Farallon receives mixed messages

New fund draws $750 million as other investors pull assets

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Staying: Thomas Steyer founded Farallon, one of the industry’s longest-running hedge funds, in 1986.

One of the hedge fund industry's veteran managers, Farallon Capital Management LLC, received a rash of redemption requests from institutional investors for its flagship multistrategy approach this fall even as it raised $750 million for a new Asia-focused special situations fund.

At least $223 million is poised to flow out of the multistrategy funds after the most recent redemption period, which ended in November, because institutional investors are nervous about staff turnover and the yearlong lockup period.

The bad news-good news scenario is not particularly unusual for a number of large, long-established multistrategy hedge funds, said investment consulting sources who spoke on condition of anonymity about San Francisco-based Farallon.

”Some firms don't age well,” said one consultant, whose clients are not invested in Farallon funds. “We wouldn't recommend them because the lockup is too long and a lot can happen in a year,” the consultant said.

Both Thomas F. Steyer, Farallon's co-managing partner and co-senior managing member, and Mary Beth Grover, the firm's official spokeswoman, declined to comment.

Because executives declined to comment, no information was available on the new Asia special situations fund. External sources contacted did not have knowledge of the fund. Farallon has not added details about the fund to its ADV filing with the U.S. Securities and Exchange Commission, which was last updated Sept. 9.

Farallon imposes a one-year lockup on assets invested in its main multistrategy hedge funds — Farallon Capital Partners and Farallon Capital Institutional Partners — and allows its largely institutional client base to redeem only once per year.

The assets of the two flagship strategies account for $12.7 billion, or 60%, of the firm's $21 billion of assets under management, according to Farallon's ADV filing.

Because assets aren't returned to investors until the end of January, that 13-month delay is just too long for some investors, including the $650 million Nevada System of Higher Education, Reno.

$45 million redemption

The system will redeem a $45 million investment made by the system's $450 million operating pool because of liquidity concerns, said Ruby Sharman, banking and investor director.

She said the system's “board is uncomfortable investing in illiquid assets with funds from the operating pool,” because it is the source of spending capital to colleges in the system.

The Nevada system made its first investments in Farallon's hedge fund in 1999 and 2000, Ms. Sharman confirmed.

She stressed that the System of Higher Education's board is satisfied enough with Farallon's performance to leave $14 million from the system's $200 million endowment fund with the firm.

“The performance has been very good, especially during the market downturn,” Ms. Sharman said in an interview.

Farallon Capital Institutional Partners, the vehicle in which many of the firm's institutional investors are invested, returned 10.87% year-to-date Nov. 30 and 33% for all of 2009, according to performance data provided by an investor on the condition of anonymity.

By way of comparison, for the 11 months ended Nov. 30, the HFRI RV Multi-Strategy index returned 11.87% and the broader HFRI Fund Weighted Composite index returned 7.12%. For calendar 2009, the indexes returned 24.67% and 19.98%, respectively.

Consultants said performance is not their main concern when it comes to Farallon.

“Like Citadel LLC and Fortress Investment Group — whose multistrategy hedge funds are on thin ice — Farallon obviously has sparked fresh interest through the launch of a specialized strategy,” said a consultant whose clients have been invested in Farallon's multistrategy funds.

The consultant, who asked not to be identified, said Farallon is “a great firm. They've made a lot of money for their clients over the years, but they've also had a lot of turnover of senior investment staff and they're still dealing with a huge drawdown in 2008. There's not any one thing that bothers us. It's the culmination of many smaller things. The question for our clients is whether they are willing to stay with this manager for (13) months or do we have better alternatives to offer them. We think our clients have better alternatives.”

Farallon is one of the industry's longest-running hedge funds. Founded in 1986 by Mr. Steyer, Farallon was a must-have hedge fund manager throughout much of its first 22 years.

The firm's client base, which is heavily biased toward endowments and foundations, reads like a who's who of sophisticated institutional investors, including New Jersey Division of Investment, University of Michigan, Michigan State University, Doris Duke Charitable Foundation, and University of Oklahoma Foundation.

But as a result of the market downturn in 2008 and client withdrawals, Farallon's assets dropped to $21 billion at the beginning of September, down 41.7% from the peak of $36 billion at the end of 2007.

High marks

Although Farallon put up a gate to stop client withdrawals at the end of 2008, sources gave the firm high marks for meeting client redemption requests from the multistrategy funds ahead of most other gated hedge funds. A source who asked not to be identified said the firm closed the multistrategy funds to new investment in May.

The largest Farallon redemption that's been publicly announced was made by the $6.8 billion Delaware Public Employees' Retirement System, Dover, which asked for its full investment in Farallon Capital Partners to be returned, according to minutes from the board's Oct. 29 meeting.

However, no reason was given for the redemption in board meeting documents, and David C. Craik, pension administrator, did not return calls seeking comment.

The fund made an initial investment of $100 million in the Farallon fund in 2008, according to minutes from the board's Jan. 25, 2008, meeting. An updated figure was not available on the Delaware PERS website.

Staff turnover was the tipping point for the $11.6 billion New Mexico Public Employees Retirement Association, Santa Fe, which decided to redeem its full $78 million investment in Farallon Capital Institutional Partners because of portfolio manager departures, said Joelle Mevi, chief investment officer.

Ms. Mevi declined to identify the managers who left, but described the departures as “material to the investment of the hedge fund.”

The PERA board committed $35 million from the Farallon redemption to Wexford Spectrum Fund, an opportunistic/global macro hedge fund managed by Wexford Capital LP. Ms. Mevi said the association's investment staff is reviewing other hedge fund managers for the balance.

Sources said the departure in March of four Farallon value equity portfolio managers unnerved many clients invested in the multistrategy hedge funds because that asset class accounted for a significant portion of Farallon's total assets.

Former Farallon managing members William F. Duhamel, Jason E. Moment, Ashish H. Pant and Richard H. Voon formed Route One Investment Co. LP, San Francisco, in March and launched their own hedge fund this fall with about $500 million under management.

Farallon has “long been a firm that's had a lot of turnover, more so than most other hedge funds,” said a third investment consultant who insisted on anonymity.

“It seems like they lose at least one senior person every year. I think that's partly because Tom Steyer is too nice. He doesn't lock down employees by making them keep some of their wealth in company equity, doesn't make them sign non-competes and that sort of thing. Investment staffers may feel bogged down in a large company like Farallon and are eager to have more control over their investment strategies,” the consultant said.