge fund, Graham Capital, which now has $6 billion in assets.
"There has been an inflow of talent as well as an outflow," Mr. Henry says about recruiting new stars.
The Merrill decision, reported earlier by nakedshorts.typepad.com, a financial Web log, means a lot to Mr. Henry's 25-year-old firm since he hasn't been able to attract a rush of money the way other hedge-fund honchos have done in recent years -- despite what had been stellar returns until recently. That is because his programs had always been highly volatile, scaring away some potential clients.
A spokeswoman for Merrill declined to comment.
Mr. Henry hasn't moved into stock trading or other new strategies like some peers, and continues to rely on models to guide the firm's trades, which generally need trends of at least five months to generate big profits. Some say central banks have done a better job keeping a lid on inflation in recent years, and global economies have become more resilient, narrowing the range of trading for interest rates, hurting Mr. Henry.
Some argue that Mr. Henry hasn't focused enough on his firm and updating the trading models, a notion that he disputes. "I am in daily contact with our trading supervisors," he says. "We are a long-term, technical trader utilizing systematic programs that have changed very little over the past 25 years. The portfolios have evolved, but we strictly adhere to a philosophy of long-term trend-following through good and bad periods."
Mr. Henry's firm has discussed affiliating with another investment manager, but no deal is imminent, according to a person close to the matter.
Despite the travails, and the smaller size, Mr. Henry says he is optimistic and has no plans to shutter his firm. "For many firms, just a half-billion dollars would be a sizable amount," he says. "If I thought that long-term trend-following had lost its efficacy for the future, I would close. But at this point I don't believe that. It is hard for me to imagine that volatility has left financial markets once and for all." (Dow Jones)
Posted by Boston Globe Business Team at 08:36 AM