Scottwood Pursues Family Office Model
In a hedge fund world with no alpha generation and where everyone seems correlated to the markets and each other, Scottwood Capital Management was one money manager that stood apart from the crowd. Now its successor firm, the Perlman Family Office, is trying to emulate the former hedge fund.
A Short History of Scottwood
Scottwood Capital Management was an absolute-return driven firm with a management style emphasizing robust controls, best practices and the highest levels of integrity. Scottwood's investors were rewarded with a solid 10-year annualized net return of almost 12% per year from 2001 through 2011, a record that outperformed the markets and the majority of hedge funds.
Edward Perlman, its head during those ten years, closely aligned his firm's interests with those of his clients'. Always vigilant about his investors' capital, he went to great lengths to protect them from hidden market and business risks. As a hands-on manager running the day-to-day side of the business, he was even 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 in his opinion 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. Immediately following the return of capital, financial markets melted down from the Euro debt crisis.
In terms of financial performance, the short history of Scottwood Capital is one of alpha generation and being uncorrelated to the 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 very unstable; most fell between 10 and 20 percent, and nearly all hedge funds and other asset managers mirrored that performance. The Scottwood fund, 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, Mr. Perlman raised the fund'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 hedge funds 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 reinvesting in 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.
Scottwood Capital Management won several awards from well-known publications that follow 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 Week magazine awarded Scottwood First Place as "best event-driven hedge fund" in the U.S. That same year, Absolute Return nominated Scottwood as best event-driven fund.