“There is a very simple rule in investment,” said Bruno Crastes with a wry smile. “If you are not able to get poor, you will never get richer. When you don’t want to lose, you will never make money.”
The tanned and silver-haired chief executive of H2O Asset Management articulated his philosophy of risk-taking at an awards ceremony in 2018, where he was collecting a trophy for market-beating returns.
The Frenchman used his acceptance speech to assert that his industry had become “corrupted by all this regulation and all this risk management”, which made investors “behave like software”.
Two years later, Mr Crastes’ approach to investing is under strain. The fate of his €20bn investment firm hangs in the balance. A year of drastic losses, renewed scrutiny around risk controls and regulatory difficulties pushed H2O’s majority shareholder Natixis to cut ties.
Natixis, the French bank that has backed H2O since its inception a decade ago, declared earlier this month that it was looking to sell out of the London-based asset management subsidiary.
It marked a sharp U-turn from a partner that had previously given H2O its unequivocal backing. That endured through a bruising 18 months, which began when the FT revealed that H2O had poured more than €1bn into hard-to-sell bonds linked to the controversial German financier Lars Windhorst.
Now, cut off from the powerful Natixis fund marketing machine that helped H2O grow to more than €30bn in assets at its peak, Mr Crastes faces the biggest test of his more than 30-year career. He will need all of his charisma and self-confidence to retain investors, many of whom once regarded him as the finest European fund manager of his generation.
“He’s super charming, very smart and very arrogant,” according to an investment consultant, who said that the 55-year-old inspired “cult-like” loyalty in some of his clients.
Even among his most ardent supporters, cracks have begun to appear. Several of France’s biggest life insurance firms — once the backbone of H2O’s domestic investor base — have halted new investments.
If Mr Crastes cannot cure the crisis of faith among some of his disciples, it would prove a stunning downfall for a star fund manager once lionised for his moneymaking bets on the direction of bond and currency markets. He declined to be interviewed for this article.
The smartest guys in the room
In his heyday, the UK’s fallen star stockpicker Neil Woodford was known as the “man that made Middle England rich”. Mr Crastes’ Midas touch, in contrast, generated outsized returns for a truly international group of investors. His fan base stretched from retail investors in France and Italy to professional money managers in Switzerland and South Korea.
That broad appeal was no mystery. In the 25 years to the end of 2019, Mr Crastes recorded an astonishing return of close to 2,500 per cent, according to H2O marketing materials. In its first decade, the asset manager recorded annual returns of over 30 per cent on five separate occasions.
The firm’s 2019 accounts show that its discretionary profit shared between H2O’s management team and Natixis topped £400m, the largest ever annual pre-tax payout to its owners. By then Mr Crastes had swapped a home in London’s Kensington for the tax haven of Monaco.
“Bruno was seen as the French Soros,” said one former investor, referring to legendary hedge fund billionaire George Soros.
A trained actuary and mathematics graduate of the University of Lyon, Mr Crastes began his fund management career in 1989 after a brief stint as a proprietary bond trader. He made his name in the early 2000s at the asset management arm of Crédit Agricole, France’s largest retail bank, running a team in London that became known for skilfully navigating swings in bond and currency markets.
One investor recalled how the Frenchman’s desk was at the centre of a large room in Crédit Agricole’s offices near the Bank of England. Trading teams would sit around it, with those in favour often parked closest to him. “It was like a royal court with the king in the centre,” the investor said.
It was here that he earned a reputation for an uncanny ability to bounce back — even from periods of extreme losses.
In 2007, Mr Crastes dismissed the brewing US subprime mortgage crisis as “something that shouldn’t damage the state of the real economy”. This disastrous misjudgement meant that several of his team’s funds at Crédit Agricole were sitting on huge losses. But the following year, they staged a stunning comeback.
With a stellar period of performance behind him, Mr Crastes struck out on his own in 2010, setting up shop with his longtime business partner Vincent Chailley as chief investment officer. The pair convinced Natixis, Crédit Agricole’s rival co-operative lender, to snap up a 50.01 per cent share in the newly minted H2O Asset Management — named after the importance of managing liquidity risks that Mr Crastes learned during the financial crisis, he said at the time.
