Scottwood Pursues Family Office Model
In an investment world with little alpha generation and much correlation to the markets, Scottwood Capital Management, the former hedge fund founded by Edward "Eddie" Perlman, was one money management firm that stood apart from the crowd. After returning all outside investor funds in 2011, his successor firm, the Perlman Family Office, is continuing a track record of outperforming the markets and the majority of hedge funds.
Since its inception December 2012, the Perlman Family Office has been invested in the U.S. public securities markets. Net returns for 2013 were 34.34% and ranked 3rd best among all event-driven funds tracked by Barclayhedge and Eurekahedge. For 2014, gains exceed the S&P 500 index and the majority of hedge funds. The Perlman Family Office is included in the HFR Index.
A Short History of Scottwood Capital Management
Scottwood Capital Management was a Greenwich, Connecticut-based hedge fund whose investment objective was to produce good risk-adjusted returns, with alpha. Scottwood's investors were rewarded with 10-year net annualized returns of approximately 12% from inception December 2001 through 2011, when the firm returned all of its investors' capital. That track record outperformed the markets and the majority of hedge funds. At its peak, Scottwood had $1 billion in assets under management.
Edward Perlman, the firm's founder, closely aligned his firm's interests with those of his clients'. Always vigilant about his investors' capital, he went to great lengths to avoid hidden market and business risks. As a hands-on manager running the day-to-day side of the business, he was lauded for keeping fund expenses among the lowest in the hedge fund industry. Always striving for transparency, in 2006 Scottwood registered with the SEC, many years before regulators made such requirements mandatory.
With little fanfare, Mr. Perlman in 2011 made a dramatic call to return all outside capital promptly to his investors. In the months preceding that decision, Mr. Perlman had already quietly liquidated all of the fund’s portfolio, thereby eliminating exposure to what he felt was an impending period of poor market conditions and a lack of distressed investment opportunities -- the kind that Scottwood always liked to invest in.
In his letter to investors, Mr. Perlman made it clear at that time in mid-2011 that cash was the safest place to have their money. His investors were thankful, as none had made any requests to remove their capital from the fund, and all were happy to receive their money promptly. The timing was prescient, as financial markets immediately began to melt down from the European debt crisis.
In terms of financial performance, the short history of Scottwood Capital is one of alpha generation and having little correlation with the financial markets, two sought after, and elusive, goals of hedge funds.
Back in 2002, the firm’s first full year in existence, the financial markets were grappling with a recession and were very unstable; most fell between 10 and 20 percent, and nearly all hedge funds and other asset managers mirrored that performance. Scottwood, by contrast, gained a net 10 percent for 2002, Notably, the firm avoided many disastrous investments, like WorldCom, that attracted throes of hedge funds.
In 2008, another year of extreme volatility in the midst of the financial crisis, Mr. Perlman raised Scottwood's cash level to 100% in anticipation of the market’s free fall later in the year. Scottwood only lost 7.65% that year (its worst year ever), compared to 19% for the hedge fund industry and 38% for the S&P 500 stock index.
But, it was Edward Perlman's fair treatment of his investors, not just his returns, that stood out in 2008. While many hedge funds engaged in the practice of “gating,” or limiting investors’ withdrawals, and antagonized investors by placing many of their investments in side pockets, Scottwood Capital Management avoided both practices. In fact, the firm gladly helped out its clients by sending them money back that they could not otherwise redeem from other hedge funds who gated them. Thankful investors rewarded Scottwood by returning to the fund the very next year, loyal actions that are rare in the hedge fund industry.
Mr. Perlman re-entered the markets with a vengeance in the spring of 2009, snapping up bargains and setting the stage for what would be the firm’s best year ever, a 44.05% net return.
Mr. Perlman received recognition from publications, and his peers, within the hedge fund industry. In 2010, Barron's magazine ranked Scottwood in its Top 100 Hedge Funds in the world in its Penta list, based on 1- and 3-year performance. In 2009, Hedge Fund Markets awarded Scottwood First Place as "best event-driven hedge fund" in the U.S. That same year, Absolute Return selected Scottwood as a final nominee for best event-driven U.S. fund, based on its risk-adjusted returns.
Scottwood was launched in New York City in 2001 with funds raised by Mr. Perlman. Adam Weiss was the first hire, as Scottwood's COO. Only an employee until 2007, Mr. Weiss years later started Cabochon Capital and Credit Online Ventures.