Key Takeaways
- • Echo Street Capital Management is shutting down its approximately $2 billion equity market-neutral hedge fund despite strong historical performance and a waiting list of prospective investors, returning 90–95% of capital to investors by end of September 2020.
- • The firm is exiting the hedge fund business entirely, citing structural headwinds in the hedge fund industry including the difficulty of managing risk constraints and the diminishing effectiveness of risk-smoothing techniques that have become commoditized.
- • Echo Street will continue operating through two alternative vehicles: its established long-only strategy "GoodCo" (managing ~$6 billion) and a new product called Echo Street Select Plus launching November 1, which will offer long positions with "hedge-fund style" tools including short-selling capability.
- • The decision represents a strategic pivot away from traditional hedge fund management rather than a response to underperformance—the firm acknowledged March 2020 losses of approximately 15% and year-to-date losses of 10%, but attributed the closure to industry-wide operational challenges rather than fund performance.
- • The move underscores broader structural pressures on the hedge fund industry, where managers operate within increasingly restrictive risk constraints and face mounting competitive pressure as previously differentiated risk-management strategies become standardized across the industry.
Summary
Echo Street Capital Management, founded by Greg Poole, is liquidating its roughly $2 billion equity market-neutral hedge fund and plans to return 90–95% of investor capital by the end of September 2020, according to a client letter obtained by Institutional Investor. The decision surprised market participants, particularly given that the firm maintained a waiting list of interested new investors and possessed what institutional allocators characterized as an excellent historical track record.
The timing of the closure stands in marked contrast to typical hedge fund liquidations, which typically follow periods of sustained underperformance and capital flight. While Echo Street disclosed approximately 15% losses in March 2020 and year-to-date declines of 10%, these figures alone do not appear to have driven the decision. Rather, in its September 9 letter to investors, Echo Street management articulated a structural critique of the hedge fund business model itself, describing the operational workflow as "increasingly a soul-sapping one." The firm explicitly questioned why "the environment for hedge funds is getting harder," attributing the challenge to a narrowing of effective risk-management strategies as techniques become commoditized: "If that box includes a need to 'smooth the ride,' then that box gets tighter and smaller every year. As the techniques we use to smooth the ride get discovered, they no longer smooth."
Rather than exiting asset management entirely, Echo Street is repositioning its business model. The firm will continue operating its established long-only strategy, "GoodCo," which manages approximately $6 billion in assets. Additionally, Echo Street plans to launch a new product called Echo Street Select Plus on November 1, 2020, which will invest in the same portfolio of long positions held by GoodCo but will offer "hedge-fund style" tools and operational latitude, including the ability to employ short-selling strategies. This structure effectively allows the firm to maintain hedging flexibility outside the traditional hedge fund regulatory and operational framework.
The exit reflects broader industry pressures facing hedge fund managers, who increasingly operate within restrictive risk constraints that limit differentiation and reduce competitive advantage as strategies become standardized. Echo Street's decision to pursue an alternative product structure rather than a full exit suggests that the firm views the operational and regulatory burden of the hedge fund designation as the primary constraint, rather than fundamental inability to generate returns or attract capital.
The timing of the closure stands in marked contrast to typical hedge fund liquidations, which typically follow periods of sustained underperformance and capital flight. While Echo Street disclosed approximately 15% losses in March 2020 and year-to-date declines of 10%, these figures alone do not appear to have driven the decision. Rather, in its September 9 letter to investors, Echo Street management articulated a structural critique of the hedge fund business model itself, describing the operational workflow as "increasingly a soul-sapping one." The firm explicitly questioned why "the environment for hedge funds is getting harder," attributing the challenge to a narrowing of effective risk-management strategies as techniques become commoditized: "If that box includes a need to 'smooth the ride,' then that box gets tighter and smaller every year. As the techniques we use to smooth the ride get discovered, they no longer smooth."
Rather than exiting asset management entirely, Echo Street is repositioning its business model. The firm will continue operating its established long-only strategy, "GoodCo," which manages approximately $6 billion in assets. Additionally, Echo Street plans to launch a new product called Echo Street Select Plus on November 1, 2020, which will invest in the same portfolio of long positions held by GoodCo but will offer "hedge-fund style" tools and operational latitude, including the ability to employ short-selling strategies. This structure effectively allows the firm to maintain hedging flexibility outside the traditional hedge fund regulatory and operational framework.
The exit reflects broader industry pressures facing hedge fund managers, who increasingly operate within restrictive risk constraints that limit differentiation and reduce competitive advantage as strategies become standardized. Echo Street's decision to pursue an alternative product structure rather than a full exit suggests that the firm views the operational and regulatory burden of the hedge fund designation as the primary constraint, rather than fundamental inability to generate returns or attract capital.
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