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Tudor Jones Turns Away Investors as Hedge-Fund Outflows Persist

Date: Thursday, December 17, 2009
Author: Saijel Kishan and Katherine Burton

In a year when investors pulled an estimated $118 billion from hedge funds through November, Paul Tudor Jones was one of at least six managers who decided it was time to turn away cash.

BVI Global Fund Ltd., Jones’s biggest, stopped taking new investments after bringing in $1.3 billion from March to July, according to a person with knowledge of the matter. Brookside Capital Partners LP and Woodbine Capital Advisors LP also have closed or restricted inflows, said people familiar with the firms, who asked not to be named because the funds are private.

Institutions and wealthy individuals have sought out managers with consistent long-term gains, especially those with funds previously closed to new investors. After firms such as D.E. Shaw & Co. and Polygon Investment Partners LLP froze or limited redemptions, investors also gravitated to funds that avoided such steps or eased restrictions quickly.

“Those managers that honored their agreements and treated their investors as partners during the last 18 months of economic difficulties are being rewarded with additional money this year,” said Debra Pipines, founder of New York-based Asperion Group LLC, which raises capital for hedge funds.

Managers usually stop taking new cash when they are concerned that their funds are getting too big to run effectively. They give up the chance to manage more money and earn more fees, usually 2 percent of assets, to protect their ability to produce investment gains, of which they typically take a 20 percent cut.

Hedge funds are loosely regulated private partnerships that can bet on rising or falling prices of any securities.

Bain Affiliate

Jones, 55, has returned an average of 22 percent a year since he founded Greenwich, Connecticut-based Tudor Investment Corp. in 1986. The firm limited investor withdrawals from the $9.5 billion BVI fund in November 2008. It removed those restrictions three months later, placating some clients. Tudor, which oversees $11.5 billion, has kept smaller funds open.

Another manager that is restricting new cash is Brookside Capital Partners, a $10 billion affiliate of Boston-based private-equity firm Bain Capital LLC. It raised about $1 billion from investors, according to a person familiar with the firm. Brookside, which invests in stocks, has returned about 16 percent this year, after losing 16 percent in 2008.

While investors tended to flock to established firms, one exception was Woodbine, founded in January by Josh Berkowitz and Marcel Kasumovich, former executives at George Soros’s hedge- fund company, along with three other partners.

$2.5 Billion

The New York-based firm, which started with $185 million, cut off new investments last month after assets reached $2.5 billion, according to people familiar with the matter. Woodbine runs a so-called macro fund, which seeks to profit on broad economic trends by trading stocks, bonds, currencies and commodities.

Berkowitz, Woodbine’s chief executive officer, also worked at SAC Capital Advisors LLC and New York-based Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history. During his three years at New York-based Soros Fund Management LLC, he returned an annual average of 34 percent after fees, according to Woodbine’s marketing documents.

The firm has as much as $500 million in commitments made before last month’s closing that it may take in January, a person familiar with the matter said.

“The combination of a strong pedigree, investment process and a favorable strategy goes a long way,” said Richard Tomlinson, founder of London-based Tomlinson Investment Consulting, which advises clients on hedge funds.

Brevan Howard, Clive

Brevan Howard Asset Management LLP, Europe’s largest hedge- fund firm, closed its $2 billion Asia Fund and $2.5 billion Emerging Market Strategies Fund to new investors as of Nov. 1. The London-based company may consider shutting its $21.3 billion Brevan Howard Master Fund Ltd. after clients said it may be too large, people familiar with the matter said earlier this month.

Two other London-based managers -- Clive Capital LLP and Lansdowne Partners LP -- also closed funds this year.

All the firms declined to comment on their decisions to restrict inflows.

The hedge-fund industry, which managed $1.47 trillion as of November, continued to see net withdrawals this year as investments returned an average 18 percent, compared with the 24 percent gain by the Standard & Poor’s 500 Index, according to data compiled by Singapore-based Eurekahedge Pte.

Last year, withdrawals were $198 billion, an all-time high, Eurekahedge data show. Hedge funds lost a record 19 percent in 2008, though that was half the 38 percent decline by the S&P 500, a benchmark for large U.S. stocks.

“Before, managers could rely on their returns to sell themselves,” said Andrea Gentilini, head of strategic consulting at Barclays Capital’s Prime Services unit in New York. “Now investors want more transparency and communication.”

Cohen’s SAC Capital

About 40 percent of funds have yet to return to their peak asset level or high-water mark, data compiled by New York-based Morgan Stanley show. Those funds can’t collect their share of investment gains. Of those funds, about half are 10 percent or more away from breaking even, meaning it could be another year before they can earn performance fees.

SAC Capital, the Stamford, Connecticut-based hedge fund run by Steven Cohen, attracted $1.3 billion for its main fund, while Highbridge Capital Management LLC, a New York-based unit of JPMorgan Chase & Co., received more than $500 million, people familiar with the firms said. Both remain open to new investments.

Smaller Funds

As some well-known managers close to new investments, smaller funds will begin to benefit from inflows, investors said. After outflows in January through April, funds have gained $82 billion, though are still negative for the year, according to Eurekahedge.

“I’m seeing more interest in mid-sized managers,” said Brad Balter, who runs Boston-based Balter Capital Management LLC, which invests in hedge funds. In part, that’s because clients are worried that in some instances funds are growing too large and that returns will suffer, he said.

The influx of new money has come from pensions, foundations and sovereign wealth funds, overtaking university endowments and firms that invest on behalf of wealthy individuals as the biggest hedge-fund investors, Morgan Stanley said in a Nov. 23 report.

Investors are steering clear of some managers that were slow to return money after restricting redemptions last year, or those that left them holding hard-to-sell assets that were segregated into separate funds, known as side-pockets.

“Patience has worn thin among investors over the last 12 months,” said Simon Atiyah, a lawyer at London-based Lovells LLP, whose clients include hedge funds. “Some managers that prevented investors from getting their money back have done terrible long-term damage to their businesses.”

Money Trap

About 60 percent of the money that clients sought to withdraw from funds hadn’t been returned as of Sept. 30, according to data compiled by Credit Suisse Tremont Index LLC, based on its index of 480 hedge funds that oversee about $531 billion. About 55 percent of money put into side-pockets has been released.

Philip Falcone’s Harbinger Capital Partners LLC told clients that it may take 12 months to 24 months to return their money after limiting withdrawals from its largest fund last year. The New York-based firm has given back less than 10 percent of the assets that the firm restricted.

Citadel Investment Group LLC, the $13 billion firm run by Ken Griffin, returned $250 million of the requested $1.5 billion at the end of September after suspending redemptions last year. The Chicago-based company said in October that it plans to return the rest of the money at the end of the year.

Both Harbinger and Citadel have raised about $1 billion in new cash.

‘Acted Like Traitors’

Drake Management LLC, the New York-based firm run by Anthony Faillace and Steve Luttrell, told clients in April 2008 that it was liquidating its biggest hedge fund. As of October 2009, it hadn’t returned all the money.

Hedge-fund investors including Amit Shabi, a Paris-based partner at Bernheim Dreyfus & Co., say they won’t put money in a hedge fund that had imposed limits on client redemptions.

“Many managers acted like traitors,” said Shabi. “They hid the fact that they were invested in illiquid assets.”

To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net