A deep and surprising drop in Tiffany shares this week came amid chatter that it was sparked by a trader’s recent departure at billionaire Ken Griffin’s hedge fund Citadel Investments, sources told The Post.
After recently losing a trader at one of its merger arbitrage desks, Citadel’s Surveyor Capital fund liquidated a position in the New York-based jeweler, which agreed in November to be acquired for $16.2 billion by French luxury giant LVMH, according to sources close to the fund.
Last week, Tiffany shares briefly dipped below $110 — a 19-percent discount to its acquisition price of $135 a share. The steep selloff had fueled speculation that the LVMH-Tiffany deal might be in trouble amid the coronavirus crisis.
Indeed, LVMH was forced to issue a statement last week saying it was interested in buying Tiffany shares on the open market before its deal closed. In response, Tiffany shares recovered to close at $125.44 on Friday.
Behind the scenes, meanwhile, Citadel’s Surveyor Fund had recently lost a portfolio manager its merger arbitrage desk, Maulin Shah, insiders said. Sources said rumors were rampant that Citadel had been liquidating its Tiffany position because of Shah’s departure, possibly helping spark the recent, precipitous drop in the jeweler’s shares.
A source close to the situation, however, told The Post that Citadel had sold the Tiffany shares managed by Shah ahead of this week’s sharp drop, and that the position wasn’t big enough to cause such a sharp decline.
Tiffany’s stock drop “occurred while the broader stock market plummeted, and it is not surprising given the current market and social/travel restrictions that a seller of luxury jewelry items would see such a drop,” the source added.
A Citadel spokeswoman declined to comment on Shah’s departure. Shah couldn’t be reached for comment, but arbitrage traders say it’s standard practice for a fund to liquidate positions left by a departing trader who was most knowledgeable about the thinking behind them.
“When the head is gone the trades need to be gone too,” one such trader told The Post. “You don’t want their positions.”
The speculation comes as hedge funds eye their merger arbitrage desks — which take major positions in the stocks of merging companies, profiting from relatively small upticks when the deals are completed — as cash piles ripe for harvesting in case of a liquidity crunch, sources said.
With the coronavirus crushing stocks, hedge funds are eager to keep a healthy balance sheet to protect against redemptions and margin calls, sources said. Indeed, insiders say the crisis is beginning to reveal how many funds have piled into what industry insiders call “risk parity,” a strategy that seeks to lower risk through diversification while also pumping returns through leverage, or borrowed money.
This strategy has become a financial minefield as virtually every asset class has imploded and the credit market has seized up, forcing many hedge funds to make a mad dash for cash, experts say.
“The market action surrounding risk parity funds clearly shows that these guys were jammed into basically the same trades which have been unwound not by the portfolio managers that built these trades, but by the firms’ risk managers,” said Thomas Thornton of Hedge Fund Telemetry. “A lot of chatter out there that these portfolio managers have been shut down.”
It’s not just Tiffany shares that got hammered last week. Tech Data — an electronics distributor that was sold in November for $145 a share to buyout firm Apollo Global Management — saw its shares plunge below $100 last week. On Friday, they closed at $114.
[This story has been updated to reflect that a recent drop in Tiffany’s shares came amid rumors that it was sparked by the departure of a Citadel trader. An earlier version of this story had stated that the drop was partly driven by the trader’s departure. Also, Maulin Shah was a portfolio manager, not the head of a merger arbitrage desk at Citadel, and he did not make a bad bet on the Sprint/T-Mobile merger, according to a source close to the situation.]
