Pine River Capital Management is shrinking

Pine River Capital Management, one of the Twin Cities hottest hedge funds following the Great Recession, is closing its diversified flagship fund that has been pressured by market-lagging performance and client withdrawals, according to competitors and industry reports.

A wave of client withdrawals from the flagship could bring assets down to as low as $300 million compared with a peak of about $1 billion for the 15-year old fund.

Overall, Pine River's assets peaked in 2015 at about $15 billion and slid to under $10 billion this year.

Competitors report waves of resumes from jettisoned Pine River employees since 2016

The Minnetonka-based firm, which employed about 400 employees in 2014, has laid off an unspecified number from offices in the Twin Cities, London, New York, San Francisco, Hong Kong and Austin, Texas.

Several partners also have left the firm.

Pine River officials have declined comment since Monday.

According to recent reporting by Bloomberg Markets, the flagship fund was pressured by client redemptions that would cause the share of illiquid assets in the fund to increase disproportionately. Management decided to close the fund.

Bloomberg said the Pine River fund gained 1.7 percent this year through August, after gaining less than 1 percent in 2016 and dropping 2.75 percent the year prior, according to investor documents.

Moreover, investors have gotten discouraged with lagging hedge fund returns as low-cost retail market index funds have provided double-digit returns over the last couple years for annual fees of less than 0.5 percent on assets.

Hedge funds typically charge up to "two-and-20," or a two percent management fee on invested assets plus 20 percent of capital gains. The firm's owners reportedly shared hundreds of millions in gains and profits over the good years.

Since 2015, the hedge fund industry has lost more money than it's attracted from investors, according to Hedge Fund Research Inc. More hedge funds have closed than opened for the last two years.

Last year, Pine River closed its $1.6 billion fixed-income fund, after one of its co-managers left money management for philanthropy.

Steve Kuhn, who ran the Pine River Fixed Income Fund and its head of fixed-income trading, was the firm's public face at conferences and industry events.

Kuhn joined Pine River in 2008 from Goldman Sachs and was one of the industry's most celebrated mortgage bond traders. Following the mortgage crisis, Kuhn bet correctly that deeply discounted mortgage-backed securities, from junk bonds to government-insured, would rebound from the depths of the recession, thanks to the federal rescue of the financial system and the Federal Reserve money pump that kept interest rates at record lows and brought huge profits to the buyers of those discounted bonds.

"Pine River ... has had so much success with its mortgage strategy ... that outsize returns have become an odd sort of image problem — the kind most hedge fund managers would die for," Institutional Investor magazine said in 2014. "Pine River probably has to spend as much time moderating expectations of future profits as it does explaining its methods and operations."

Pine River was started by Brian Taylor in 2002, named for the central-Minnesota lake-country town where he owns a cabin and plotted his next move after leaving another Twin Cities fund. Taylor, 52, was the first investor with $350,000 from his IRA account.

Pine River's great mortgage play helped the firm take its act public. In 2009, Pine River launched a publicly traded REIT, or real estate investment trust, called Two Harbors that invests in mortgage-backed securities. Its value peaked in 2013.

In 2012, Pine River launched Silver Bay Realty Trust to directly invest in thousands of single-family homes that had been foreclosed and which presumably would rise in value as the housing industry recovered. Silver Bay CEO David Miller, also a managing director of Pine River, resigned last fall. Miller was a former U.S. Treasury official who managed the investment portfolio of the federal government's $700 billion in troubled assets it took on as part of its bailout of the financial system.

Pine River merged Silver Bay into another fund earlier this year, according to a regulatory filing.