The aim: To keep clients from fleeing when the big-name managers leave
An older generation of hedge fund heavyweights, including Julian Robertson and Michael Steinhardt, shut their firms after deciding they no longer wanted to invest money for clients. Some of today's most successful hedgies are surrounding themselves with experienced traders in an effort to keep clients from pulling out after they stop running the funds.
Steven A. Cohen, the 54-year-old founder of SAC Capital Advisors, picked four people from his staff earlier this year to help choose investments for the $2 billion he personally oversees at his firm. Louis Bacon, 53, bolstered the ranks at Moore Capital Management, which he founded in 1989, by recruiting four senior managers in the past 20 months, while Thomas Steyer, 53, designated Andrew Spokes as his likely successor in the event he leaves Farallon Capital Management, which he founded in 1986.
Persuading investors to stay after founders depart will be a challenge, according to Jean Keller, chief executive officer of Geneva-based 3A, which has $2.2 billion invested in hedge funds on behalf of clients. "Most of them are intrinsically linked to their charismatic and entrepreneurial founders," says Keller. "Few hedge funds will succeed in a management transition."
John Horseman, 51, who started Horseman Capital Management in 2000, told clients in November that he would step down this year, leaving fund managers Russell Clark and John-Paul Burke at the helm. Assets in Horseman Global, the London-based firm's biggest fund, fell to $444 million in May from $3.67 billion in October, mainly because of client withdrawals, according to an investor in the fund. Spokesmen for Horseman and the other hedge funds mentioned in this story declined to comment.
Cohen started SAC in 1992 with $25 million and now has $12 billion under management. Naming the four senior traders will allow Cohen to focus on fewer investments, mentor employees, and manage risk, according to an Apr. 28 letter sent to investors. At Moore Capital, among the four senior people Bacon brought in was Greg Coffey, 39, a top-performing emerging-markets trader at hedge fund GLG Partners. His resignation from GLG in late 2008 triggered $2.2 billion in withdrawal requests. Matthew Carpenter, 43, who ran a Citigroup (C) unit that traded U.S. stocks with more than $1 billion of the bank's own money, joined in May as Bacon's head of equity trading. At Farallon, Co-Managing Partner Spokes was named the firm's second so-called key man at the beginning of the year. That means investors have the right to withdraw their money if either manager leaves the firm.
James Simons and David Shaw are examples of big-name hedge fund founders who engineered their own exits without shutting their companies. Simons, the 72-year-old mathematician who began Renaissance Technologies after leaving academia in 1977, retired last year and turned over responsibility for the firm to former Co-Presidents Robert Mercer, 63, and Peter Brown, 55. Shaw, who started D.E. Shaw in 1988, ceded oversight of his firm to a six-person committee in 2002, when client assets were $2.36 billion. The firm has grown to $22 billion. Both firms use computer models to trade, although D.E. Shaw has more than a third of its assets in discretionary investments.
Funds that built their reputations on one person's gifts may find it harder to survive their founders' exits. "It's good that veteran managers are thinking about deepening the benches, but it's not going to be easy," says Guido Bolliger, Paris-based chief investment officer of Olympia Capital Management, which invests $2.7 billion in hedge funds for clients. "While there are a lot of smart people in the hedge fund world, there are not that many geniuses."
The bottom line: While hedge fund managers can build organizations to execute their investment philosophy, it's hard to impart their mystique to others.