Even hedge fund billionaires tighten purse strings

Date: Wednesday, September 19, 2007
Author: Landon Thomas Jr, International Herald Tribune

NEW YORK: On a sun-splashed day this month, Harald Grant, a Sotheby's real estate agent, showed his top listing to a hedge fund client.

The client himself was not touring the jaw-dropping, 11-acre estate, with its two swimming pools, 21 bedrooms and sweeping view of Lake Agawam in Southampton, an exclusive Long Island village outside New York City. Instead, he had sent a representative - a fast-talking young woman with jewels on her fingers and a cellphone pressed to her ear.

"So, asking is 48 million," she said. "Magnificent."

But unsold. There have been several low-ball offers for the estate, dubbed Old Trees, over the past year, mostly from hedge fund executives and other Wall Street barons, Grant said.

A few years ago, as markets boomed and the new hedge fund rich banked paydays that surpassed $1 billion, Old Trees, with its Gatsbyesque allure, would have been snapped up by a brash executive looking to crash the old money gates of Southampton.

But a cautiousness has begun to creep in, brought on by the recent turmoil in the markets, the uproar over the conspicuousness of the 60th birthday party for the equity buyout chief Stephen Schwarzman and the cries from Capitol Hill to increase taxes on hedge funds and private equity billionaires.

In August, hedge funds showed a negative return of 2.5 percent, according to the HRFX index of leading funds compiled by Hedge Fund research. On the surface it does not seem like a lot, given the billions of dollars that hedge funds have accumulated.

Yet, it was the largest monthly reversal since a 3.8 percent decline in April 2000. Taken together with larger percentage downturns experienced by several prominent funds, the number represents a stark, albeit early, reminder that the fast and easy returns of recent years are on the wane.

"People just don't feel euphoric and they don't want to be high profile any more," said Dolly Lenz, a high-end real estate broker at Prudential Elliman, who first saw this growing reserve from her hedge fund clients in July. "They are no longer seeing new highs every month. They may have the same net worth, but it's all about euphoria and confidence. These are trade up purchases, no one really needs them."

It is not just Old Trees. Lenz cited a growing number of luxury properties that cannot find a buyer, most prominently a $70 million penthouse at the Pierre Hotel.

There has been no outright moratorium on big ticket real estate buys: Sanford Weill, the former chief executive of Citigroup was recently reported to have paid $42 million for an apartment at 15 Central Park West.

All the same, industry participants describe an emerging psychological shift, albeit a subtle one, given this early stage of softness in the markets and the overall economy. They say that the shift will become more pronounced if funds continue to show negative returns for the year, which will keep executives from reaping the 20 percent share of the profits that they get when their funds show a positive return. What is more, having finished down one year, it becomes more difficult to recapture that higher ground, especially in a choppy market environment.

So the pressure begins to build, until, "you stop spending," said Andy Kessler, a former hedge fund manager. Why? Fear, mostly.

"You worry about redemptions," Kessler said, "you worry about margin calls, and you worry about working for free. Down 7 percent may be no big deal, but when your investors say 'get me out,' you have to sell everything."

After years of huge returns, sudden losses can come as a shock causing anxiety and distress. Aware of the psychological impact, several funds have retained psychologists to counsel stressed out managers.

"It has been a very challenging period for these people," said Jonathan Katz, a psychologist who works with large hedge funds. "I have seen people shaken, their confidence eroded. They are upset and depressed."

Such anxieties become all the more acute when taken with the boundless spending habits developed at the height of the hedge fund bubble.

The distress can result in what some call a social contagion, as hedge fund executives let their market woes affect their personal lives. Soaring golf scores, loss of appetite and a propensity to wake up in the middle of the night in a cold sweat are some of the symptoms cited by investors.

To be sure, many investors are cold blooded enough not to let the inevitable bout of failure derail them. But others find it hard to keep their egos insulated from the losses they may be suffering.

"Some people are debilitated by it," said Ari Kiev, a psychiatrist who works principally for SAC Capital, the hedge fund founded by Steven Cohen. "You can't sleep, you can't eat, you have catastrophic thoughts about losing your house."

A prominent hedge fund investor, who like all the executives interviewed declined to discuss his fears and anxieties on the record, spoke of a crisis of confidence. "It's an intellectual destabilization," he said. "All of a sudden your funds are down 5 percent and the S&P is down 1 percent. Once you were master of the universe, but the market makes you humble."

In the view of one investor, that trepidation was palpable at a recent board meeting of the Robin Hood Foundation, the prominent charity that includes hedge fund magnates like Cohen, Paul Tudor Jones II of Tudor Investment and Glenn Dubin of Highbridge Capital (Funds run by Jones, Dubin and Cohen were hit hard by the market turmoil in August.)

"It looked like the Nuremberg trials, a lot of white pasty faces," said an investor in attendance.

Like the very worst fears, this has much to do with the unknown. Liquidity is drying up, as is confidence prompting many to steel themselves for the worst.

"I have never seen it like this before," this person said. "It could be a run on the bank, a 2,000 point drop in the market. People are frightened."

Back at Old Trees, Grant highlighted the old world charm of the Georgian mansion, built in 1911 as a summer home for the architect Goodhue Livingston.

"I know he can afford it," he said of his latest prospect, a hedge fund executive whom he would not identify. "It's just a question of whether he decides to buy it."