William Cash does six months time on Hedge Row with David Yarrow
William Cash does six months’ time on Hedge Row with David Yarrow
David Yarrow, founder of Clareville Capital, is the hedge fund equivalent of a gutsy long-distance, cross-country runner. The straight-talking 41-year-old Scot – his father ran the Yarrow shipyard in Glasgow for over 30 years as well as becoming chairman of Clydesdale Bank – might not have a First in PPE from Oxford but he certainly has the stamina and personal connections with captains of UK industry to match any of the Mark’s Club, Hermes-tie wearing Oxbridge hedgie brigade.
Clareville is currently celebrating its tenth anniversary – no small achievement in the roller-coaster, high-stress world of London hedge funds where the casualty lists for closures, blow-ups and burn-outs continue to pile up every week.
‘The average lifespan of people doing what I do is two-and-a-half years,’ Yarrow tells me at his slick, glass-and-steel, open-plan Victoria offices, complete with a pub table-football game, tiger-skin rug and fully stocked wet bar upon which proudly stand various trophies, animal bronzes, awards and a framed print of the legendary New York Upper East Side Euro-flash restaurant La Goulue (a favourite of Conrad and Barbara Black). ‘I’ve done ten years and I’m still enjoying it. But I can’t see myself doing thirty’.
If he manages to make it sound as if the last ten years have been akin to serving ‘time’, that’s only because Yarrow’s job involves the unenviable responsibility of looking after the hard-earned cash of many of his closest friends and mentors.
These include various board members of Clareville Capital (such as Carphone Warehouse founder Charles Dunstone, former F1 motor racing team owner Eddie Jordan, and Jonathan Marland, former Treasurer of the Conservative Party), as well as around 50 names on the Sunday Times Rich List.
Whilst running a hedge fund business can often feel like the loneliest job in the world, Yarrow has never had any shortage of friends. Recently invited to become a founding member of the British Olympics Advisory Board, a regular pundit on CNBC Europe and ranked in the Top 25 of London hedge fund managers by The Business – he was educated at Marlborough and Edinburgh University – David is one of the most popular and colourful of managers working today. Much of his $700 million under management is still backed by HNW private client money.
When he was married back in 2000, David had no fewer than sixteen ushers. ‘Every single one of my ushers, I look after their money,’ he says. ‘I look after money for everyone in the world who is close to me. Why? Because they know I’m insecure and it’s better to give money to an insecure person because they are terrified of letting you down.
‘Maybe insecure is the wrong word. I’m determined, and I’m honest, and nothing could be worse to me than letting down my mates. I tend not to lose too many people who work for me. The key part of our job, when you have the tough times, is finding out about people. If I have a reputation in the City for anything, it’s for being a fighter in tough times’.
After spending the last six months talking with Yarrow, through the ups and downs of the year, I can vouch for the fact that he is somebody who doesn’t understand the concept of ‘quitting’.
Unlike many managers, he understands humility. When I first started talking with him, meeting his young team, and attending meetings with him, the markets were still recovering from the plague-like industry losses of May 2006 and the reputation of Clareville, following the launch of its new Shackleton Fund (which lost 22.7 per cent in May 2006), had taken a battering.
‘It’s a never ending game,’ David says now that the storm has passed. ‘Right now, our position at the table has never been firmer. But six months ago it was questionable. At some stage, you become almost removed from the table – like a game of poker. Since the end of the year we have had three chairmen or CEOs of FTSE 350 companies investing with us, which brings the number to fifteen.
‘I don’t know of any other hedge fund that has that number.’ After last May, was he ever afraid the fund might not make it through? ‘No,’ he says. ‘We might not have revealed the full extent of our fear. I don’t think a pilot, when he sees a thunderstorm ahead, will turn to the passengers and say “we might not make it”. You just say “please put your seat-belts back on’’.’
Partly because Yarrow has such a close personal relationship with his clients, almost all stayed loyal, and the good news is that by sweating through the ‘tough times’, his flagship Pegasus funds (long/short UK and European equities) were up an average eighteen per cent net by the end of last year.
