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Hedge Fund Rescued Theme Park as Co-Founder Built Property Dream

Nishant Kumar and Sridhar Natarajan
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Hedge Fund Rescued Theme Park as Co-Founder Built Property Dream

(Bloomberg) -- It hosted World War II troops and the Rolling Stones. Retro rides and a roller disco. There was even a public campaign to turn it into a heritage site.

But it’s the dealings of a veteran hedge fund manager that’s drawing new attention to Britain’s oldest surviving amusement park.

Nick Niell, the man behind Arrowgrass Capital Partners, was snapping up properties worth millions of pounds around the Dreamland resort in the seaside town of Margate just as his hedge fund was pouring client money into an effort to revitalize the attraction.

As the firm run by former Deutsche Bank AG traders now plans to shutter, its amusement park investment and the CIO’s personal buying spree is raising eyebrows in the industry. A lawsuit brought last month by a former executive publicly flagged the dealings. It calls them “an obvious conflict of interest” because Niell’s personal investments in properties stood to benefit from Arrowgrass’s work with the nearby park.

The $3.2 billion hedge fund’s plan to unwind holdings is offering another window into an industry long criticized for its opacity, relatively high fees and poor performance compared with lower-cost funds tracking stock indexes. Institutional investors including pension funds, endowments and wealthy families have revolted in recent years, yanking their cash from hedge funds at an accelerating pace.

London-based Arrowgrass has privately classified the park as one of its harder-to-sell holdings -- so called level 3 assets, according to people familiar with the matter, who asked not to be identified because the information is private.

Dreamland Project

Niell bought homes, stores and a hotel in three separate locations around the Dreamland resort in the town of Margate, in the south east of England, between April 2016 and December 2017, according to HM Land Registry records. By the end of 2017, Arrowgrass had taken control of the site’s operating company, which was previously run by a former Arrowgrass portfolio manager.

A representative for Arrowgrass declined to comment on behalf of the firm and Niell.

Niell’s personal investments around the seaside resort about 75 miles from London had been previously questioned internally, according to a person with knowledge of the matter, who asked not to be identified because the discussions were private. It was even raised with the firm’s compliance department, said the person, who didn’t say what, if any, actions were taken.

“Even if they made any disclosures, that doesn’t ameliorate the ethical problem,” said Michael Rosen, chief investment officer for Angeles Investment Advisors, which manages money for endowments and foundations. “And the size of the investment relative to the hedge fund size doesn’t matter.”

‘Outside the Norm’

Last month, one of Arrowgrass’s former money managers, Michael Edwards, mentioned the Dreamland investment in a lawsuit seeking $7.2 million in compensation. He has accused the firm of trying to persuade him to delay leaving to avoid investor redemptions, according to court filings.

“The project was well outside the norm of Arrowgrass investment strategies,” Edwards, who served as global head of event-driven strategy and later oversaw the U.S. business of Arrowgrass, said in the suit. “It was, however, a project of substantial personal interest to Niell.”

Arrowgrass, which has invested in distressed debt, has countersued, accusing Edwards of breaching his agreement with the firm. It’s seeking to recoup money it says he shouldn’t have been paid. It didn’t address the conflict-of-interest allegations raised by Edwards.

Edwards declined to comment.

Margate is a seaside town that gained popularity with holidaymakers from the 18th century until the 1970s when it started to lose out to cheap package holidays abroad. A plan to close Dreamland earlier this century sparked a campaign by locals and eventually led to 18 million pounds ($22.2 million) of public funding, allowing it to reopen in June 2015.

Since Niell started buying properties, real estate prices in the town have climbed about 14%, outperforming a 9.2% rise in prices in the wider county of Kent, according to data compiled by Zoopla, a property-search website.

Niell made one of his earliest property purchases in April 2016 in Hawley Square for 391,000 pounds, according to data compiled by the Land Registry. Most of the purchases came the following year, along with his most expensive acquisition at 1.98 million pounds in October 2017.

In total, he bought properties with 15 different title deeds.

Sands Heritage

During that time, the park’s operator, Sands Heritage Ltd., a firm set up by former Arrowgrass portfolio manager Nick Conington, went into administration, a form of insolvency.

Arrowgrass started investing in Sands Heritage from 2016 and it eventually came out of administration in November 2017, according to a report by administrator Duff & Phelps. The operator obtained more than 35 million pounds in new investment, with Arrowgrass as its only shareholder.

Most of Niell’s personal purchases were made via three companies: Brede Properties Ltd., Brede Estates Ltd. and Brede Hotels Ltd. Niell owns all three and Conington is a director at them all, according to data compiled by the U.K.’s Companies House.

Conington didn’t respond to a request for comment via his LinkedIn account.

Blaming Central Banks

Arrowgrass, which Niell started with Henry Kenner and other former Deutsche Bank traders in 2008, has seen its assets slump by half from a peak of $6.4 billion in 2017. The firm has received redemption requests to withdraw another billion.

The firm blamed central bank policies for its demise, saying that a new round of quantitative easing was disrupting the business cycle and therefore its strategies, according to a letter to investors this month.

The Arrowgrass Master Fund was down 2.5% through Aug. 23 this year after low-single-digit returns since 2016, according to a separate investor update seen by Bloomberg. By contrast, hedge funds overall were up about 6.4% in the first eight months, according to Eurekahedge.

Arrowgrass plans to return about 75% of clients’ cash by December, according to a letter to investors this month seen by Bloomberg. The firm classifies about 7% of its assets under management as so-called level 3 assets, which are deemed as less liquid, according to Arrowgrass’s countersuit against Edwards.

--With assistance from Jeremy Diamond, Jack Sidders and James Hertling.

To contact the reporters on this story: Nishant Kumar in London at nkumar173@bloomberg.net;Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, David Scheer

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