Geode, Fidelity’s 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 turned sour last year, people familiar with the matter said. The fund fell 36% in the spring. The losses and the consequent margin calls forced the Geode Diversified Fund to liquidate other unrelated positions and led the fund’s main investor, Fidelity itself, to withdraw its money, people said.

Geode closed the fund and went out of its broader absolute return business, offering its clients similar hedge fund investments to focus on index investing, according to some people familiar with the subject. Losses and closing of the hedge fund business have not been previously reported.

The firm recently eliminated several jobs that served that business, according to people who knew the subject.

Many investment firms continue to pay the market selling price driven by Covid-19 last year. Geode’s withdrawal also highlights the continued risks of investing through derivatives, even in companies that grow otherwise.

Geode began as one of the few store managers created to invest a portion of the fortune of the Johnson family founding Fidelity. He left Fidelity almost two decades ago. Geode is owned by its employees, former Fidelity executives and a trust of the Johnson family. Abigail Johnson is president and CEO of Fidelity, founded by her grandfather.

In recent years, Geode has grown dramatically as its former parent has embraced low-cost funds that are followed by major market benchmarks as a means to attract money from new customers. These funds bear the Fidelity brand and are sold to customers of the Boston-based firm. But the task of buying and selling shares that coincides with the performance of the parameters corresponds to Geode, the sub-advisor of the funds.

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

Geode’s diversified fund was the largest offering and its losses forced Geode executives to recognize the challenges of managing riskier strategies within a company built primarily to track market benchmarks. Index managers tend to do light operations, keeping costs low, as most of their funds charge low commissions. And overseeing riskier investments may require stronger risk management, negotiation and compliance needs.

Geode Diversified, launched in June 2003, pursued several different strategies and ranged from stocks and convertible bonds to currencies and commodities. It was a solid money winner for years and, at the peak of 2018, grossed $ 1 billion.

The fund aimed to offer annualized returns of 5% to 6%, according to people familiar with the subject.

Shares fell sharply last March as investors reacted to the news that the coronavirus was spreading around the world and posed serious threats to the economy. The Cboe volatility index, known as the Wall Street Fear Meter, hit a record high.

The U.S. government rushed to intervene, keeping investors ’nerves with a series of programs designed to unclog markets. The shares soon reunited, but not before the episode produced its share of casualties. Some funds, including a pair managed by Allianz Global Investors, were liquidated after struggling to restructure options trades that accumulated losses as volatility grew.

The Geode fund had placed approximately $ 80 million in derivatives that would earn profits if the market remained calm. This was not the case, and losses in business soon increased.

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

Within months of the Geode Diversified implosion, the firm’s president and chief investment officer Vince Gubitosi informed Geode’s board that he was interested in retiring to pursue business interests. He remains an advisor to the firm.

In December, Geode chose Bob Minicus of Fidelity as Mr. Gubitosi’s successor. Minicus, formerly head of equity trading, recently led compliance, risk and business operations in Fidelity’s asset management division.

Geode’s total assets rose more than $ 135 billion in 2020, driven by continued demand for index funds and stock market gains, and the money manager had its most profitable year in history.

Write to Justin Baer a [email protected] i Dawn Lim a [email protected]