Richard Perry (Trades, Portfolio), a renowned hedge fund investor for many years, announced last September he was returning his clients' money. It seems he has now pulled back to the point of running a strictly family-type fund.
That’s not all. Sources report he would also like to exit his majority ownership of the iconic Barneys New York retail chain.
Mhat are we to make of his portfolio of one stock and a load of put options?
Who is Perry?
Richard Caynes Perry began life in Chicago in 1955, and moved to New York City at age 10. He was born into a family that included an uncle, James Cayne, who was a Bear Stearnes CEO. He received a B.A. from the Wharton School of the University of Pennsylvania and an MBA from the NYU Stern School of Business (earned through night classes while interning at Goldman Sachs).
He impressed Goldman Sachs CEO Robert Rubin early on, and was offered a full-time job after completing his MBA.
He began at the Goldman equity options trading desk but decided he liked research better than trading and subsequently moved to equity-arbitrage. While in that position, Perry was Rubin's teaching assistant at NYU Stern.
According to Fortune magazine, Perry was one of many students who learned from Rubin and went on to become a big-name investor. Others include Eddie Lampert, Thomas Steyer, Daniel Och and Eric Mindich (Trades, Portfolio). He left Goldman in 1988 to launch Perry Capital.Ă‚
What Are Perry Capital and Perry Corp?
Perry Capital was a hedge fund, or an investment advisory service, but has recently undergone a transition.
The original Perry Capital, according to WhaleWisdom and Form ADV Part 2A, managed six private funds:
- Perry Partners
- Perry Private Opportunities
- Perry Private Opportunities Offshore
- Perry Partners International Master
- Perry Real Estate Fund
- PC Wrangler Fund.
It cites data from a 13F filing to report Perry himself owns more than 75% of the parent company.
The firm transitioned to Perry Corp. in the fourth quarter of 2016. The most recent Form ADV (filed in February 2017) notes the firm had decided to wind down its flagship hedge funds, Perry Partners and Perry Partners International. Client assets were to be returned, and no new investments were being accepted. It reports it also liquidated the remaining assets of Perry Real Estate Fund and PC Wrangler Fund.
As of March 7, it held discretionary assets under management of $1.7 billion. GuruFocus shows the firm holding $334 million in equities on Sept. 30.
While the firm will continue to actively invest, it will do much less. The New York Post reported the firm was laying off 32 employees, and keeping 16, so the new head count would be one-third of what it was in mid-2016. Perry’s letter to investors, as cited by the Post, refers to strong “industry and market headwinds” that had made returns “unpredictable.”
It is not only Perry’s style of investing that no longer worked. The hedge fund industry, once master of the Wall Street universe, has had its fortunes significantly trimmed by the long-running bull market.
Strategies
Perry Corp. describes itself, in its Form ADV Part 2A, as opportunistic event-driven, or "multi-strategy."
- By opportunistic, it means investing capital where it is needed most, which is in complex, deep-value situations that the market misunderstands.
- Event-driven means investing in securities of companies and/or governments that are undergoing significant changes.
Examples of these strategies are: investing in companies that are selling assets, exiting businesses, entering new businesses, changing their capital structure or are the subjects of publicly announced changes.
To find candidate companies, Perry Corp. does fundamental research that covers all asset classes, all sectors and all regions. It reviews published reports by companies, general economic data and government publications. It also enlists experts such as accountants, attorneys and consultants. They are called in when the firm is analyzing opportunities and events such as arbitrage, bankruptcy, restructuring and special situations that involve private equity and real estate.
Out of all this comes an "Expected Value Analysis" result. Portfolio managers then weigh the probability that an investment has for a positive versus negative outcome.
One of Perry's more interesting investments has been in Barneys New York. There may be some emotional connection: wwd.com reports he considered it "something of a trophy asset" because he is a longtime Barney’s shopper and his wife is a fashion designer who sells through it.
Despite a herd heading in the opposite direction, Perry had been putting more capital into Barneys, primarily a brick-and-mortar retailer, enough to earn a majority stake. His investments helped the company build a new flagship store and get onto a digital platform.
In July 2016 (about two months before Perry announced his transition) the New York Post reported Perry had hired Goldman Sachs to find a buyer. The paper also reported that Barneys' lease comes due early in 2019, and the rents will go up significantly. Fashion United says the rent could double; Barneys got a deal when it emerged from bankruptcy in 1998. There’s no word on whether Perry has been able to sell his stake.
Holdings
In keeping with the big scale-down in late 2016, Perry now has a portfolio of just one stock, plus derivatives (AerCap Holdings NV (AER, Financial) was sold out in the previous quarter):
Note that the AT&T Inc. (T, Financial) holding is made up of put options, which provide a short position. When the price of a stock goes down, its put options increase in value.
Overall, a short-dominated portfolio, with put options more than triple the equity holdings.
And, as noted, equities make up just $334 million of the $1.7 billion portfolio.
Performance
In an October 2008 article, Fortune contributor Marcia Vickers noted that Perry had not had a down year in his flagship fund in 14 years. That was the also the year in which GuruFocus added him to its list of gurus.
In 2011, Business Insider reported Perry had delivered an average annual return of 15.4% since inception (1998), and had only one losing year: 2008.
In 2014, however, his fortunes turned and took the shine off his long-term average. This TipRanks chart shows the decline:
With a chart like this, it’s not a surprise that he drastically scaled down his operations. Not only did his performance make it difficult to keep and add clients, it also meant Perry was earning nothing in performance fees.
Conclusion
Earning nothing in performance fees would be a sad fate for any hedge fund manager, and despite the fact many others in his corner of the business are suffering the same fate, but having to concede his investment model does not work anymore, must at least double the pain.
Richard Perry (Trades, Portfolio), it seems, could not cope with the relentlessly optimistic market that kept going higher and higher. The same fate apparently awaited Barneys, as it faces significantly higher operating costs that will arrive on the first day of 2019.
For value investors, the lesson here might be that fundamental research, due diligence, and other tools and procedures aren’t enough by themselves. There must also be a strategic thrust that is not only robust, but also adaptable as the market changes.
Disclosure: I do not own shares in any of the securities listed, and I do not expect to buy any in the next 72 hours.
