Paloma Partners Faces Redemption Challenges and Restructures Investments
Introduction: Paloma Partners’ Current Struggles
Paloma Partners, one of the most well-respected and oldest hedge funds in the industry, is currently navigating a challenging period. The firm, founded by Donald Sussman in the 1980s, has faced significant redemption requests totaling $1.2 billion. To address this, Paloma has implemented a strategic plan to liquidate certain assets and repay investors over time. This process has required the firm to restructure its investments and approach to managing its capital. The situation highlights the complexities of managing a multistrategy hedge fund and the difficulties of meeting investor demands during periods of underperformance.
Redemption Requests and the Creation of the Dove Vehicle
Facing $1.2 billion in redemption requests, Paloma Partners informed its investors in November that it would only be able to pay out 30% of the requested amount upfront, with the remaining 70% to be distributed over time as assets are liquidated. To facilitate this process, Paloma created a special-purpose vehicle (SPV) called Dove. This vehicle will hold assets that are harder to sell, allowing the firm to manage the orderly liquidation of these holdings. The SPV will be managed by PwC, and Paloma has opted not to charge fees on the vehicle, ensuring that investors receive as much value as possible from the remaining assets.
One of the key assets being transferred into the Dove vehicle is Paloma’s investment in Aquatic Capital, a quantitative hedge fund founded by Jonathan Graham in 2019. Paloma seeded Aquatic with $500 million, and the firm has since grown to manage $1.5 billion in assets. However, Aquatic has struggled with performance, losing 3.3% between September 2023 and September 2024. This underperformance is particularly notable given that quantitative hedge funds were among the top performers in 2024, with an average gain of 14.2%. Paloma’s $360 million investment in Aquatic is subject to lock-up terms and will be redeemed in tranches over the next few years, adding to the firm’s cash flow challenges.
Leadership Changes and Performance Issues
In addition to the redemption challenges, Paloma Partners has also undergone significant leadership changes. In 2023, the firm brought in Neil Chriss, a hedge fund veteran with experience at Millennium and Hutchin Hill Capital, to lead the firm. However, Chriss’s tenure was short-lived, lasting less than a year. He was replaced by Ravi Singh, who joined Paloma from Credit Suisse’s asset management division and previously held leadership roles at Goldman Sachs. Despite these changes, Paloma has continued to struggle with performance, gaining just 2.5% in 2024 and averaging a modest 3.6% return over the past three years. This underperformance is particularly concerning given that the broader hedge fund industry has seen stronger returns, with a composite hedge fund index returning 6.6% over the same period.
The firm’s assets under management have also declined significantly, dropping from $4 billion when Chriss took over in 2023 to $1.7 billion currently. This decline reflects both the redemption requests and the challenging performance environment. Paloma’s struggles have been further compounded by the need to liquidate assets to meet investor demands, a process that has required the firm to carefully balance short-term cash needs with long-term investment strategies.
Restructuring and Asset Liquidation
As part of its restructuring efforts, Paloma has also moved a portfolio of commercial-mortgage-backed securities (CMBS) valued at $240 million into the Dove vehicle. These securities, which were previously managed by Cannae Portfolio Advisors, will be sold off over time. Cannae, which was spun out of Paloma in 2020, has continued to manage this portfolio as a separate account. The liquidation of these assets will likely result in losses for Paloma, as many commercial real estate-related bonds are currently trading below par value. This situation underscores the broader challenges facing the commercial real estate market, where many investors are struggling to recover their initial investments.
In addition to its work with Dove, Paloma is also focusing on new investment opportunities. The firm is supporting Geoffrey Lauprete, the former chief investment officer of WorldQuant, who is expected to launch his own hedge fund later this year with backing from Paloma. This move reflects Paloma’s continued commitment to identifying and supporting emerging talent in the hedge fund industry, a strategy that has been central to its success over the years.
Future Outlook and New Initiatives
Despite the current challenges, Paloma Partners is taking steps to position itself for future success. The firm has recently hired several new executives to strengthen its leadership team, including Michael DeAddio, the former president and chief operating officer of WorldQuant, and Louis Molinari, who joined as chief marketing officer in early 2025. These hires reflect Paloma’s efforts to revamp its operations and improve its investor relations, both of which are critical to restoring investor confidence and attracting new capital.
Paloma’s decision to create the Dove vehicle and its efforts to liquidate assets in an orderly fashion demonstrate the firm’s commitment to transparency and fairness in addressing the redemption requests. By providing investors with regular updates and ensuring that the liquidation process is managed by a third-party administrator, Paloma is working to maintain its reputation as a trusted and reliable partner in the hedge fund industry. While the road ahead remains uncertain, Paloma’s strategic initiatives and focus on emerging opportunities suggest that the firm is taking proactive steps to navigate its current challenges and position itself for long-term success.
