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Hedge funds: Know when to walk away

Date: Friday, August 14, 2009
Author: Rob Cox, breakingviews.com

Handing back money when your heart's not in the job, may not be ideal, but at least it's honest.

When is the right time to quit the hedge fund rat race? For Tim Barakett at Atticus Capital it's at the age of 44 with $1 billion in the bank - but near the bottom of his game.

That's not ideal, but at least it's honest to hand back money when your heart's not in the job. Others make the mistake of hanging on too long and being forced to give up.

Barakett told investors this week he's dissolving the $3 billion flagship Atticus Global fund he started with a few million 15 years ago. Over the past year the fund fell 13%. While better than the S&P 500's 20% slide, it marks a low point for Barakett's strategy of taking concentrated bets on companies he considers cheap.

Over the past half-decade, when the bulk of investors would have committed their funds to Atticus, Barakett chalked up annual returns of 9% while the market was flat. So while Barakett can claim a relatively robust long-term track record, the former Harvard hockey champ isn't leaving with a trophy cup above his head for lifting investors out of the past year's mess or avoiding the crisis completely.

Contrast that with, say, Andrew Lahde, who started winding down his smaller, eponymous fund last September as the markets began their six-month meltdown, having made an 870% return in the previous year.

Of course others exiting the business have fared far worse than Barakett. A handful of stalwarts of the industry recently hoisted the white flag over their funds: John Meriwether, Arthur Samberg and James Pallotta to name a few.

But in most of these cases, the decision to give up came too late. Investors had already sustained stinging losses -- in the case of Meriwether nearly 50%. And trying to salvage a reputation for savvy investing looked too challenging a prospect. Pallotta needed to gain nearly 40% to begin making any performance fees.

At least Barakett appears to have recognized there's no use continuing in a job to which he's not fully committed, and it's better to make that decision while you've still got the respect of most of your investors. That makes the inevitable comeback that much easier to pull off.