One of London's prominent hedge fund managers, Capula Investment Management, has reported a steep decline in its performance-related earnings, highlighting the challenging conditions faced by asset managers in volatile markets.
A Sharp Decline in Performance Fees
According to recently filed accounts, Capula Investment Management LLP saw its performance fees plummet by 48% for the year ending 31 December 2023. The fees fell to $73.1 million, down dramatically from the $141.3 million recorded in the previous financial year. This substantial drop occurred even as the firm's assets under management remained robust, ending the period at $15.1 billion.
The accounts, filed with Companies House, reveal that the partnership's total revenue, which is predominantly driven by these performance fees, also fell sharply. Total revenue for the year stood at $168.4 million, a significant decrease from the $248.8 million generated in 2022.
Profitability and Partner Payouts Take a Hit
The ripple effect of the lower fee income was felt directly in the firm's profitability. Capula's pre-tax profit for 2023 was $126.4 million, representing a substantial 38% fall from the $203.1 million profit posted the year before.
Consequently, the profit available for division among the firm's members, which includes its high-profile founder Yan Huo, also declined. The total profit share for members was $110.9 million for 2023, down from $182.3 million in 2022. The highest-paid member within the partnership received a share of $44.4 million, a notable reduction from the $72.9 million taken by the top earner in the prior period.
Navigating a Challenging Market Landscape
The filed documents indicate that the decline in performance fees was primarily attributed to "lower performance fee eligible returns" across the firm's funds. This period of diminished returns aligns with a broader phase of market uncertainty and shifting interest rate expectations, which can pose challenges for fixed income and relative value strategies often employed by firms like Capula.
Despite the downturn in variable earnings, the firm's management fee income, which is based on a percentage of total assets under management, provided a steadier revenue stream. The firm also reported a strong cash position of $183.5 million at the year's end. In a strategic move noted in the accounts, Capula repaid a $50 million shareholder loan during the year, strengthening its balance sheet.
The accounts further disclosed that the highest-paid member's profit share included a $10 million salary and a $34.4 million allocation of partnership profit. While the figures represent a major reduction, they underscore the high-stakes nature of performance-driven hedge fund compensation, which can fluctuate wildly with annual returns.
