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The Champagne was flowing at the 21 Club in New York City. It had been a good year. FX Concepts employees, gathered at the 2006 holiday dinner party, quieted down as the firm’s founder, chairman, and CEO took to the front of the room for his address. He held up a brick. Did anyone know what it meant, John Taylor asked. Then he filled them in: On top of the performance and trading bonuses, which promised to be bountiful, FX Concepts was sending all 60 or so staff members and their partners to the BRIC country of their choosing—first class all the way.
Seven years later, the fund cannot afford to clean the two massive, custom fish tanks in its Park Avenue office. According to Chapter 11 bankruptcy filings, International Foreign Exchange Concepts owes $3,742.10 to New York Aquarium Service. There is talk of repossessing the fish.
The average life span of a hedge fund is about five years. FX Concepts lasted 32. Not all of those years were good, either: The fund teetered on the brink of insolvency in 2001, then rebounded to become one of the industry’s most powerful revenue engines. With such a strong foundation and so much institutional experience, how could things end this way? The fund is more than $35 million in the red to its creditors, and $35 million short of where it started—at zero.
“It’s hard for me to believe, but in 1980, ’81, when we started, we didn’t even have a computer,” says Taylor in “FX Concepts: Looking Back and Moving Forward,” a video released by the fund this August. “In 1981, inflation was really very high in the United States. There was a lot of feeling that things were out of control. I had the feeling that foreign exchange wasn’t very well understood by most of the people in the world. I found a couple of people who agreed with me… and we became a quantitative shop that tried to measure psychology, political change, trends in the market. For us, going into this business and trying to tell people where we thought currencies and interest rates were going to go was really very different. There was no one doing this kind of business when we started.”
After a few years of building out its technology and research process, FX Concepts took flight. It had about 70 clients in 1985; two years later, Taylor and his team were providing currency research to 250 investors. “We were doing very well,” he says. It became the first firm to manage foreign exchange risk for pension funds, and in doing so, it helped create an entirely new asset class: currency.
This burgeoning sector spawned another hedge fund titan. Ray Dalio, who founded Bridgewater Associates out of his two-bedroom Manhattan apartment in 1975, made his living advising corporations on how to manage currency and interest-rate risk. Both Dalio and Taylor’s firms built their reputations on research first, and the assets to manage followed. Bridgewater, of course, is now the world’s largest hedge fund; FX Concepts is the largest in recent memory to go bust. But according to industry players from those early years, it was by no means obvious which of the two hotshot currency shops would end up on top.
Rusty Olson, the legendary longtime former head of Eastman Kodak’s pension fund, backed both. In 1987, the fund awarded FX Concepts the mandate to manage the currency exposure linked to its international equity portfolio—one of the first currency overlay mandates ever granted. Three years later, Bridgewater launched its first hedge fund portfolio with its own overlay mandate from Kodak.
“Bridgewater was pretty much in the same boat as FX Concepts—they played the same game,” says Arun Muralidhar, a longtime currency specialist and the founder of Mcube Investment Technologies. “Both firms were cutting edge with good research.” In 1995, as head of research for the World Bank and a member of its investment committee, Muralidhar hired FX Concepts as an overlay manager. “I liked them because they were boutique-y, and they were aggressive. There were a lot of bright guys working there.” Later on, Muralidhar would be one of them: He served as a managing director during FX Concepts’ best years. But while Taylor and his team devoted themselves to dominating the currency market, Dalio and company were already thinking bigger. Bridgewater’s Pure Alpha strategy launched in 1991, giving the firm free reign to invest in almost any asset class. FX Concepts stuck to its namesake until the very end.
Remaining dedicated to its core strategy wasn’t necessarily the fund’s death knell, however. Plenty of currency-focused firms continue as going concerns today, including Insight Pareto, Adrian Lee & Partners, and AG Bisset. And FX Concepts hit its peak success as hedge funds in nearly every other sector were bottoming out. In 2008, the firm’s flagship strategy, the Global Currency Program, returned 11.5% to investors, net of fees. In comparison, Credit Suisse’s broad index of 496 hedge funds dropped by 19.1%. Extreme volatility in currency prices, as were brought on by the global financial crisis, only gave FX Concepts’ quant traders more room to play. This massive outperformance crowned nearly a decade of stellar returns: 26.1% in 2001, 29% in 2003, 18.6% in 2006, and 12% in 2007, according to fund data. Total assets under management hit an all-time high of $14 billion in 2008, and John Taylor took home an estimated $250 million of that. Almost no hedge fund manager out-earned Taylor that year. But the end of the financial crisis also brought an end to FX Concept’s good years.
