Hedge Funds Lower Fees to Lure Investors

February 19, 2018 James Heinsman Hedge Fund News

Since the financial downturn of 2007-2008 hedge funds have been under increasing pressure to keep their clients. In 2016 disgruntled investors pulled $70 billion out of hedge funds in response to poor past performance exacerbated by immodest fees.

The average management fee paid for a hedge fund investment fell to 1.56 percent in 2017 and the average performance fee shrunk to 17.3 percent. The trend of falling fees sped up in 2014, dropping an average of .13 percent for management and .78 percent for performance.

Before the crisis the fee structure for hedge funds was almost universally the famed “two and 20,” standing for 2 percent management charge and a whopping 20 percent for performance. Although many hedge funds are lowering that formula, there are still others holding on.

Lowering fees seems to be having an affect on winning back investors. In 2017 hedge funds acquired $9.8 billion in new money, helping to bring industry wide managed assets to a record high of $3.2 trillion by the end of the year.

Multi-strategy hedge funds are still more expensive that other strategies which are less work intensive, while customized fees structures are also a possibility at some firms. In some cases managers will agree to lower fees if assets grow, or if they agree to keep their money invested for a longer time frame.

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History in the Making: Donald Sussman & David Shaw

February 19, 2018 James Heinsman Company Spotlight

It’s always fascinating to get a peek into the early days of the hedge fund industry and of the people who have helped to shape it. Certainly, Donald Sussman and David Shaw are shapers of the industry and the story of where their two worlds collided is one worth retelling.

In a recent article in NY Magazine, that’s exactly what was done. In the summer of 1988, David Shaw asked Donald Sussman if he might come to see him for some advice. Asking advice of the Paloma Partners founder, Shaw wanted to know whether or not to take an offer from Goldman Sachs. Donald Sussman had an incredible talent for recognizing talent. Shaw explained to Sussman that “I think I can use technology to trade securities.”

Donald Sussman, reading Shaw and his talent said, “If you’re confident this idea is going to work, you should come work for me.” Paloma Partners ended up investing $30 million with D.E. Shaw, and his certainly never regretted it. D.E. Shaw has grown into a company with an estimated $47 billion and Shaw is worth an estimated $5.5 billion.

Interestingly, in the early days, Sussman would visit Shaw’s office weekly. As Sussman recounted,

“Once they started trading, they started making money out of the box. These were very serious folks. I used to go and sit next to them watching them trade. They didn’t miss a goddamn thing. The atmosphere of the place was unlike any other investment firm. It was like going into the research room in the Library of Congress.”

Now, as D.E. Shaw gets ready to celebrate its 30th anniversary, Sussman will be celebrating along with him. Donald Sussman’s firm invested hundreds of millions of dollars with D.E. Shaw;  Sussman can say with certainty, “I never doubted him for a minute. I never envisioned that D.E. Shaw would be $47 billion, but I did envision how David would change the world of finance.”

The rest, as they say, is history.

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New Appointments at George G. Hicks’ Värde Partners, Inc.

February 15, 2018 James Heinsman Hedge Fund News

Värde Partners, Inc., is a $13 billion global alternative investment firm which George G. Hicks co-founded in 1993.   As well as being a co-founder of the firm, Hicks also today holds the roles of: CEO co-CIO and Partner.

In recent news, the company at which George G. Hicks is at the helm, announced a new partnership between Värde Partners, Inc. and SS&C Technologies Holdings Inc., the latter of which is an international provider of fiscal services software as well as software enabled services.  SS&C Technologies is now offering services to its new client – Värde Partners – in the areas of operational administration, fund administration and other such technology applications for their new client’s various strategies and funds.

George G. Hicks brings a wide variety of expertise and experience to his current roles at the firm.  This gives him the ability to focus on Värde Partners’ capital equipment investment strategies, corporate securities and small balance loans.  He brings to the firm a background in the legal industry, most notably when he worked toward the facilitation of various restructuring matters.  Hicks also worked at Cargill Financial Services Corporation in the role of Senior Vice President and Manager, whereby he supervised international merchant banking matters. Vis-à-vis his official legal career, Hicks held the role of Senior Attorney and counsel at Cargill, in their legal department.

