Hedge fund division of York bites the dust, costs Tier 1 FX dealer $450 million

Credit Suisse has held a stake in York Capital for ten years. As York Capital winds its hedge fund business down, the bank prepares for a huge hit.

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Credit Suisse expects to take a roughly $450 million impairment on its stake in alternative investment firm York Capital Management, the Swiss bank said.

The Wall Street Journal yesterday reported York Capital, run by renowned hedge-fund manager Jamie Dinan, had informed employees and investors about plans to wind down its European hedge funds business, while converting its U.S. hedge fund into one primarily managing internal money.

Credit Suisse, which has been an investor in York Capital since 2010, said on Tuesday it expected to take an impairment on York Capital in the fourth quarter, which would hit its key capital metric — or common equity tier 1 (CET1) capital ratio — by roughly 7 basis points.

“The amount of the impairment taken will be assessed as part of our year-end process, but is currently expected to be approximately $450 million,” the bank said.

The impairment would not change its existing guidance for dividends and capital distributions in 2020 and 2021, Switzerland’s second-biggest bank said.

The Swiss bank, which placed an initial $425 million investment into York a decade ago, said it intended to maintain a continuing interest in York’s Asia-Pacific business, which it expects to be spun out as a new and separate hedge fund next year.

York’s new strategy will focus on longer-term assets such as private equity, private debt and collateralised loan obligations, Credit Suisse said

Credit Suisse has been grappling with falling revenues for some time now, especially within its interbank dealing division as an investment bank.

The bank recently report a fall in profits, yet still went ahead with dividend payments. The company said it planned to restart its share buyback plan next year, spending up to 1.5 billion Swiss francs to repurchase stock. The lender also forecast a 2020 dividend five per cent higher than the previous year’s.

Shares in the bank fell as much as 5.25 per cent following the publication of the results last month. Credit Suisse shares have lost more than a quarter of their value so far this year – falling twice as much as those of arch-rival UBS, but staying ahead of the European banking index.

Chief executive Thomas Gottstein said that if exceptional items were excluded, underlying performance across the bank’s main divisions had been healthy.

The drop in profits reflected a 327 million franc revenue boost Credit Suisse recorded in the same period last year from the sale of its InvestLab fund platform.

With volatility comes risk. Indeed, many companies have been doing well recently, however most of the trading volume that has come about due to this year’s events is being conducted by existing customers of b-book brokerages. This means that very little order flow is going to the banks, therefore it is harder for them to maintain their might.

In this case, hedge funds of high stature simply being wound down is quite a rare occurrence. A few years ago, the largest hedge fund in history, FX Concepts wound its last position down.

This was due to mass withdrawals of the public sector pension schemes that were held and traded by the firm, which came about because many of FX Concepts’ top quality traders had left for other opportunities leaving trading to less experienced staff. Pension funds being conservatively operated and having a responsibility to their customers pulled out in their droves.

Yes, going into the hedge fund business is a natural progression for FX brokers, but in today’s world, nothing is as stable as it was. Add a bit of volatility to the mix, and you get exciting yet high risk opportunities.

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