Geode, Fidelity’s index fund manager, shuts down hedge fund business after derivative betting implosion

Geode’s largest private fund lost around $ 250 million after its bets on stock market volatility deteriorated last year, people familiar with the matter said. The fund was down about 36% in the spring. The losses, and the margin calls that followed, forced the Geode Diversified Fund to liquidate other unrelated positions and led the fund’s largest investor, Fidelity itself, to withdraw its money, the sources said. .

Geode closed the fund and pulled out of its larger absolute return business offering clients hedge fund-style investments to focus on index investing, some people familiar with the matter said. The losses and the shutdown of hedge fund activity have not been previously reported.

The company recently cut several jobs that served the company, people familiar with the matter said.

Many investment firms are still paying the price of the Covid-19-induced market sale last year. Geode’s decline also highlights the continued heightened risks of investing through derivatives, even in growing companies elsewhere.

Geode started out as one of the few boutique managers created to invest a share of the fortune of the Johnson founding family of Fidelity. It was created by Fidelity almost two decades ago. Geode is owned by its employees, former Fidelity executives and a Johnson family trust. Abigail Johnson is CEO of Fidelity, which was founded by her grandfather.

Over the past few years, Geode has grown dramatically as its former parent company adopted low-cost funds that track major market benchmarks as a way to attract money from new clients. These funds carry the Fidelity brand and are sold to clients of the Boston-based company. But the task of buying and selling stocks to match the performance of benchmarks falls on Geode, the fund’s sub-advisor.

But since its inception, Geode has continued to maintain a group of other funds that offered family offices and other institutions a menu of more complex investments.

The largest of these offerings was Geode Diversified Fund, and its losses forced Geode executives to recognize the challenges of managing riskier strategies within a company designed primarily to track market benchmarks. Index managers tend to operate lean, keeping costs low, as most of their funds charge low fees. And overseeing riskier investments may require stronger risk management, trading and compliance needs.

Geode Diversified, which was launched in June 2003, pursued a number of different strategies and owned everything from stocks and convertible bonds to currencies and commodities. It was a solid source of money for years, and at its peak in 2018, managed $ 1 billion.

The fund aimed to produce annualized returns of 5% to 6%, people familiar with the matter said.

Shares fell sharply last March as investors reacted to news that the coronavirus was spreading around the world, posing serious threats to the economy. The Cboe volatility index, known as the Wall Street fear gauge, has hit an all-time high.

The US government was quick to intervene, easing the nerves of investors with a series of programs designed to unclog the markets. Stocks recovered quickly, but not before the episode produced its share of losses. Some funds, including a pair managed by Allianz Global Investors, were liquidated after struggling to restructure options trades that racked up losses as volatility increased.

The Geode fund had placed around $ 80 million in derivatives that would be profitable if the market remained calm. This was not the case and the losses on the transactions increased rapidly.

The fund’s volatility derivatives represented approximately 10% of the fund’s assets.

A few months after the implosion of Geode Diversified, the company’s chairman and chief investment officer, Vince Gubitosi, informed Geode’s board of directors that he wanted to retire to pursue entrepreneurial interests. He remains an advisor to the cabinet.

In December, Geode selected Bob Minicus of Fidelity as Mr. Gubitosi’s successor. A former head of equity trading, Mr. Minicus most recently led compliance, risk and business operations in Fidelity’s asset management division.

Geode’s total assets jumped by more than $ 135 billion in 2020, driven by continued demand for index funds and market gains, and the fund manager had the most profitable year in its history .

Write to Justin Baer at [email protected] and Dawn Lim at [email protected]