By Juliet Chung and Susan Pulliam
A $60 million hedge fund led by a high-profile Wall Street
executive lost all but $200,000 of its assets in about three weeks,
a stunningly quick fall for the well-heeled investors in the
fund.
The collapse of Canarsie Capital LLC caught the attention of
Wall Street because it was run by the longtime former head of risk
management at Morgan Stanley-- Kenneth deRegt--along with Owen Li,
a 28-year old former Galleon Fund Management trader. Among the
fund's wealthy investors, according to a person familiar with the
matter, was Richard Axilrod, a top lieutenant to Louis Bacon Moore
of Moore Capital Management.
Messrs. Li and DeRegt didn't return requests for comment and
telephone calls to the firm weren't picked up. Mr. Axilrod declined
to comment.
In a letter to investors sent Thursday morning, the fund said
that Mr. Li was stepping down and that Mr. deRegt would take over
the fund's unwinding, according to a person familiar with the
matter.
The details behind the fund's fall aren't clear. In a letter to
his investors earlier this week, Mr. Li--who named the fund after
the Brooklyn, N.Y., neighborhood where he grew up--said he was
writing to express his "sorrow and deep regret for engaging in a
series of transactions over the last several weeks that have
resulted in the loss of all but two hundred thousand dollars."
According to a March 2014 regulatory filing, the fund had a
"gross asset value" of $98 million, which included leverage, or
borrowed money, according to a person familiar with the matter. The
fund managed $60 million, not including borrowing, at the start of
this year, the person said.
In March, Morgan Stanley, Carnarsie's sole prime broker,
executing and financing the fund's trades, told the fund it was
uncomfortable with its risk practices, people close to the
situation say. Canarsie at the time hired an independent consultant
to look into Morgan Stanley's concerns, one person familiar with
the firm said.
About a month later, Morgan Stanley told Carnarsie it would need
to move its assets to another clearing firm because of remaining
questions about the fund's risk profile, the people said. Several
months ago, Goldman Sachs Group Inc. began clearing for Canarsie,
some of the people said.
Mr. Li launched Canarsie in January 2013 and focused on
investing in technology, energy, financial and consumer growth
stocks, people close to the situation say. In 2013, he ended the
year up 50%, one investor said, partly stemming from heavy
leverage, or borrowing, by the fund and big investments in social
media, including Facebook Inc. and Twitter Inc.
In 2014, Mr. Li invested in some less-successful IPO stocks,
including FireEye Inc. and Splunk Inc., both of which foundered
last year.
In his letter to investors, dated Jan. 20, Mr. Li said the
fund's losses happened after "I engaged in a series of aggressive
transactions over the last three weeks that--generally
speaking--involved options with strike prices pegged to the broader
market increasing in value, but also involved some direct
positions." In his letter, Mr. Li didn't elaborate on the soured
trades.
He wrote later on in the letter, "I acted overzealously."
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