The Hedge Fund Exodus

Date: Wednesday, August 25, 2010
Author: Max Abelson, ,The New York Observer

Earlier this month, a story splashed across the front page of the Post warned that representatives from more than a dozen New York City hedge funds had "crossed the border" to meet with Connecticut Governor Jodi Rell. Over fried calamari, the governor reportedly pitched the executives on moving their businesses to her state: There had been talk for months that the city's hedge fund managers might flee because of cruel new taxes, just like the threats about a mass exodus from London to Switzerland, or from Europe to Hong Kong.

Instead, the real threat to the hedge fund world has turned out to be the ineffable, sweet, cozy lure of hammocks.

This month, Richard Grubman, the top Boston hedge fund manager, who was in the papers earlier this year for allegedly throwing his keys in the face of a valet who had asked him to move his BMW X5 at the Ritz in Boston, announced his retirement from the $10 billion Highfields Capital. Then, last week, the 57-year-old Soros protégé Stanley Druckenmiller announced he was shutting his hedge fund, writing a widely circulated letter that described the stress of recent struggles. He reportedly had his retirement epiphany after turning down a nice October golf invitation from another billionaire.

Two days later, Paolo Pellegrini, who only recently left John Paulson to start his own fund, announced that he'd be returning money to investors after a terrible year. "I've concluded that substantial additional work," he said, "is required to position the Fund to profit consistently." Earlier in the summer, Steven A. Cohen, No. 113 on this year's Forbes billionaires list, and often associated with the Damien Hirst formaldehyde-suspended shark he owns, told Vanity Fair he was about ready to step down from full-time trading.

Is this wave of hedge fund retirement what happens after too many chaotic years in a row, or is it a symptom of the changing times on Wall Street, where there are slightly new rules getting in the way? Or, like Julian Robertson's iconic announcement just as the dot-com bubble was bursting, is it a sign of dark days ahead?

"THERE ARE A couple of ways people quit," a person who manages a multibillion-dollar hedge fund said this week. "One is, they make a ton of money, they have a crappy year, now investors want to meet with them to find out why they're not making money, and they're like, 'I don't want to meet with these assholes.'"

That was not the case with Mr. Druckenmiller, according to his letter. In his first two paragraphs, he used the words "friends" and "pleasure" twice each, and then "love," "wonderful," "gratitude," "trust," "joy," "satisfaction," "luckier," "marveled," "reward," "rewarded" and "rewarding."

"Then," said the hedge fund manager, who would only speak anonymously, "there's the guy who's doing great, but says, 'I don't love what I do anymore because I've gotten bigger.'" In fact, Mr. Druckenmiller wrote that he left George Soros' fund a decade ago because of how hard it was to perform well with gigantic sums of capital, and he said that again became an issue. Its stress took a toll. "I have had to recognize that competing in the markets over such a long time frame imposes heavy personal costs," he said. "While the joy of winning for clients is immense, for me the disappointment of each interim drawdown over the years has taken a cumulative toll that I cannot continue to sustain."

"Then there's the guy," the hedge fund manager continued, "who says he's quitting, when, in fact, his investors are putting him out of business." He paused to search for the phrase. "If they're trying to drive you out of town, get in front of the parade."

There are more obvious reasons, too. In May, Arthur Samberg's Pequot Capital Management, once one of the biggest hedge funds in the world, closed because of an insider trading investigation. Funds are shuttered after good times, too: "Nearly everyone will be forgotten," Andrew Lahde wrote in October 2008, after a year of 870 percent returns. "Give up on leaving your mark. Throw the BlackBerry away and enjoy life."

Just like that autumn, this summer has been a season of nerves. Everyone, even the billionaires, seems vulnerable. "Money manager Philip Falcone is effectively mortgaging a significant chunk of his multibillion-dollar hedge funds' assets in an effort to raise financing for an ambitious plan to construct a high-speed wireless network," Reuters said earlier this month. On the other end of the spectrum, even old-time stock pickers are leaving. This week, 73-year-old Lou Simpson, who's managed the $4 billion investment portfolio at Warren Buffett's Geico for years, announced his retirement.

Back in 2000, one of the ur-hedge fund managers, Paul Tudor Jones, was asked about retirement. "I have a son that just turned 3, and I would unequivocally continue to trade until he went to college," he said. "At that point, I think I'd probably be airborne hunting and fishing all over the globe every day in my life." One assumes his son should be headed to school by 2015. Does his father only have a few years of work left? "He's not going anywhere," a spokesperson said. "No intentions to stop."

mabelson@observer.com