The multistrategy hedge fund Paloma Partners is drumming up cash to repay its departing investors — but it's going to take some time, and not everyone is coming along for the ride.
Facing $1.2 billion in redemption requests, Paloma told its investors this past fall it would need more time to liquidate harder-to-sell assets and repay them in full. Now, more details are emerging about what Paloma is putting into the special-purpose vehicle created to house those assets.
As part of the payoff plan, Paloma is set to exit its investment in Aquatic Capital, one of the buzziest quant fund launches in recent years, said four people familiar with the matter who asked to remain anonymous to discuss private information. Paloma seeded Aquatic, which was founded by the Citadel alum Jonathan Graham in 2019. It has $360 million invested with Aquatic, which is subject to lock-up terms and can be redeemed in tranches over the next couple of years, the people said.
Paloma has also put into the special-purpose vehicle — called Dove — a portfolio of commercial-mortgage-backed securities valued at $240 million, which are set to be sold off over time, people familiar with the matter said. The portfolio was previously managed as a separate account by Cannae Portfolio Advisors, a credit fund that has managed Paloma money since 2009.
A Paloma representative declined to comment.
Paloma is one of the oldest and most venerated hedge funds. Founded by Donald Sussman in the 1980s, it is best known for seeding the quant giant D. E. Shaw, as well as its bets on LMR Partners, Squarepoint Capital, and Sona Asset Management.
While Paloma is off to a strong start this year — it's up 2.5% through mid-February, a person familiar with the performance said — the firm has struggled with performance in recent years and has overhauled its C-suite.
The fund brought in the hedge fund veteran Neil Chriss, formerly of Millennium and Hutchin Hill Capital, in 2023 to lead the firm. But he lasted less than a year. He was replaced by Ravi Singh, an alum of Credit Suisse's asset management division and Goldman Sachs, where he held leadership positions in prime brokerage, equity derivatives, and equities risk.
Paloma gained just 2.5% in 2024, which was generally a bumper year for hedge fund managers, and it has averaged 3.6% over the past three full years, according to performance figures seen by Business Insider. A composite hedge fund index returned 6.6% over the past three years, the industry research firm PivotalPath found.
Paloma's assets under management have fallen to $1.7 billion, down from about $4 billion when Chriss took the helm in 2023.
Assets in Dove to be sold over time
With redemption requests piling up, Paloma told its limited partners in November it would be able to pay them only 30% in up-front cash and the rest over time as it liquidated holdings, The Wall Street Journal reported. Ultimately, Paloma paid half the $1.2 billion balance in cash, with the remaining $600 million to be distributed as it winds down assets in Dove, the people familiar with the matter said. Paloma will not charge fees on the vehicle, which is being administered by PwC.
Systematic trading outfits, reliant on technology and data, typically require years of patience to yield results, but Aquatic has nonetheless gotten off to a slow start. It launched in 2019 with $500 million in commitments from Paloma, Bloomberg reported, and its assets later hit $1.5 billion with capital from investors including the Teacher Retirement System of Texas.
Aquatic lost 3.3% between September 2023 and September 2024, according to returns from the Teacher Retirement System of Texas, a public pension. Quant hedge funds were among the industry's best performers in 2024, gaining 14.2% on average, according to PivotalPath's equity quant index.
Aquatic did not respond to requests for comment.
Cannae, which specializes in structured products, was spun out of Paloma in 2020 and raised external capital. It continued to manage a structured-credit portfolio for Paloma through a separate account, composed primarily of commercial-mortgage-backed securities. Commercial real estate has taken a beating in recent years, and with many bonds trading below par, liquidating holdings would in many cases mean locking in losses.
While assets have fallen and Paloma has had to pull capital from external managers, the fund isn't finished allocating. Geoffrey Lauprete, the ex-chief investment officer of WorldQuant, is expected to launch his own fund later this year with backing from Paloma.
Paloma has also revamped its C-suite. Apart from Singh, it has recently hired new executives to manage finance, risk, operations, and marketing. Michael DeAddio, the president and chief operating officer of WorldQuant until 2020, joined in December, and Louis Molinari, the global head of capital introduction and hedge fund consulting at Barclays until 2024, joined as the firm's chief marketing officer this month.
Correction: February 21, 2025 — An earlier version of this story misstated that Blackstone was an investor in Aquatic. Blackstone is not an Aquatic investor.
