Saturday, March 26, 2005
Good Article on Why We'll See Manager Flow
Hot Managers Start New Funds
By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
March 22, 2005; Page C1
The boom in new hedge funds shows little sign of abating. And in recent months, many of the people starting new funds have come from other hedge funds.
One recent high-profile defection is Jeff Aronson, who racked up strong returns for the portion of Angelo, Gordon & Co.'s $11 billion fund dedicated to trading the bonds of companies in financial distress. Mr. Aronson earned a reputation for shrewd dealing in the competitive distressed-debt world, taking stakes in the bonds or loans of ailing companies and reaping rewards when the businesses returned to health. Mr. Aronson plans to start a fund focusing on distressed-company debt.
His departure underscores a challenge that hedge funds—loosely regulated investment vehicles that mainly cater to deep-pocketed institutions and wealthy individuals—have in holding on to ambitious money-managers and traders who aren't top partners: Once a fund achieves a certain level of success, how does it retain talent after it has matured beyond the entrepreneurial roots that attracted its star traders in the first place?
Examples of restlessness among hedge-fund traders abound. In recent months, John Lykouretzos left Viking Global Investors to start Hoplite Capital Management, Lee Hobson left Maverick Capital to start Highside Capital and SAC Capital lost a few folks who went to start their own funds.
Of course, departures aren't new to the hedge-fund world. Top hedge-fund traders often bolt to open up their own shops.
While defections from investment banks and mutual funds to set up hedge funds have gained a lot of attention, many new funds are being formed by restless underlings already in the industry. Of the 1,400 hedge funds launched last year, many were founded by eager No. 2s and No. 3s at existing hedge funds.
Given the ease of starting a new fund, there seems no easy answer to retaining star performers. Both sides "feel hemmed in by compensation issues," says David Moody, a lawyer with Pur rington Moody LLP who has a large hedge-fund practice.
Basically, the restless underlings want a bigger share of the profits. Typically, funds charge a management fee of about 2% and take 20% of the gains. For strong performers, the annual take can be significant. Unable to resolve the compensation issues, some hedge funds, like SAC Capital, seek to profit from talented departees by investing in them or setting up funds for them with shared back offices. But money, ego and control combine to discourage founding partners from making a trader, even a star trader, their equal.
Other hedge funds make it difficult for traders to leave by imposing onerous legal conditions. In many cases, departing managers agree not to give potential investors their track record, since that is considered confidential company information. Often, they also are prevented from soliciting investors in the original hedge fund. These measures aren't always effective.
By the standards of the youthful hedge-fund world, Angelo, Gordon is well into middle age. Mr. Aronson, now 46 years old, joined just a few months after its 1988 founding. But it was during a recent run of company failures—such as of WorldCom (now MCI) and cable-TV concern Adelphia—that Mr. Aronson's skill at trading the debt of ailing companies became evident. In the past 18 months alone, he was responsible for producing $3 billion in returns for investors, according to a presentation made by Mr. Aronson at a conference in January.
"He had more cable than anyone," says Bennett Goodman, who until recently was in charge of alternative investments for the Credit Suisse First Boston unit of Credit Suisse AG. "And he cashed out at the absolute peak. He knew it would all come back."
One of Mr. Aronson's best bets in the recent past came with Exide Technologies, a battery maker. Mr. Aronson accumulated a large position in Exide's debt—at one point after the company filed for bankruptcy, he was the single largest holder of its bank debt. He made huge gains when the bankruptcy court came up with a higher-than-anticipated valuation for a reorganized Exide.
Write to Henny Sender at henny.sender@wsj.com1
URL for this article:
http://online.wsj.com/article/0,,SB111144680580085576,00.html
By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
March 22, 2005; Page C1
The boom in new hedge funds shows little sign of abating. And in recent months, many of the people starting new funds have come from other hedge funds.
One recent high-profile defection is Jeff Aronson, who racked up strong returns for the portion of Angelo, Gordon & Co.'s $11 billion fund dedicated to trading the bonds of companies in financial distress. Mr. Aronson earned a reputation for shrewd dealing in the competitive distressed-debt world, taking stakes in the bonds or loans of ailing companies and reaping rewards when the businesses returned to health. Mr. Aronson plans to start a fund focusing on distressed-company debt.
His departure underscores a challenge that hedge funds—loosely regulated investment vehicles that mainly cater to deep-pocketed institutions and wealthy individuals—have in holding on to ambitious money-managers and traders who aren't top partners: Once a fund achieves a certain level of success, how does it retain talent after it has matured beyond the entrepreneurial roots that attracted its star traders in the first place?
Examples of restlessness among hedge-fund traders abound. In recent months, John Lykouretzos left Viking Global Investors to start Hoplite Capital Management, Lee Hobson left Maverick Capital to start Highside Capital and SAC Capital lost a few folks who went to start their own funds.
Of course, departures aren't new to the hedge-fund world. Top hedge-fund traders often bolt to open up their own shops.
While defections from investment banks and mutual funds to set up hedge funds have gained a lot of attention, many new funds are being formed by restless underlings already in the industry. Of the 1,400 hedge funds launched last year, many were founded by eager No. 2s and No. 3s at existing hedge funds.
Given the ease of starting a new fund, there seems no easy answer to retaining star performers. Both sides "feel hemmed in by compensation issues," says David Moody, a lawyer with Pur rington Moody LLP who has a large hedge-fund practice.
Basically, the restless underlings want a bigger share of the profits. Typically, funds charge a management fee of about 2% and take 20% of the gains. For strong performers, the annual take can be significant. Unable to resolve the compensation issues, some hedge funds, like SAC Capital, seek to profit from talented departees by investing in them or setting up funds for them with shared back offices. But money, ego and control combine to discourage founding partners from making a trader, even a star trader, their equal.
Other hedge funds make it difficult for traders to leave by imposing onerous legal conditions. In many cases, departing managers agree not to give potential investors their track record, since that is considered confidential company information. Often, they also are prevented from soliciting investors in the original hedge fund. These measures aren't always effective.
By the standards of the youthful hedge-fund world, Angelo, Gordon is well into middle age. Mr. Aronson, now 46 years old, joined just a few months after its 1988 founding. But it was during a recent run of company failures—such as of WorldCom (now MCI) and cable-TV concern Adelphia—that Mr. Aronson's skill at trading the debt of ailing companies became evident. In the past 18 months alone, he was responsible for producing $3 billion in returns for investors, according to a presentation made by Mr. Aronson at a conference in January.
"He had more cable than anyone," says Bennett Goodman, who until recently was in charge of alternative investments for the Credit Suisse First Boston unit of Credit Suisse AG. "And he cashed out at the absolute peak. He knew it would all come back."
One of Mr. Aronson's best bets in the recent past came with Exide Technologies, a battery maker. Mr. Aronson accumulated a large position in Exide's debt—at one point after the company filed for bankruptcy, he was the single largest holder of its bank debt. He made huge gains when the bankruptcy court came up with a higher-than-anticipated valuation for a reorganized Exide.
Write to Henny Sender at henny.sender@wsj.com1
URL for this article:
http://online.wsj.com/article/0,,SB111144680580085576,00.html
# posted by Tom @ 6:49 AM 
