Asset allocation and avoiding emotional trading
The bonhomie was flowing inside the Great Banking Hall in Toronto as the city’s hedge fund barons arrived to toast their success and themselves.
Among the guests of honour on that Tuesday night last month: Chris Callahan, whose firm was to be celebrated for top-notch performance.
He didn’t show. A little more than a week later, he was dead.
Friends and associates are stunned. And, to the industry’s shock, authorities are in the process of untangling what happened to the young trader and his once-high-flying investment firm.
Officials haven’t disclosed a cause of death — police say it wasn’t suspicious in nature — but Callahan’s sudden passing has led to a widening investigation into what appears to be tens of millions of dollars in losses at his Traynor Ridge Capital Inc.
What’s only now becoming clear is that Callahan’s firm found itself in deep trouble in October.
Even as Traynor Ridge was scheduled to be feted at the annual Canadian Hedge Fund Awards, it was already sinking under the weight of bad bets on cannabis and energy companies, according to people with knowledge of the events.
An assortment of trades left three brokerage firms holding the bag for nearly $100 million in losses, according to the Ontario Securities Commission. Regulators are probing the matter and one market-maker, Virtu Financial Inc., has filed suit to recover its losses, while Callahan’s friends and former colleagues mourn.
Echelon Wealth Partners Inc., a Canadian money manager and capital markets firm with more than $8 billion in assets under management and administration, was one of those caught, having made trades for Traynor that it couldn’t settle.
Echelon — which employed Callahan when he was a fresh university graduate, nearly a decade ago — quickly sold those positions and is no longer exposed, Chief Strategy Officer Dominic Chow said, declining to discuss the details of the trades or say how large they were.
Affluent investors who helped Traynor Ridge grow from a startup to more than $120 million in assets under management have their money stuck in limbo, for now. Securities regulators in Ontario have prohibited trading by the fund, which they say appears to be in “serious financial difficulty.” Even if it were allowed to trade, Callahan’s death has left no one in charge — he was Traynor’s “ultimate designated person,” its only director and shareholder as well as its chief compliance officer, according to regulators.
Topping the list of those who are stuck are customers of Westcourt Capital Corp., a Toronto advisory firm that connects the wealthy with hedge funds, real estate opportunities and other private investments not available to the masses.
Westcourt’s clients, who typically have more than $10 million in assets, represented the majority of the money managed by Callahan’s fund, David Kaufman, who founded Westcourt and is its chair and co-chief executive officer, told Bloomberg News in an email.
Key to Traynor’s fundraising success was William Chyz, a finance executive Callahan hired in 2021 and who was in a position to know Westcourt’s client base — because he’d spent almost nine years there, according to his LinkedIn profile. Chyz did not respond to multiple requests for comment.
But Callahan’s early performance undoubtedly helped, too.
Callahan marketed himself as a trader who was able to exploit “inefficiencies” in public markets. His biography on Traynor’s website reads: “Chris has been involved in hundreds of merger and convertible arbitrage investments along with having significant experience in event-driven special situations.”
Traynor’s flagship TR1 Fund was sold as a market-neutral fund that aimed to make money regardless of the overall direction of equity and bond prices.
“We employ arbitrage strategies for the most part. These are strategies that generate returns off specific defined events occurring as opposed to what the broader markets are doing,” Callahan said during an event put on by a Canadian hedge fund group in May. “What I saw was a strong opportunity to focus a smaller capital base on a variety of deals that actually had a really strong risk-adjusted return. And really what that means is that in our view, the deals are mispriced.”
It seemed to work, at first. Just as the fund opened its doors, COVID-19 was beginning to spread around the globe, causing a wave of panic in markets and a stock market crash in February and March of 2020.
Callahan eked out small gains in both of those months and much larger ones as equity prices recovered and the global economy began the long, halting process of reopening from the initial shutdown. Traynor ended its first year up almost 40 per cent, and followed that with a 24 per cent return in 2021, according to a document prepared by Bank of Montreal’s prime brokerage services desk.
Callahan continued to outperform last year, dodging a historic correction on equities and bonds to post a return of just under one per cent, the document says. But the fund suffered its worst losing streak — three straight down months from May through July — and was down 3.2 per cent for the year as of September, according to the document.
Then came October.
Traynor Ridge was active in small-cap securities, trading convertible bonds in relatively illiquid companies, along with preferred shares and cannabis stocks, according to people with knowledge of the fund’s strategy. It also invested in blank-check companies, the people said.
It’s not clear how things went south so quickly. But at some point in the middle of October, Callahan was making trades that it appears the fund didn’t have the money to back up.
Over a period of weeks, Traynor Ridge made dozens of “failed trades,” according to a lawsuit filed Monday by Virtu, a market-making firm that has been doing business with the fund since its inception.
Before last month, all of the trades Traynor Ridge made through Virtu were allocated to its accounts at CIBC World Markets Inc., one of the hedge fund’s prime brokers. The fund also did business with the prime brokerage divisions of Bank of Montreal and Toronto-Dominion Bank, according to documents seen by Bloomberg. Spokespeople for all three banks declined to comment.
Prime brokers help hedge funds with services such as loans, borrowing securities and cash management. When a fund makes a trade, it’s required to instruct its prime brokers to release money or securities to settle it. In Canada, that happens two business days after the trade, Virtu said.
Virtu contacted CIBC to ask about Callahan’s trades. Officials with the bank said they didn’t have any instructions about them. On Oct. 23, at 6:34 p.m. Toronto time, Virtu emailed Callahan and Gianluca Curcuruto, an analyst at Traynor, telling them it would begin selling the securities the next day and that the fund would be on the hook for any losses, according to court documents.
Brokers began to dump the fund’s positions, which included at least three cannabis companies — Curaleaf Holdings Inc., Cresco Labs Inc. and Cannabist Company Holdings Inc. — and a tiny energy exploration company named Trillion Energy International Inc., said the people, who spoke on condition they not be named because of the sensitivity of the matter.
The shares of all four companies had already tumbled hard amid a broader swoon in the stock market. Now they crashed: Cannabist shares plunged 48 per cent in Toronto over four trading sessions beginning Oct. 24, while Curaleaf and Cresco each dropped more than 20 per cent.
Virtu said in the court filing that it’s lost more than $5 million in resolving Traynor’s failed trades so far and it expects that number to rise.
“Traynor Ridge was a client of Virtu. We are working with our client and regulators to help resolve the misconduct that took place at Traynor,” Andrew Smith, a spokesperson at Virtu, said via email. “Our exposure was not material. We are keeping the principals at Traynor Ridge in our thoughts and prayers at this difficult time for them.”
KPMG, the auditor on the fund, declined to comment.
While the regulators’ investigation may bring more definitive conclusions, the structure of Traynor Ridge — in which Callahan held all of the most critical roles — has caught the eye of corporate governance and finance experts.
When the chief investment officer is also the chief compliance officer, “then you have a profound web of conflicts of interest,” said Jon Aikman, a lawyer who is an adjunct faculty member at Queen’s University — the school where Callahan graduated with an economics degree in 2014 before launching his career in finance.
For his part, Callahan appeared to believe that his firm was sound, having passed the test of regulators. Canadian regulators put hedge funds through a rigorous process before registering them, he said during that industry event in May.
“It’s a high standard,” he said, “and you have to make sure that your structure and your firm is up to that high standard.”
With assistance from David Gillen