William H. Gross might be the last of the true superstar managers at traditional investment management shops, but star power still is very marketable in the hedge fund industry.
For years, long-only equity and fixed-income managers scrambled to relabel their investment approaches as team-oriented following departures or retirements of household names such as Peter Lynch at Fidelity Investments or Mr. Gross at Pacific Investment Management Co.
In contrast, hedge fund companies have, for the most part, deliberately kept the focus on their iconic founders, even as they built their infrastructure to accommodate billions from institutional investors.
“Star power is alive and well in the hedge fund business,” said David Shukis, managing director and head of global investment services at investment consultant Cambridge Associates LLC, Boston.
“Investors still clamor for access to funds run by legendary investors, managers with extensive press coverage or with reputations earned through outstanding performance — even if that performance happened sometime in the past,” Mr. Shukis added.
The most recognizable hedge fund superstars tend to be activist or event-driven managers who have resorted to very public media campaigns to effect changes that will increase shareholder value in the companies they own, sources said.
Among the high-visibility hedge fund principals:
- John A. Paulson, president, director and portfolio manager, Paulson & Co., with $22.9 billion under management;
- Daniel S. Loeb, founder and CEO, Third Point LLC, $14.8 billion;
- William A. Ackman, CEO of Pershing Square Capital Management LP, $11.6 billion;
- David M. Einhorn, president and director, Greenlight Capital Inc., $11.4 billion; and
- Barry Rosenstein, managing partner and co-portfolio manager, JANA Partners LLC, $10.7 billion.
“There is a paucity of excellent investment managers and given challenging market conditions, characterized by so much equity beta over the past five years, everyone is looking for the very best investors,” said Joseph B. Goldsmith, partner of specialist investment management recruiter Goldsmith & Co., New York.
“Hedge funds are well positioned to generate diversified sources of alpha,” said Mr. Goldsmith, adding that difficult market conditions tend to accentuate the importance of investing with an experienced portfolio manager with a proven long-term track record.
The “star mentality is still very much evident” in the hedge fund industry and is played out when portfolio managers leave a larger manager to start their own companies and try to attract investors, said Joseph Larucci, a partner at specialist hedge fund consultant Aksia LLC, New York.
“It's still feast or famine, depending on whether you have the right pedigree and star status. If you don't, it can be extremely difficult to raise funds as a startup,” said Mr. Larucci, noting “we believe there are plenty of hidden gems among the non-star status launches.” Among the star-powered spinouts that observers said have attracted attention and inflows is Three Bays Capital LP, founded by Matthew K. Sidman, managing partner and chief investment officer, formerly a veteran portfolio manager at Highfields Capital Management LP. Three Bays' assets grew to $1.4 billion as of April 1 from $500 million at the beginning of the year, according to its SEC ADV filing.
Another is Junto Capital Management LP, headed by CEO James C. Parsons, who was a senior portfolio manager at Viking Global Investors LP. Junto had $738 million as of Feb. 28, up from $318 million at the beginning of the year, its ADV filing showed.
“There are two ways to look at the star-oriented culture in the hedge fund industry,” said Ray Nolte, chief investment officer, SkyBridge Capital II LLC, New York.
“You can draw the line between the many firms that could not survive the departure of their founder, the guy whose name is on the door, who is the firm, and the far fewer firms that could survive,” Mr. Nolte said. He added if the principals of “95% of the hedge funds we invest in left, we would, too.”
SkyBridge manages $7.7 billion in hedge funds of funds, mostly for institutional investors.
More institutional money
For many hedge fund firms, especially large companies like Paulson & Co., the growth of their institutional client base over the past decade required a huge increase in investment and risk management, administration, client service, marketing, legal and compliance processes.
More institutional money has also required deeper due diligence by internal investment teams, consultants and hedge funds-of-funds managers into the support network beneath the star investor.
Kenneth J. Heinz, president of industry tracker Hedge Fund Research Inc., Chicago, noted that hedge fund companies now put far more emphasis on multiple layers of management — investment and operational — than they did 10 years ago.
“I think the star investor model still is a very strong feature of the hedge fund industry, but investors are digging down deeper into the second and third layers of investment decision-makers, the teams that are providing support for the main guy,” Mr. Heinz said.
“A lot of investors romanticize that these key investment guys really are solely in charge of the whole investment decision. That was true back in the early days in the late "90s and early "00s, when the firm was synonymous with one person,” said Michael Goodman, managing partner of alternative investment specialist recruiter Long Ridge Partners Inc., New York.
Today, the figurehead investor might have “his thumbprints all over the firm, but investment decisions are more likely now to be handled by committee,” Mr. Goodman said.
Cambridge Associates' Mr. Shukis noted: “The reality is that some hedge fund stars are still very active in running the funds that bear their name or in astutely allocating capital among strategies and teams. But in some other cases, the star is no longer really responsible for the firm's performance.”
Some funds try to “obscure the fact that the star is no longer the key player in managing the fund,” while others are “more straightforward about the evolution of the organization, which in fact may be a better strategy if the firm hopes to outlive the founder's active participation,” he added.
Hedge fund managers that have addressed succession adequately include Eminence Capital LP, Glenview Capital Management LLC, Och-Ziff Capital Management Group LLC and Paulson & Co., sources said.The question of longevity and succession planning is paramount in the due diligence process, said hedge funds-of-funds executives and consultants.
“Understand that these star-based hedge fund firms are willing to liquidate when the star no longer shines. You might say that star-model hedge funds seek to prioritize performance while team-oriented traditional managers prioritize longevity,” said Stephen L. Nesbitt, CEO of alternative investment consultant Cliffwater LLC, Marina del Rey, Calif.
Succession planning — or the lack thereof — can be a pivotal factor for investment consultants and investors debating an investment with a particular hedge fund company.
“The founder has managed the firm for 20 odd years, he's in his late 60s and says `I plan to work till I die.' But that's not very believable,” said Aksia's Mr. Larucci.
“There are a number of firms in this situation that concern us because they haven't distributed equity ownership and do not have a succession plan in place for when the star walks out the door,” he added. n
This article originally appeared in the November 24, 2014 print issue as, "The star system is still shining at hedge funds".