July 8, 2009 9:58 pm

Meriwether’s JWM Partners winds down flagship fund

Barely 10 years after the infamous collapse of Long Term Capital Management, the hedge fund set up in 1994 by the former superstar Salomon Brothers bond trader John Meriwether, JWM Partners, Mr Meriwether’s second fund, is winding down its operations.

According to people close to the group, JWM Partners is to shut its flagship fund, Relative Value Opportunity II, which had a net asset value of about $1.6bn at its peak.

The value of the fund has fallen more than 44 per cent since the financial crisis started in September 2007. Management fees on the fund had not been collected recently by JWM Partners because of a so-called “high watermark clause”, which means fees cannot be earned until assets under management regain previous highs.

The fund’s poor performance has been exacerbated by its ongoing use of high leverage – money borrowed to increase returns.

People said the fund was leveraged as much as 10 times earlier this year and had been running at 15 times leverage last year. Most hedge funds have drastically cut their use of leverage to as little as two times or less since markets became volatile in 2007.

Investors in JWM Relative Value II had earlier raised concerns about the continuing use of high leverage. In a letter to investors last year, Mr Meriwether assured them that the fund would reduce its borrowing.

JWM Relative Value II used the same trading strategy as LTCM, meaning it needed to use high levels of borrowing to bolster returns from often tiny price discrepancies in the value of liquid fixed-income products.

The fund was marketed as a more conservative outfit than LTCM, with far more rigorous risk-management practices.

Mr Meriwether set up the fund in 1999, shortly after LTCM was bailed out in an unprecedented rescue operation by its creditor Wall Street banks – a move undertaken because of Federal Reserve fears that the disorderly collapse of the fund could cause panic.

Mr Meriwether was joined by several other LTCM employees, who together put up $250m of their own money to found JWM Partners.

The Relative Value II fund had not suffered a down year until 2008.

JWM Partners employs about 25 people worldwide, with its principal operations in Greenwich, Connecticut, and an office in London. Staff numbers were cut at the start of this year after the fund made big losses in 2008. Four of the seven partners also left.

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