Odey Asset Management has entered dangerous new territory after JPMorgan Chase & Co. sent a notice agreeing to act as its custodian to protect assets for hedge fund clients.
Having a custodian—a bank that holds customers’ securities to protect them from loss or theft—is a Legal requirements For hedge funds operating in the UK, Odey Asset Management would be in breach of the FCA’s rulebook if it tried to operate without the hedge fund, said a person familiar with the regulator’s stance.
FCA’s rule book The outgoing trustee has also been asked to find a replacement, which market sources say could be challenging under the circumstances: Odey has been charged following serial sexual assault allegations against company founder Crispin Odey. Most of Asset Management’s business partners have cut ties, as detailed in a Financial Times investigation last week. He strenuously denies the allegations.
“Now it’s a three-way game between Odey (asset management), regulators and service providers,” said a former regulatory official who oversaw liquidations.
“If no provider is going to support Odey (asset management), then the outcome is predetermined and that is they are at a standstill, but you do need regulators to play referee here and make sure it doesn’t ‘don’t make a mess,'” the The former regulatory official explained.
In this case, the FCA will focus on ensuring that fundamental investors in hedge funds are protected, which means setting up custodians for their assets and servicing and managing their funds in the normal way.
Funds could be liquidated to return money to investors in the event of a shutdown, says a fund management expert, although not in the case of Neil Woodford – the former star manager’s stock fund was frozen and trapped raised £3.7 billion from investors. Cash – it probably won’t lead to a fire sale of assets.
The FCA declined to comment on whether it would force JPMorgan to stay put if no other institutions came forward. The Wall Street bank declined to comment on whether it had found a replacement custodian to take over the business.
Odey Asset Management did not immediately respond to a request for comment on whether it would be forced to close if a new custodian did not come forward.
The fact that JPMorgan sent a termination notice after partners at the hedge fund firm voted to oust its founder over the weekend hints at trouble ahead for Odey Asset Management.
JPMorgan is also one of Odey Asset Management’s largest prime brokers, providing funds to hedge funds to enable them to make bigger bets and selling them derivatives to manage investment risk. The bank also issued a notice regarding its prime brokerage relationship with the British firm, the Financial Times reported on Wednesday.
Morgan Stanley, Odey Asset Management’s other big prime broker, began cutting ties last week and has not softened that stance. Goldman Sachs International CEO Richard Gnodde tell bloomberg The bank is still in the process of “removing” the company.
The partners now controlling Odey Asset Management have moved to bring order to the situation. On Sunday night, they announced plans for the future management of funds managed by Crispin Odey, including the Odey Europe Inc Fund and the Odey OIE Mac Fund, both of which were handed over to Freddie Neave.
Odey Asset Management closed one fund and shuttered others in an effort to protect investors and the firm from a flood of withdrawn orders. In a letter to investors this week, the firm said the 117 million euro Odey Swan fund would be liquidated and the funds returned to clients. It also halted withdrawals from Brooke’s Developed Markets Fund and Absolute Return Fund after a surge in redemption requests from investors.
Ryan Johnson, principal at Lloyd Expert Consultancy, which advises the fund management market, warned that more Odey funds could face barriers and closures. “If all of Odey’s and Brook’s funds close, these managers have solid pedigree, which should lead them to manage alternative funds, or even their own range of funds,” Johnson said. Odey declined to comment.
Still, even if Odey Asset Management can find a new prime broker and replacement custodian, significant hurdles remain. Untangling this company from its founders was not going to be easy. Odey personally manages about $1.2 billion in assets, about half of which is his money. Before this week, he owned a majority stake in Odey Asset Management holding company and subsidiaries.
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The partnership had already taken steps to distance Crispin Odey from other fund managers in 2020, when it created the Brook subsidiary to house the funds ahead of his criminal trial on charges of molesting a junior banker. Some of the largest funds in the firm. He was found not guilty. Other fund managers at the firm, including James Hanbury, rebranded their product as Brook.
Odey Asset Management will now be controlled and owned by the remaining partners, they said, although they have not released details of its new ownership structure. “You can’t change all ownership in hours,” said a person familiar with the company’s inner workings.
The company is also under investigation by the FCA, which is looking into corporate governance issues and considering expanding its investigation in light of last week’s sexual assault and harassment allegations against Odey, the Financial Times previously reported.
A former partner at Odey said questions must be asked of the firm’s current management. “We all leave because of our integrity (…) The simple question is: why did you stay when everyone else left?”