Saturday, April 18, 2015

Carlyle's Un-Carlyle Like Returns on Mutual Fund Offering

Reuters reported:

Next month, Carlyle will close Carlyle Global Core Allocation Fund, which has $US50 million in net assets with a mandate to invest across equities, debt, real estate, commodities and currencies using exchange-traded funds, according to a filing with the U.S. Securities and Exchange Commission.

Carlyle Enhanced Commodity Real Return Fund, which had a mandate to invest in asset classes such as energy and metals, but never took off, will also be wound down, according to a second filing.
For every $10 invested in Global Core Allocation Fund customers have $9.83 cents.  That's a -1.7%, hardly the 30% annual return on equity frequently cited by Carlyle co-founder David Rubenstein.   No wonder the funds had to go. They're harming Carlyle's super return image.  One fund couldn't make.  The other couldn't make money.  Here's Carlyle's take:


The Fund commenced operations on August 1, 2014. While the month of August was quite ordinary in terms of market behavior the remainder of the year turned out to be anything but. Geopolitical events rang in the fall and a dramatic collapse in the price of oil concluded the year. 

The third quarter of 2014 was one of the most unusual quarters in a number of years. Not only did volatility return to the marketplace, but also the quarter ended with most asset classes falling in unison for a sustained number of days. September was punctuated by a relatively large loss for the Fund (roughly 2.5%), as there was very little opportunity for positive performance. Diversification was nearly non-existent. 

The biggest factors influencing the markets were geopolitical and global in nature. The tension in Ukraine, the deteriorating situation in the Middle East, the outbreak of Ebola in Africa – along with the first confirmed case of Ebola in the US on the last day of the quarter. 

The fourth quarter of 2014 will be remembered for the nearly 50% drop in the price of oil. In concert, interest rates plunged in the US and Eurozone. For most markets participants, both of these events were largely off the radar screen at the beginning of the year. To say they were a surprise is an understatement

The net effect of the turbulence of the second half of 2014 is that the Fund lost approximately 2.7% on a net basis for the period. While disappointing, nothing indicates to us that our investment philosophy is no longer the appropriate course to follow to achieve diversification. There is no reason to believe diversification is no longer a prudent investment approach. On the contrary, we believe the highly unexpected events of the latter half of 2014 reinforce the belief that one should not “bet” on what one thinks is going to happen before the fact. 

It is sometimes said that, “Diversification is one of the few free lunches.” While we would agree with the intent of this statement (diversification is “good”), we would disagree that it is free. A diversified portfolio does not simply consist of a random amount of many different investments. Our opinion is that it takes a methodical approach to harness the “good” of diversification. This effort represents a cost and one well worth absorbing. 

We look forward to a prosperous 2015. 

Actually, they don't.  Carlyle's first mutual fund plans to roll up by May 18th.  Under Carlyle's risk-return statement for the fund a footnote stated:

Includes the operating expenses of Carlyle Cayman Core Fund I Ltd., a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (the "Subsidiary")
Those sneaky little PEU devils, investing 11% of the funds assets in their own Cayman Islands subsidiary.  Even the offshore arm couldn't save Carlyle's first mutual fund offering from drowning in a turbulent sea.  Funny, PEUs normally like market dislocation.  Carlyle placed the wrong bets, which brings to mind Carlyle Capital Corporation, another colossal Carlyle failure

Update 4-19-15:  Bloomberg found the story.   They reported KKR shuttered two funds last year.