“John used to say, ‘We’re an impressive company because nobody in this company drives a BMW or a Mercedes.’ Up until the time that the money really started coming in, it was the nicest place to work,” says one former employee. But dramatic wins, as prudent asset owners and managers know, also pose a danger to long-term success. As Alberta Investment Management Company CIO Leo de Bever puts it, “You can’t start believing your own bullshit.” Lady Luck has flattered many an ego. FX Concepts’ exceptional longevity and string of good years indicates it was riding on more than mere chance. But markets change, and strategies that worked in the past almost by definition cannot continue to do so forever. According to accounts from many former employees, the social and governance structure at FX Concepts rendered it both more vulnerable to believing its own bullshit and less able to evolve with changing market circumstances.
The fat bonuses and gratis vacations bought Taylor pliancy from his top deputies, former staffers say, but not dedication to the fund’s best interests. He had hired each one out of relative obscurity early on and made them millionaires. This core group of management committee members included Vice-Chairman Jonathan Clark, President and Director of Investment Management Philip Simotas, and COO Hugh Tilney. None consented to comment for the story. Sources say that when one of these executives would push back or disagree with Taylor, the founder’s reaction served to remind everyone present why the practice was such a rarity. “I absolutely adore John,” says one former staff member. “He is furiously bright and generous to a fault. The trouble is, he surrounded himself with sycophants.” Rather than checks and balances, Taylor had yes men.
The model broke in 2009. “We went on a fantastic streak from 2001 to 2008, um…” Taylor pauses for a moment in his video, “… and then, since that time, the currency world has been undergoing some changes. The governments now are very, very much involved with managing the currency rates.” FX Concepts entered 2009 with $14 billion in institutional capital, and closed the year having lost 17.9% of its flagship fund. Models were revised, and 12.5% gains in 2010 suggested the bad year might have been an aberration.
Taylor’s old FX rival Ray Dalio went through something similar this spring—albeit on a smaller scale—when drawdowns in his risk parity fund suggested the approach wasn’t quite so “all weather” after all. The facts of the markets changed, so Bridgewater’s strategy did, too. “To rebalance All Weather and improve the balance, we hedged some of the real yield exposure,” CIO Bob Prince told aiCIO at the time. “By doing that, we’ve got the same Sharpe ratio, but [we can also] produce a return that’s as close to a straight line as possible over a long period of time.” He described it as “not really an earth-shattering change, more of an incremental improvement.” It’s too early to judge the real implications (if there are any) of this drawdown and rebalancing, but performance has rebounded in the short term.
For FX Concepts, however, 2010’s recovery—and not the losses of 2009—turned out to be the anomaly. The bloodletting picked up in 2011 with 19.4% drawdowns. By 2012, assets under management had dropped to about $3 billion. Withdrawals continued until the San Francisco Employees’ Retirement System’s $450 million allocation represented more than two-thirds of the fund’s assets. The pension voted to redeem its money on September 11, 2013. “Having so many public pension clients probably bought FX Concepts a lot of time,” one former employee reflected just after the closure announcement. “It takes them, like, three quarterly meetings to decide to pull their assets.”
But this wasn’t FX Concepts’ first trip to the brink. The fund was just about broke for its 20th birthday, and went on to celebrate 12 more. Why, this time, didn’t it return?
“I don’t know,” answers Robert Savage after a pause. He joined the fund as chief strategist this January, betting on a revival and instead handling a bankruptcy. FX Concepts had bought out his research company and paid Savage in equity; he’s now a pallbearer at his own funeral. “Maybe the lesson is that you can’t just be in one market. Maybe they should have branched out and used their knowledge from FX to exploit inefficiencies. They did try famously to get into fixed income, and spent a lot of money and time trying to make it work. Maybe it was wrong time, wrong place; or maybe they were the wrong people for that market. But it’s not like these people changed—John Taylor didn’t grow fangs. The business changed enormously.”
