Geode, Fidelity’s Index-Fund Manager, Closes Hedge Fund Business After Derivatives Betting Is Imploded

Geode’s largest private fund lost about $ 250 million after its bets on stock market volatility turned sour last year, people familiar with the case said. The fund fell about 36% in the spring. The losses and subsequent margin calls forced the Geode Diversified Fund to liquidate other unrelated positions and prompted the fund’s largest investor, Fidelity itself, to withdraw its money, the people said.

Geode closed the fund and left its broader Absolute Return business by offering clients hedge-fund-like investments to focus on index investing, said some of those familiar with the matter. The losses and closure of the hedge fund business have not been previously reported.

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

Many investment firms are still paying the price of last year’s Covid-19 sell-off. Geode’s withdrawal also highlights the persistently heightened risks of investing through derivatives, even with growing companies.

Geode started out as one of the few boutique managers created to invest some of the fortunes of Fidelity’s founding Johnson family. It emerged from Fidelity almost twenty years ago. Geode is owned by its employees, former Fidelity executives and a Johnson Family Trust. Abigail Johnson is Chairman and CEO of Fidelity, which was founded by her grandfather.

In recent years, Geode has grown enormously as the former parent company embraced low-cost funds that track broad market benchmarks as a means of attracting money from new clients. Those funds bear the Fidelity brand and are sold to the Boston-based company’s clients. But the job of buying and selling stocks to match the performance of the benchmarks falls to Geode, the sub-advisor to the funds.

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 Geode Diversified Fund was the largest of those offerings, and its losses forced Geode executives to recognize the challenges of managing riskier strategies within a company built primarily to track market benchmarks. Index managers typically run streamlined operations and keep costs low as most of their funds charge low fees. And overseeing riskier investments may require more robust risk management, trading and compliance requirements.

Launched in June 2003, Geode Diversified followed a number of different strategies, owning everything from stocks and convertible bonds to currencies and commodities. It was a solid money maker for years, and at its peak of 2018, it was managing $ 1 billion.

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

Shares fell sharply last March as investors responded to news that the coronavirus was spreading around the world, posing a serious threat to the economy. The Cboe Volatility Index, known as Wall Street’s anxiety meter, hit an all-time high.

The US government rushed to step in and calm investors’ nerves with a series of programs designed to unclog markets. Shares rose quickly, but not before the episode caused his share of the victims. Some funds, including a few managed by Allianz Global Investors, were liquidated after struggling to restructure options trading that resulted in losses as volatility rose.

The Geode fund had placed about $ 80 million in derivatives that could benefit if the market stayed calm. That did not happen and the losses on the trades increased rapidly.

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

Within months of Geode Diversified’s implosion, the company’s president and chief investment officer, Vince Gubitosi, informed Geode’s board that he was interested in retiring to pursue entrepreneurial interests. He remains an advisor to the firm.

In December, Geode selected Fidelity’s Bob Minicus as Mr. Gubitosi’s successor. As a former head of equity trading, Mr. Minicus recently led the compliance, risk and business activities at Fidelity’s asset management division.

Geode’s total assets are up more than $ 135 billion in 2020, driven by continued demand for index funds and stock market gains, and the money manager had its most profitable year on record.

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