How long can he continue to put himself under such pressure to perform? ‘Right now, we’re on a roll,’ Yarrow says. ‘I’ll keep doing it so long as it continues to be fun. And it has to be a fun adventure, because if I am not enjoying it I will go off and become a photographer and travel to far-flung places that I never have time to get to’.
Yarrow’s love of flying and photography nearly turned fatal earlier this year when he was taking pictures over the Sahara in Mauritania in a microlight and his helmet flew off into the propellor. ‘We fell two hundred feet and I thought I was going to die,’ he says. ‘We crash-landed into the desert and I walked away. But it made me re-assess my life. When we were in freefall I certainly wasn’t thinking about central bank interest rates.’
Despite what you read about the glamorous lifestyle of hedge fund managers, jetting off to St Moritz and St Tropez on private planes and trading with their Blackberries from mountain peaks in Verbier, the truth is that the life of a manager such as Yarrow is very different from the media myth.
It is usually the third-party marketers – i.e., the smooth, money-raising guys in Zegna suits, Brioni shoes and de Grisogono watches –who live the flash Jet-Set lifestyle as they schmooze the global, aspiring billionaire set. Somebody like Yarrow, who actually works on the fund coal face, managing the money on a daily basis, has no time for playboy antics, although when he does have a few days off (like last summer when he went to St Tropez and partied with some champagne-swilling, wealthy Russians at Nikki Beach) Yarrow certainly knows how to have fun.
Last year, he also took a few days off to watch the Ryder Cup in Ireland at the K Club, where he dined with some Big-Lunch Tie Irish business figures. ‘People will tell you I’m a networker,’ he says. ‘Which is true. But I think it’s grubby to sell your business all the time. It’s better just to come across as a nice guy with no angle.’
Clareville’s annual Christmas party is a legendary event in the City. Last December, the lavish party was held at the Collection in South Kensington; the 250 guests comprised a Who’s Who of the hedge fund and investment banking industry, with Yarrow paying £5,000 to have the Macdonald brothers from TV show The X-Factor flown down from Scotland to sing on stage.
This was followed by a troop of scantily clad go-go girls dancing on the bar, much to the amusement of the VIP finance crowd. ‘Feedback was that it was just how a financial services party should be,’ says Yarrow. ‘Lots of pretty girls wearing not very much and no corporate message whatsoever.’
With his love of photography, sport, exotic travel, and his old family house by the sea in Devon (‘my thought pad’) where he switches off, plays some poor golf with friends and drinks good wine, Yarrow is unquestionably a maverick.
‘When I go around to his Chelsea flat, I see bags of M&S shopping everywhere. The fridge is full of M&S food as well. ‘I’m a friend of Stuart Rose and we have a big position in the company. Anybody in my firm who buys at Tesco gets fired,’ he says, only half-jokingly.
But then most of the most successful managers are highly driven, focused and ambitious individuals whose contrarian dispositions are partly what makes them smart managers. Yarrow admits he has certainly had his share of Jerry Maguire ‘moments’ in the last year or so, and says that the Tom Cruise film is ‘the Bible’ for anyone setting up their own business. ‘You learn so much more in the tougher times, and we had a very tough time last May,’ he says.
Yarrow admits that some hedge fund managers he knows are ‘fairly dysfunctional’ people leading ‘sub-optimal’ lives. ‘They have a degree of stress and a constant day-to-day degree at that. It’s a journey that never ends, like a hamster-wheel that you can’t get off’.
He began his career working for eight years as an institutional stockbroker in UK equities in London and New York. In 1993, he moved to become Director of Equities at Natwest Securities where he stayed until he founded Clareville Capital in 1996, aged 29.
When he left Natwest, he already had seventeen people on the dealing floor who were prepared to put their money with Yarrow’s new fund. ‘I was very lucky in that I set up when I had no kids and no wife and a bit of money and some money to run.
‘Nowadays, you speak to someone with a wife and kids who is leaving Deutsche Bank after ten years to start a hedge fund, and ask them how many of their colleagues from the trading floor are investing into their fund, and the answer is often “None”. Is that not a slight concern? So at least when I started, I hit the ground running’.
He adds that it is much more difficult to raise money today. ‘It took me four years to go from zero to one hundred million dollars, and two years to go from one hundred to eight hundred million. I think there are too many hedge fund managers today, too many people chasing the same trades.’
