Geode, Fidelity index fund manager, closes Hedge-Fund business after derivative bets implode

Geode’s largest private fund lost about $ 250 million after its bets on stock market volatility worsened last year, people familiar with the matter said. The fund fell by about 36% by spring. The losses and margin calls that followed forced the Geode Diversified Fund to liquidate other unaffiliated positions and caused the fund’s largest investor, Fidelity itself, to withdraw its money, people said.

Geode closed the fund and went out of its larger business with Return Absolut, offering clients hedge-fund investments to focus on index investments, said several people familiar with the matter. Losses and the closure of hedge funds have not been reported previously.

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

Many investment firms still pay the selling price of Covid-19 last year. Geode’s withdrawal also highlights the continued increased risks of investing in derivatives, even in growing firms.

Geode began as one of a handful of boutique managers created to invest a slice of the wealth of the Johnson family that founded Fidelity. It was derived from Fidelity almost two decades ago. Geode is owned by its employees, former Fidelity executives and a Johnson family trust. Abigail Johnson is the president and CEO of Fidelity, which was founded by her grandfather.

In recent years, Geode has grown dramatically as its former parent has embraced low-cost funds that pursue general market benchmarks as a means of attracting new customers’ money. These funds bear the Fidelity brand and are sold to Boston-based clients. But the task of buying and selling shares to match the benchmark performance rests with Geode, the fund’s sub-advisor.

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

Geode’s diversified fund was the largest of these offerings, and its losses forced Geode executives to recognize the challenges of managing riskier strategies within a firm built primarily to track market benchmarks. Index managers tend to conduct weak operations while keeping costs low, as most of their funds charge low fees. And overseeing riskier investments may require more robust risk management, trading and compliance requirements.

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

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

Shares fell sharply in March last year, while investors reacted to news that the coronavirus was spreading around the globe, posing serious threats to the economy. The Cboe Volatility Index, known as the Wall Street Fear Gauge, has reached a record high.

The US government rushed to intervene, stirring investors’ nerves with a series of programs aimed at unclogging markets. Stocks gathered soon, but not before the episode took its toll. Some funds, including a pair managed by Allianz Global Investors, were liquidated after they struggled to restructure trading with options that accumulated losses as volatility increased.

The Geode Fund has placed about $ 80 million in derivative financial instruments, which could be profitable if the market remains calm. It did not, and transaction losses soon swelled.

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

A few months after the Geode Diversified implosion, the company’s president and investment director, Vince Gubitosi, informed Geode’s board of directors that he was interested in retiring in order to pursue his entrepreneurial interests. He remains an advisor to the company.

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

Geode’s total assets grew by more than $ 135 billion in 2020, driven by continued demand for index funds and stock market earnings, and the money manager had the most profitable year of all time.

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