Hedge Fund Element Forces Some Client Redemptions in $3 Billion Downsizing

Element Capital Management is encouraging investors to pull their cash and expelling some who refuse to do so as it seeks to shrink assets by about $3 billion.

(Bloomberg) — Element Capital Management is encouraging investors to pull their cash and expelling some who refuse to do so as it seeks to shrink assets by about $3 billion.

Jeff Talpins’s firm, which managed $12.6 billion in January, believes it has grown too big and that the move will allow it to be more nimble after two straight years of losses, according to people familiar with the matter. A representative for New York-based Element declined to comment.

Hedge fund clients generally dislike being forced to withdraw cash after a down year. It means the fund pocketed management fees — in Element’s case, 2% of assets — while still posting losses. If investors fully exit, they miss out on being made whole, as performance fees are waived until the fund rebounds to its so-called high watermark. In 2019, Element hiked its performance fees to 40% — double the industry standard.

Element prompted clients to redeem cash by allowing unlimited withdrawals through March, the Financial Times reported in February. About 80% of the redemptions expected by Friday are voluntary while the rest are mandatory, and the firm aims to end the process with roughly $8.5 billion under management, one of the people said. Investment losses over the first two months of the year trimmed assets to $11.3 billion.

Read more: Talpins Hikes Fees to 40% at Element Fund, Defying Industry

The fund, which uses a global macro strategy, gained 18.8% in 2020, before losing 8.9% and 3.4% in the following two years, the only annual declines in the firm’s history. It’s down about 9% so far this year.

Element debuted in 2005 as part of Vega Asset Management before Talpins — a billionaire who previously worked in fixed-income trading at Citigroup Inc. and Goldman Sachs Group Inc. — spun it out in 2007. Assets peaked at $18 billion in 2019, and the fund has been closed to new capital for almost five years.

This isn’t the first time Element has sought to shrink. Four years ago, it returned $3.6 billion to investors after an internal review concluded that doing so would improve performance. It returned an additional $2 billion in 2021.

–With assistance from Katherine Burton.

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