The worst aspect of the job is that there is never any real break. ‘My favourite time of the year is Easter, when you have four days off,’ he says. He adds that the majority of hedge fund managers he knows would pay ‘half a million quid’ for the markets to go on strike for six months so they could take a proper holiday. ‘I would break down in tears from happiness at the prospect,’ he adds. ‘Because you could go and be normal for a while, do normal things and not worry.’
Still there’s no need to have too much pity for Yarrow. Unlike many top managers he is certainly not the type to fill his day staring at his Bloomberg screens. He estimates he spends about 30 hours a week in the office, and another 30 outside.
At our final interview in February he was just about to fly up to Celtic Park to watch AC Milan play football. That night he was off to schmooze with UK captains of industry at a London Olympics Committee event. ‘I don’t know where the invitation came from,’ he says, ‘but I am flattered that I was invited.’
Travel not only provides material for his photography but also offers a chance to visit his international clients. ‘Before Christmas I met with two sovereign governments and then I spent the last day of the year in the Australian Outback taking pictures where the Castlemaine beer ads were filmed. It’s very close to the founding mine of BHP [the mining multinational] so it was a mixture of work and pleasure.’
Despite being very well paid, Yarrow is unsettled by aspects of the monied lives that so many hedge fund managers live today in London. ‘Like the birthday parties where the kids get two-grand’s worth of presents,’ he says. ‘I find the whole thing shocking, because at the next birthday the next kid has to get two-and-a-half grand’s worth of presents. To go from the intensity of your work to a kids party at four o’clock… I find that sort of thing detached from reality.’
Yarrow often walks to and from work to give himself some time to think. He likes to play the pub game ‘spoof’ with his young daughter who regularly beats him. ‘Sometimes you have to loosen yourself for a while, to remove the monster from within you, and go and be normal again. The best managers are the ones who can remove that monster when they have to. Because too many of us work in a world where we think we’re Masters of the Universe. I try to solve problems and act as rationally as possible.’
Part of this old-fashioned grounding in values comes from his father. ‘My father ran a shipbuilding business for many years in Glasgow and employed three thousand people, so I think I’ve achieved little that is tangible by comparison. I think our return on capital might be slightly higher than Yarrows though!’
Was he ever competitive with his father? Was it his father who instilled in him his drive for success? ‘Whilst my father is from a generation that finds the creation of wealth rather vulgar, he has always supported my drive. My Dad set wonderful standards in client and work-force skills, but he also dissaproved of nepotism. I always knew I was going to have to make my own way in the world.’
How do you deal with redemptions? Do you get upset? ‘I do, I take it out on myself. I’m tough. But, equally, I think it’s the nature of the game. If we don’t perform, we have no role to play; it doesn’t matter if we have nice offices, whether we have pretty pictures in the brochure, unless we make money for people. Make no mistake, this is a job where, if you do not do the job, then you have no role to play.
‘The vast majority of funds don’t make it. I do pride myself on getting to ten years of the main Pegasus fund, because how many hedge funds last for ten years? Not many. And we’ve compounded at sixteen per cent, which I think is OK, because the market’s been shaky. Over the last ten years, markets have not been a lot of fun. Over the next ten, I think they might be more fun; which might be one reason to continue to do it.’
It wasn’t only the markets that were low on fun. One of the casualties of Yarrow’s extreme focus on work has been his six-year marriage. One of his first dates with his future wife was at a Miami bar at noon (after the UK market had closed, at 11.30am local time) following a bad drawdown on the markets.
‘I’d had a shocking three days, because I wasn’t in control of my risk. I went to the bar and had a beer, and my hand was shaking and my future wife said: “I don’t know what you do, but you’re obviously not very good at it!” She was bang on. But it’s very rare now that I lose sleep over anything, because the key thing is to have a balanced portfolio where your risk is controlled.’
Like many brilliant and driven managers who live and breathe their funds’ market positions 24/7, the pressure of dividing time between work and family finally became too much and his marriage recently ended. ‘Hopefully we’ll remain friends,’ he says. ‘My marriage has been a big failure in my life.’