The post-recession years have not been kind to currency hedge funds overall. The strategy has been one of the worst-performing segments of the industry in the last two years, according to eVestment data. More than 60% of the 80 or so firms reporting for fiscal year 2013 have posted negative returns, with an average of -2.2%. Last year wasn’t much better.
But to say that John Taylor hasn’t changed does him a greater disservice than admitting he has. He built a stellar reputation and cutting-edge business on his market calls, yet couldn’t execute an exit strategy. And if Taylor isn’t receptive to advice now, it wasn’t always this way. The one-time political science scholar founded a leading quantitative hedge fund, and not by boning up on computers; he found a young satellite systems programmer and trusted him. The pride Taylor took in humble automobiles doesn’t square with paying $22 million—$4.5 million above asking price—for a three-bedroom on Fifth Avenue.
The apartment became a flashpoint in the final years of FX Concepts’ life, and likely hastened its end. Taylor purchased the 4,030-square-foot property—an entire floor of a co-op building that faces Central Park—in 2010, after the fund suffered a horrendous year. Asset Management Finance (AMF), majority owned by Credit Suisse, had invested $20 million with the fund in 2006 in exchange for a share of future revenue, according to court documents. It turned out to be a superb move, as FX Concepts earned double-digit profits while other funds blew up. AMF issued another $20 million in exchange for revenue share in 2010, which Taylor spent on the apartment. Word of this arrangement leaked out during a stakeholders’ meeting—most employees had equity—and resentment multiplied as client assets, compensation, and eventually staff members began to disappear.
While the management committee largely insulated Taylor from criticism in the office, it migrated to a much more public forum as the fund disintegrated. “At one time, some employees thought the CEO was a charismatic, brilliant, and generous man,” wrote one person on the employer review website Glassdoor.com, “but now that the firm has gone nearly bust, all of his faults have been exposed: He is a self-serving and selfish man (bought himself a $22 million apartment with firm assets), zero leadership skills (after promising to sell said apartment as the firm continued its decline, he moved into his luxurious 5th Ave pad on the exact day that he laid off 20% of his staff), a poor money manager (firm has severely underperformed for the last several years and lost a majority of client assets), and has let his most promising employees leave the firm while holding onto his coterie of sycophants who support him even as the firm is crumbling day by day.” Published on May 13 of this year, the user said they were a current employee of more than five years. Posts are anonymous, but former employees told aiCIO of the furious response to Taylor’s alleged firing of longtime staff members before moving into his new digs. Another reviewer, also recorded as five-plus-year current employee as of March 26, listed “the nice office” as the only upside of working at FX Concepts, and had the following advice for senior management: “It’s time to call it a day.”
What bitter former staff members may not have realized is that Taylor cannot simply “call it a day” by folding FX Concepts. The fund hasn’t collected any meaningful performance fees since those earned in 2008. Last year, with dwindling assets and average management fees of only 80 basis points, according to Savage, it could no longer afford to service its debt with AMF. Taylor personally guaranteed the payments on two $20 million loans—the balance is about $34 million—allowing FX Concepts to restructure its payment schedule with AMF. Further accommodations may not be workable, however, as the lender’s parent company Credit Suisse began winding down AMF itself earlier this year to move risk off its books.
Taylor and his family are still living in the Fifth Avenue co-op, but it has been on the market since October. Even at the $25 million asking price, he would be taking a significant haircut after pouring in millions for renovations. From moving in to listing it, Taylor’s family spent six months in the home.
It’s unclear what will happen to John Taylor. At about 70 years old, with a young family, bankrupt company, and looming debts, he’s living out the downside of founding a hedge fund: skin in the game. But most staff members lost big as well, and few have tears to shed for the man they hold responsible. More so than their own financial stake, former employees lament the loss of the institution and the community that grew around it. In their view, Taylor and his deputies may have built FX Concepts, but it wasn’t theirs to destroy. Talk of lawsuits simmers, particularly to do with fairness in the share-buyback process. Savage insists no one has cause for concern there—everyone lost out equitably. Well, almost everyone.
“Honestly,” concludes one ex-staffer, “I just feel sorry for the fish.”