Natixis operates a multi-boutique asset management model, where subsidiaries are run at arm’s length but can tap into the parent group’s marketing might. Mr Crastes became a fixture at the French bank’s fundraising roadshows, drawing attention with his bold and often contrarian macroeconomic outlooks. When economists from other investment firms spoke, the H2O chief had no qualms about publicly disagreeing with or dismissing their predictions, according to attendees.
“Stop listening to economists; listen to traders!” he implored during one such presentation.
H2O’s team “weren’t in any doubt about their own brilliance”, said another former investor. “They were firmly of the view that they were the smartest guys in the room.”
The talented Mr Windhorst
H2O’s present predicament arose after Mr Crastes strayed far from his usual area of expertise. He invested heavily in the debts of a ragbag assortment of businesses linked to one man: Lars Windhorst, a financier who had previously weathered the collapse of two companies, personal bankruptcy and served a suspended prison sentence.
H2O began dabbling in trading bonds linked to Mr Windhorst just over five years ago, after he met the firm’s co-founder Mr Chailley. In the past few years, Mr Windhorst developed a close relationship with the H2O duo. He and Mr Crastes would sometimes socialise together on the German businessman’s yacht or at private members’ clubs, according to people who also attended.
H2O’s investors and members of Mr Windhorst’s circle have questioned why a firm whose bread and butter was trading government bonds decided to pour billions of euros into thinly capitalised businesses such as La Perla, a lossmaking lingerie maker.
In June 2019 the Financial Times revealed the scale of H2O’s exposure to Mr Windhorst. Initially Mr Crastes appeared unruffled, coolly assuring clients in a video address that the financier was “extremely talented”.
But one week and €8bn of investor withdrawals later, Mr Crastes appeared rattled. In a second video, this time much more emotional, he pledged that — unlike Mr Woodford’s eponymous firm — H2O would “never gate” its investment vehicles.
The bold promise halted the stampede. Loyal investors were once again rewarded for sticking with Mr Crastes through another difficult period: his main fund finished 2019 up by more than a third.
By mid-March of this year, however, Mr Crastes’ flagship fund had halved in value as fears about the coronavirus pandemic roiled markets. His losses were amplified by the high leverage that had previously boosted returns.
Since then, the Frenchman struck a deal with Mr Windhorst where the German was to buy back his illiquid bonds, but so far progress has been “very partial”. In a recent video message to clients, Mr Crastes appeared solemn, and had swapped his suit for a grey jumper. His face was uncharacteristically covered in light stubble.
In a September address to investors, Mr Crastes admitted that investing with Mr Windhorst had “created more problems than it has created performance”, but pledged that he would do everything possible to reward clients’ trust.
“We will fight to our last breath to ensure that these transactions, despite everything, won’t cost the investment portfolio.”
H2O’s bruising 18 months
June 18 2019
Financial Times investigation reveals H2O has bet over €1bn on hard-to-sell bonds linked to the controversial German financier Lars Windhorst
June 19 2019
Morningstar suspends rating on H2O’s Allegro fund because of its holdings of illiquid bonds
June 21 2019
Natixis’s fund management chief reassures investors that H2O’s bonds linked to Mr Windhorst are “quite diversified”
June 28 2019
H2O co-founder Bruno Crastes tells investors “we will never gate” funds. H2O later blames “unfair media” for the €8bn of outflows it suffered
October 25 2019:
H2O’s auditor first flags breaches of open-ended fund rules due to trades in illiquid bonds
March 9 2020
H2O warns clients of “surprisingly large” losses after market turmoil. Mr Crastes’ fund is down 50 per cent by end of the week
late april 2020
Mr Windhorst strikes a deal to buy back illiquid stocks and bonds from H2O
August 28 2020
The French market regulator makes H2O temporarily suspend a series of its funds because of their “significant exposure” to illiquid debt
October 13 2020
H2O reopens the seven retail funds it suspended, but with substantial illiquid assets trapped in side-pockets
November 6 2020
Natixis announces it is seeking to sell its majority stake in H2O, as the French bank looks to sever all ties with its controversial subsidiary that exposed weaknesses in its risk management