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Lessons from the demise of a hedge fund

Romael Karam
Romael Karam
Proposition Sales, FX Solutions, Refinitiv

Following the demise of the Harmonic Capital hedge fund, Romael Karam, the fund’s former CEO, explains what went wrong and the three lessons he learned from the experience.

  1. In 2015, Romael Karam led a management buyout (MBO) of the Harmonic Capital hedge fund. However, two years later in January 2018, the business, managing close to $2bn, was voluntarily closed. Why did this happen?
  2. Romael explains that the hedge fund partners should share a common vision and that their levels of risk tolerance need to be aligned.
  3. Romael also found that the question of building or buying was crucial in establishing an agile business and that in hedge funds, distractions need to be kept to a minimum with people making the optimum use of their time and skills.

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In 2003, I joined the start-up hedge fund Harmonic Capital as a junior execution trader. In 2015, I led five other partners through a management buyout and eventually became CEO.

The MBO was closed at the end of 2015. In the next six months, we raised an additional $300m AUM, recovered from a drawdown, and closed the year positive, locking into performance fees.

In short, by the end of Q1 2016, we had covered what it cost to buy the business. Little did I know it at the time, but it was also at that point our purple patch ended.

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Closing the hedge fund

Fast-forward 18 months, and by June 2017, we had hit the bottom of our longest and biggest drawdown. Twenty-four months after the MBO, we voluntarily closed Harmonic Capital. We shut down a $1.8bn hedge fund because, against a challenging environment, my five partners and I failed to agree and execute against a common vision.

5 key areas for running a successful hedge fund

With this context, and a period of reflection, I’m keen to share the three things I wish I’d done differently.

Lesson 1: Choosing your partners

Accessing risk tolerance and finding a common vision

When buying the business, I felt that in order to maintain investor confidence, we had to keep all six partners on board.

At that level, it takes a lot of time and effort to bring six leaders together, effectively and efficiently, no matter how long you’ve worked together.

While every partner was an extremely intelligent, successful individual, our shortcoming was a failure to agree on a common vision and align our levels of risk tolerance.

It’s important to know how much working capital and retained profits you are prepared to spend during the difficult times. It’s surprising how much this varies; some will commit everything, others not much at all.

And let’s not forget, when you encounter a rough patch, people’s levels of risk tolerance diverge even more. In the absence of dipping in and using retained capital, our options for keeping the business going were narrow.

Unfortunately, I was unable to convince enough partners to continue, either in the current circumstances or as a smaller, more nimble business, and consequently, the divergence of risk tolerance was the biggest contributor to our closure.

My first piece of advice is to agree a time period and an amount of capital you are willing to commit. Include this in your constitutional documents and make it penal to withdraw.

This better ensures that everyone is ready for the challenge.

So many people underestimate the huge emotional investment that comes with building and running a business. I’ve sat with grown adults as they cry at the boardroom table. You don’t need each swing of profit and loss to bring with it a fresh resignation or, even better, later a withdrawal of that same resignation.

You need certainty, agreement, and alignment. Get this in black and white before you set out.

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Lesson 2: To build or to buy?

How could I have built a more agile business?

At Harmonic Capital, we prided ourselves in having built our own technology infrastructure.

From our OMS, EMS, Trading Aggregator, right through to our risk monitoring, operations tools, and even our website. There is a cost to ownership but looking back, it was more than that.

We had unintentionally incentivized our operational staff to create superfluous enhancements to our systems, spending unnecessary time and money on making those a reality.

Once you’ve custom-built a solution, the prospect of replacing an in-house solution with something off-the-shelf can be intimidating. For us, the reality was that we built for scale, but we never achieved that scale. We spent too much time building the technology rather than the business.

If you partner with a firm that can give you what you need today, it can help you get your business to tomorrow. And that means allowing for scale in both directions, for better or worse.

Romael Karam quote

And whether you decide to build or buy, it’s still part of your responsibility to stay in touch with the leaders in the field, learning about new developments and the best technology available.

Building all of our solutions really did contribute to our demise.

We reached the point where the technology we had built was too costly and burdensome to keep the business running. We quickly realised an off-the-shelf solution that performed 90 percent of our requirements would have enabled us to be more nimble, and to focus on the primary purpose of our business: Investing.

Lesson 3: Minimizing distractions

The true value of your time, and making sure the right person does the right job

Part of small business culture is the, ‘I can apply myself to anything’ attitude.

This should absolutely be maintained for relevant projects and tasks, no matter whether your business is small or large. My third and final lesson relates to those smart individuals who fall victim to solving tasks that are a distraction.

You can apply yourself to anything, you’re smart enough and qualified enough. Heck, you’re running your own hedge fund. But ultimately, your investors want to see your business leaders leading the business and your investment team focused on investing. Sounds obvious, right?


I asked one of our founding partners what he would have done differently. He told me he would have spent less time unblocking the toilet.

Another example is when we were wrestling with a tax issue. Despite a plan for our CFO to work on it and get an opinion from external consultants, others in the business wanted to get involved.

Going home and downloading pages from the HMRC website, reading until 3am, and missing time with family and hours of sleep was, to some, a small price to pay.

They had figured out the solution, in ‘their own time’. To me, those hours were everything. Bloodshot eyes the next day and seven coffees was everything. Reduced performance, diminished unnecessarily, is everything!

We still needed the CFO’s opinion, and we still paid for an external opinion.

Removing distractions by delegating, hiring, and outsourcing to experts in their field will save you time and money in the long-term. Your greatest value to the business is in your role, and you need to encourage your employees to believe the same about themselves.

That toilet the founder unblocked, kept getting blocked. Eventually, it needed replacing. On a good year, this was costing us, in his time, roughly £2,000 an hour.

If I had my time again at Harmonic Capital, I would use external consultants more frequently for key projects and regular advice.

Oh, and definitely hire a plumber.

Learning from mistakes

Now that I’ve shared the three mistakes that hurt us at Harmonic Capital, I hope you won’t fall into the same traps, and will enjoy more success than I did!

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