Yarrow adds that he was lucky in that his ex-wife was not of the hedgie, WAG breed who can be worse than footballer’s wives. ‘Many are materialistic and do nothing but spend,’ Yarrow says. ‘They don’t understand the pressure, and many hedge fund couples lead separate lives. At the end of the day, I don’t do what I do just for money. I do it because I have a responsibility to my three hundred and sixty investors. There’s no room for self-pity.’
Yarrow’s life and career has come a long way since the 1990s when he was working for NatWest. During those early days, he learnt about trading equities through hard and painful experience. ‘I had some very, very tough times when I started, and you never forget them,’ he says. ‘I think the thing about our game is that when you’re not good at what you do, you’ve got to be at the coal face getting better. With hedge fund managers, if your numbers are shit, you shouldn’t be in Annabel’s.’
Even when the Clareville numbers aren’t as good as he would like, Yarrow’s HNW clients tend to stick with him in the long term because they trust him, like him and believe in his ability to pull things around.
He was invited once by a big client to see a Celtic v. Manchester United game, and when he arrived in the box the first thing the client said was: ‘God knows why I’ve invited you, Yarrow. You’re a Protestant and your numbers stink!’ ‘He was joking, of course, but ultimately to get these mega-wealthy guys listening you’ve got to make them money,’ he reflects.
‘I can’t bluff. Why do people do business with me? It’s not because I’ve got a nice house. It’s nothing beyond a safe pair of hands that will make money for them. Rather a grubby thing, really.’
When things are going well, and the market is rising, Yarrow’s biggest fear is the fear of not participating enough; of not making enough money for his fund and his clients. ‘It’s a huge emotional fear,’ he admits.
‘And when the market has momentum and a trend behind it, if you don’t stay with it you will be in trouble with it. It’s like a calm sea on a beautiful day, no sharks or jellyfish and everyone is having a fantastic time in the sea; so if you’re the only one left on the beach refusing to go in because of sharks, you feel more ridiculous the longer you stay out.
‘But unfortunately, that was the reason why everyone was in the sea last May (when the markets crashed). We still don’t know if there was a shark or not, but the point is it doesn’t matter whether it’s there or not. The fact is how you react to the cry of “Shark!”’
This was a theme that Yarrow repeated in his monthly newsletter to clients following last May’s losses.I was at his offices during some of the worst trading days that followed this set-back and I was impressed by how coolly and calmly Yarrow reacted to the savage and unexpected turn in the markets. Instead of panicking or getting emotional, David just went outside and had a cigarette. Then he came back to his desk and focused on getting back into the trading ‘zone’.
Yarrow not only writes the summary introduction to each monthly report himself, but he also always illustrates each new issue with his own photography – ranging from scenes in the Australian Outback to a shot taken on an Antartic glacier. Yarrow is an accomplished amateur photographer and has just finished a book of his travel photographs which will be published later this year.
A show is being planned for the book, hopefully at Tim Jeffries’ Hamilton Gallery. Clareville’s offices are decorated mainly with photographs of museum-size, framed pictures he has taken on his travels, although certain decorative touches would probably raise a few eyebrows at an American bank.
In particular, there is a photo of a semi-naked, Norwegian, seventeen-year-old beauty posing under Hanging Rock (‘my Picnic at Hanging Rock moment,’ David jokes) that has been taken down from the wall of his office and hidden in a corner. ‘Girls sometimes get offended,’ he says.
Clareville certainly looks like a fun place to work and Yarrow has built up a highly talented and well motivated team of 22 employees around him, led by Matt Downer, aged 36, formerly of Deutsche Bank, who is a partner and head of trading for Clareville; and Paul Dyson, formerly of UBS, another senior fund manager at the firm. Last year, Clareville had revenues of over $40 million and this year is looking just as strong.
With those sort of returns for 2007, it is certainly no time for Yarrow to stop running. ‘One day I will cash my chips in and become a photographer, but for now I have a job to do and I employ people,’ he says. ‘The one thing I do know is that, when I quit, I’ll really quit. I’ll have a few investments, but you can’t do this job in a half-arsed way. I’ll write to investors and say, “I wish you all the best and you will get your money back at the end of the year”. But I won’t do that for a very long time.’