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Large losses on derivative transactions at Geode Capital Management forced the giant investment firm to close its hedge fund business.
Geode manages all of Fidelity Investments’ equity index funds and the company accounts for the majority of the company’s $ 720 billion. But it also offers a range of risky, hedge fund strategies to wealthy clients and institutions.
The people familiar with the matter have lost the largest $ 250 million private fund after its bets on stock volatility soured last year. The fund fell by about 36% by spring. The people said the losses and subsequent margin calls forced the Geode Diversified Fund to liquidate other unrelated positions.
FIDELITY CASHES IN MOST GAMESTOP GAME
Geode said the geode closed the fund and left its broader Absolute Return business. The losses and closure of the hedge fund business have not been reported before.
The people familiar with the matter have recently eliminated several positions serving the business.
Many investment firms still paid the price of Covid-19-powered market sales last year. Geode’s decline also highlights the ever-increasing risks of investing through derivatives, even in other growing businesses.
Large losses on derivative transactions at Geode Capital Management forced the giant investment firm to close its hedge fund business.
Geode started as one of a handful of boutique executives created to invest part of the fortune of Fidelity’s founder Johnson family. It was spelled out from Fidelity almost two decades ago. Geode is owned by its employees, former executives of Fidelity and a Johnson family trust. Abigail Johnson is the chairman and CEO of Fidelity, which was founded by her grandfather.
In recent years, Geode has grown dramatically as its former parent embraces low-cost funds that follow broad market standards as a way to raise new customer money. These funds carry the Fidelity brand and are sold to the firm’s customers in Boston. But the task of buying and selling shares to meet the performance of the benchmarks falls on Geode, the sub-adviser of the funds.
But since its inception, Geode has maintained a group of other funds that have offered family offices and other institutions a menu with more complex investments.
The Geode Diversified Fund was the largest of these offerings, and its losses forced Geode executives to recognize the challenges of managing riskier strategies in an enterprise built primarily to meet market benchmarks. Index managers tend to run low operations while costs are low as most of their funds charge low fees. And overseeing riskier investments may require more robust risk management, trading and compliance needs.
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Launched in June 2003, Geode Diversified pursued a number of different strategies, ranging from equities and convertible bonds to currencies and commodities. It has been a solid money maker for many years, reaching a peak of $ 1 billion in 2018.
The people familiar with the matter aimed to deliver returns of 5 to 6% on an annual basis.
Shares fell sharply last March as investors reacted to the news that the coronavirus was spreading around the world and posing serious threats to the economy. The Cboe Volatility Index, known as Wall Street’s fear meter, hit a record high.
The U.S. government quickly intervened and piqued investors’ nerves with a series of programs designed to expose markets. Supplies soon came together, but not before the delivery yielded some of the casualties. Some funds, including some managed by Allianz Global Investors, have wound up after struggling to restructure options that have suffered losses as volatility has risen.
The Geode fund has invested about $ 80 million in derivatives that would be profitable if the market remained calm. It did not, and losses on the transactions increased rapidly.
The fund’s volatility was about 10% of the fund’s assets.
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Within months of the explosion of Geode Diversified, the firm’s president and chief investment officer, Vince Gubitosi, told Geode’s board that he was interested in retiring to pursue business interests. He remains an advisor to the firm.
In December, Geode Fidelity’s Bob Minicus was elected as successor to Mr. Gubitosi. A former head of stock trading, Mr. Minicus, recently led the compliance, risk and business operations at Fidelity’s asset management division.
Geode’s total assets rose more than $ 135 billion in 2020, driven by continued demand for index funds and stock market gains, and the money manager had its most profitable year ever.