Geode, manager of index funds at Fidelity, closes hedge fund deals after the implication of bets on derivatives

Geode’s largest private fund lost about $ 250 million after its bets on stock market volatility soured last year, people familiar with the matter said. The fund fell about 36% in the spring. Subsequent losses and margin calls forced the Geode Diversified Fund to liquidate other unrelated positions and prompted the fund’s largest investor, Fidelity itself, to withdraw its money, people said.

Geode closed the fund and pulled out of its broader Absolute Return business, offering customers hedge fund-type investments to focus on index investments, some people familiar with the matter said. Losses and the closing of the hedge fund business have not been reported previously.

The company recently eliminated several jobs that served this business, people familiar with the matter said.

Many investment firms are still paying the price of the Covid-19-driven market sale last year. Geode’s setback also highlights the high and continuing risks of investing through derivatives, even in growing companies.

Geode started out as one of a handful of boutique managers created to invest a slice of the fortune of the Johnson family that founded Fidelity. It was created out of Fidelity almost two decades ago. Geode is owned by its employees, former Fidelity executives and a Johnson family fund. Abigail Johnson is president and chief executive of Fidelity, which was founded by her grandfather.

In recent years, Geode has grown dramatically as its former parent has adopted low-cost funds that track broad market references as a means of attracting money to new customers. These funds carry the Fidelity brand and are sold to customers of the Boston-based company. But the task of buying and selling stocks to match the performance of the benchmarks lies with Geode, the funds’ sub-consultant.

But, since its foundation, Geode has continued to maintain a group of other funds that offered family offices and other institutions a more complex investment menu.

The Geode Diversified Fund was the largest of these offerings, 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 operate lean operations, keeping costs low, as most of their funds charge low fees. And overseeing riskier investments may require more robust risk management, negotiation and compliance needs.

Geode Diversified, launched in June 2003, pursued a number of different strategies and maintained everything from stocks and convertible bonds to currencies and commodities. For years, it was a solid source of income and, at its peak in 2018, managed $ 1 billion.

The fund’s goal was to deliver annualized returns of 5% to 6%, people familiar with the matter said.

The stock fell sharply last March, when investors reacted to news that the coronavirus was spreading across the world, posing serious threats to the economy. The Cboe Volatility Index, known as the Wall Street fear gauge, hit a record high.

The US government rushed in to intervene, calming investors’ nerves with a series of programs designed to clear markets. The stock soon recovered, but not before the episode produced its share of victims. Some funds, including a pair managed by Allianz Global Investors, were liquidated after struggling to restructure option trades that accumulated losses with increased volatility.

The Geode fund had placed about $ 80 million in derivatives that would generate a profit if the market remained calm. This did not happen, and losses in the negotiations soon increased.

The fund’s volatility derivatives represented around 10% of the fund’s assets.

A few months after Geode Diversified’s implosion, the company’s president and chief investment officer, Vince Gubitosi, informed Geode’s board that he was interested in retiring to pursue corporate interests. He remains an advisor to the company.

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

Geode’s total assets increased by more than $ 135 billion in 2020, driven by continued demand for index funds and stock market earnings, and the financial manager had its most profitable year ever.

Write to Justin Baer at [email protected] and Dawn Lim at [email protected]