Institutional Investor's Alpha Magazine - October 2008 - (Page 43)

ment fee generates $100 million in revenues from these fees alone, typically far more than its expenses. Maverick Capital’s Ainslie began making preparations for potential hard times about ten years ago, when he set up a reserve fund, putting aside a small percentage of profits that could be used to pay bonuses to top people during down years. Maverick, whose ﬂagship fund was down about 21 percent through September, is likely to have to tap that fund both this year and next. The handful of ﬁrms that went public in recent years — Och-Ziff Capital Management Group, Fortress Investment Group and GLG Partners — have the flexibility to give out additional stock, stock options and restricted stock to retain talent. Och-Ziff, for example, in 2007 granted its managing directors and all other employees class-A restricted share units, which may accrue dividends. Its managing directors subsequently entered into new agreements providing that a signiﬁcant portion of their bonus compensation would be equity-based. That’s unlikely to help London’s RAB Capital. The ﬁrm, which went public in 2004 and manages $4.2 billion in assets, has been hit hard this year. Its $790 million Special Situations fund was down 48 percent through early September and faced certain redemptions. Like Camulos, RAB persuaded investors to approve a long lockup — in its case, three years — in return for lower fees. (RAB halved its management fee, to 1 percent, and cut its performance fee, to 15 percent from 20 percent. Its shares, like those of Och-Ziff, have fallen more than 80 percent this year; Fortress’s shares have dropped nearly 70 percent.) Hedge fund managers of privately held firms, who in recent years personally made hundreds of millions, or even billions, of dollars, may have to dip into their own pockets to pay their top people. “Everyone talks about this being an institutional business,” says Jane Buchan, CEO of Irvine, California–based fund-of-funds ﬁrm Paciﬁc Alternative Asset Management Co. “It will be interesting how many senior guys step up.” In general, employees at solid, reputable firms who are paid well during good times may be willing to stay around even if they don’t get a bonus this year. Tepper, whose Appaloosa Investment and Palomino funds ($4 billion in combined assets) were each down about 24 percent through September, notes that his people are used to his historically hair-raising, volatile performance. “This is not the ﬁrst time on the roller coaster here,” says Tepper, whose funds were up 8 percent last year and about 25 percent in 2006. Earlier in the decade the funds were up 67 percent, down 25 percent and up nearly 150 percent in a threeyear period. Tepper’s $1.7 billion Thoroughbred Fund, which invests in ﬁxed-income securities and launched in July, was up about 4 percent through September. Meanwhile, many funds that are losing money in 2008 may be willing to renegotiate their fees if they are allowed to earn a reduced performance fee until they hit the high-water mark. They will make the case that they need to charge some sort of incentive fee to retain and attract top talent. Lone Pine’s Mandel ﬁgures to implement his reduced performance fee next year under a plan worked out with investors early in the decade. Under the arrangement, Lone Pine will receive half of its usual 20 percent performance fee until it makes up 150 percent of this year’s losses. That could take a while: The ﬁrm’s ﬂagship Lone Cypress fund was down 26.5 percent through September. Adam Herz, founder of Hunter Advisors, a New York– based executive search ﬁrm that specializes in alternative investments, doesn’t expect to see an enormous amount of job-hopping. “In tough times the devil you know is better than the one you don’t,” he says. He notes that senior people at hedge funds often have some equity in their ﬁrms, which they lose if they leave. One thing is certain: It is getting increasingly difﬁcult to start a hedge fund. According to HFR, 487 funds were launched during the ﬁrst six months of this year, down from 609 during the same period in 2007. Even if this pace were to continue, which is unlikely given the recent market turmoil, it would result in the lowest number of start-ups since 2001, when there were 673 new funds. Heinz, the president of HFR, says the bar has been raised for the amount of capital needed to launch a hedge fund. Five years ago managers could start with as little as $10 million, he notes, but investors now are not likely to put money with a manager who doesn’t have a realistic opportunity to reach at least $100 million in assets in 12 to 18 months. “If you can’t get to that level in a reasonable amount of time, it is difﬁcult to sustain a fund,” explains Heinz. In fact, given the difﬁculty these days of raising money, he says, the market is “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.” — ELIZABETH HILPMAN, CIO, BARLOW PARTNERS more welcoming of what he calls “experienced launches” — funds that have $500 million or more in assets on day one. Ultimately, many of the changes that take place in the hedge fund business will be decided between now and the end of this year. During that period most redemption notices will have been submitted and losing funds will be scrambling simply to break even. After all, despite the huge declines so far this year, performance fees are still determined on December 31 — that’s when funds will know whether or not they have made money. “It will be fun to watch,” says Herz. Maybe for him, but not for most in the hedge fund industry. OCTOBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 43

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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