Institutional Investor's Alpha Magazine - October 2008 - (Page 42)

Industry Under Siege Meanwhile, longtime manager Daniel Benton said he would close Andor Capital Management, the $2 billion hedge fund ﬁrm that split off from Arthur Samberg’s Pequot Capital Management in 2001. Earlier, in one of this year’s most ignominious closings, Citigroup announced it would shut down Old Lane Partners, which had been cofounded by Vikram Pandit, now Citi’s CEO, and bought by the bank in April 2007 for $800 million. This year is likely to be a record one for hedge fund closings. During the ﬁrst six months of 2008, HFR reported 350 hedge fund liquidations, an increase of 15 percent over the ﬁrst half of last year. Given that most of the devastation from the escalating crisis didn’t hit hedge funds until the third quarter, the ﬁnal number could be as high as 1,000 — or 10 percent of the industry’s 10,000 funds, according to HFR president Kenneth Heinz. That would easily surpass the record 850 hedge fund liquidations in 2005. The funds that survive despite suffering big losses have a long slog ahead of them. They must ﬁrst earn back what they lost — to get to their high-water marks — before they can start collecting performance fees again. Many funds could be living exclusively off management fees until at ment, whose ﬂagship macro fund was up nearly 15 percent through September — are especially well positioned. London-based Brevan Howard is one of several ﬁrms that have been aggressively hunting for new talent, hiring portfolio managers, traders and other executives from banks, hedge funds and money management businesses. But big ﬁrms that have suffered sizable losses are also stafﬁng up opportunistically. Citadel, whose two main funds were down more than 20 percent through September, recently hired four senior people to boost the $20 billion ﬁrm’s mortgage and securitized-products business. “This is not all bad,” says Elizabeth Hilpman, a partner and chief investment ofﬁcer at Barlow Partners, a New York–based ﬁrm that advises hedge fund investors. “A lot of stuff needs to be cleaned up. In the hedge fund business, it is survival of the ﬁttest. Even good funds go out of business.” In this quickly evolving world, small ﬁrms are at a disadvantage. Unlike bigger rivals, whose management fees and retained earnings help offset the prospect of life without performance fees, many are struggling to pay the bills. Even small ﬁrms that have managed to make money this year may have to look for merger partners to gain the necessary heft to compete. Financing in general has become much more difﬁcult to get in the wake of the credit crisis (see “Good-Bye, Easy Money,” page 44). Just how much money will exit the hedge fund industry won’t be clear until later this year. Some managers don’t require redemption notiﬁcation until mid-November. Others don’t have lockups but levy severe penalties on investors who redeem early. William von Mueffling’s Cantillon Capital Management, with $9 billion in assets, neither has a lockup nor imposes a penalty, allowing investors to pull out anytime, provided they give one month’s notice. Still, according to von Muefﬂing, the ﬁrm has had few redemptions this year. “If your strategy is very liquid and you are conﬁdent in your ability to generate returns, there is no reason to have a lockup,” says von Muefﬂing. His two biggest funds, Cantillon World and Cantillon Europe, were down 8 percent and 11 percent, respectively, this year through September. The run on hedge funds could be less than some are predicting if markets stabilize. A sizable percentage of the September redemption notices have come from funds of hedge funds to meet potential redemptions from their own investors. Typically referred to as protection redemptions, these requests could be withdrawn or canceled by fund-of-funds managers if their investors, who generally need to give only 30 days’ notice, decide not to redeem. Where will all the money go? Don’t bet on it being plowed back into hedge funds anytime soon, says David Tepper, founder of $5.7 billion Appaloosa Management in Chatham, New Jersey. He thinks most investors will seek the safety of Treasuries: “People are scared to death.” Firms down signiﬁcantly this year that have high-water marks will need to ﬁnd creative or unconventional methods to retain top talent. Some will distribute a larger than usual piece of their management fees. A hedge fund with $5 billion under management and a 2 percent manage- “If you are working at a firm well below its highwater mark, you can expect to work for a year or two with disappointing compensation.” — BYRON WIEN, CHIEF STRATEGIST, PEQUOT CAPITAL MANAGEMENT least 2010, which will make it difﬁcult for them to retain top talent, as the bulk of analysts’ and portfolio managers’ compensation comes from year-end bonuses built around the industry’s rich 20 to 25 percent performance fees. “If you are working at a ﬁrm well below its high-water mark, you can expect to work for a year or two with disappointing compensation,” warns Byron Wien, chief investment strategist for Westport, Connecticut–based Pequot. “We will deﬁnitely see a shift of top talent if a fund is underwater by 20 percent or more,” adds Jonathan Kanterman, a managing director at New York–based Stillwater Capital Partners, which has $900 million under management in single-manager funds and funds of hedge funds specializing in asset-based lending. The inevitable shake-up — and shakeout — will create opportunities for hedge fund ﬁrms with large asset bases that have managed to avoid the carnage. Those in the black — like $26 billion Brevan Howard Asset Manage42 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2008

Institutional Investor's Alpha Magazine - October 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Process of Evolution The Good Guys: Israel's Champion Interview: Fast Lessons for Hard Times Cover Story: Industry Under Siege The New Hedge Fund Economics Good-Bye, Easy Money Caging the Shorts Strategies: Bottom Fishing Profile: Cult of Personalities Research Center: Alpha Awards: Eye of the Storm Alpha Bytes: Funneling the Chatter Unhedged: Commentary: Attention, Hedge Fund Shoppers

Institutional Investor's Alpha Magazine - October 2008

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