Värde Partners’ COO and MD, Brendan Albee, explained the company’s decision in selecting SS&C Technologies Holdings Inc.:

“Värde is committed to leveraging technology to digitize processes, support controls, and empower our organization with data. We are also keenly focused on partnering with service providers who can complement our efforts to meet the needs of our investors. We selected SS&C GlobeOp as our partner because of their unique combination of customized services and integrated technology solutions.”

 

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Rod Gancas Sponsors Princess Grace Foundation

February 8, 2018 James Heinsman Company Spotlight

Rod Gancas is one of the Crown Sponsors of the annual 2017 Princess Grace Awards gala.  The awards given there come from the Princess Grace Foundation in an effort to “identify and assist emerging talent in theater, dance, and film by awarding grants in the form of scholarships, apprenticeships, and fellowships.” The Princess Grace Foundation was established three-and-a-half decades ago and is in part, a way of preserving the legacy of Princess Grace (Kelly) of Monaco Monaco.

According to the foundation’s Executive Director, Toby E. Boshak:

“This marks the most joyous time of year for the Foundation as we welcome the next group talented and emerging artists into the Princess Grace Awards family.  Each year, we are captivated by a new generation of exceptional Award winners whose work will influence the artistic landscape.  It’s a privilege to be a part of their artistic growth in the same way we have watched this year’s Statue Award winners, Bridget Carpenter and Dormeshia Sumbry-Edwards, evolve.  We are incredibly proud of all of them.”

Thanks to this year’s Crown Sponsorship of the Annenberg Foundation, Karen and Rod Gancas and other generous contributors, the event was held, on October 25, 2017.  The Gancas’ in attendance at the 9th annual event at the Beverly Hilton Hotel, where over $1million was awarded to the 2017 winners. The prize-winning categories are: theater and playwriting; dance performance and choreography; and film.

Rod Gancas is the founder and CIO of Field Street Capital Management.

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Asian Startups Worth Watching

January 29, 2018 James Heinsman In the News

Asia is certainly a place to keep your eyes open for emerging hedge funds. Last year, as Asia-focused funds were some of the top performers, global investors are showing more of an interest in the area. In 2017, an estimated 37 Asia-focused hedge funds started. Interestingly however, the average new fund last year started with $21.9 million, as compared to $89.4 million in 2004.

Many of the recent and future Asian startups are listed here and include Keyrock Capital Management, Toona Tree Capital, Yunqi Path Capital, Trikon Asset Management, Ishana Capital, APTA Investments, Ovata Capital Management, Inventio Capital Management, Navik Capital and others.

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T. Boone Pickens Shuttering Energy Fund

January 18, 2018 James Heinsman Hedge Fund News

Legendary oil investor T. Boone Pickens is shutting down his energy hedge fund, BP Capital. The reasons are two-fold, poor health and poor fund performance.

“It’s no secret the past year has not been good to me, from a health perspective or a financial one,” Pickens said in a confidential letter. “Health-wise, I’m still recovering from a series of strokes I suffered late last year, and a major fall over the summer. If you are lucky enough to make it to 89 years of age like I have, those things tend to put life in perspective.”

He added that the fund will now move towards a more family office structure. Employees of the fund will be leaving the company, setting out on their own.

Pickens became famous as the leader of Mesa Petroleum during the 1980s when corporate takeovers were popular. He retired at the age of 69, launched BP Capital as an energy investment firm, and promptly made his first billion dollars.

“I’ve thrived and profited on the volatility in the energy space. But for me, personally, trading oil is not as intriguing to me as it once was,” Pickens explained.

Closing BP Capital does not mean Pickens is throwing in the towel, or slowing down. He stated that he is going to work hard on recovering his health and investing in philanthropy and political causes he believes in. He will also continue to add his viewpoint to the ongoing energy discussion.

“As this chapter closes, I couldn’t be more excited at what lies ahead,” Pickens said in the letter.

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For Vanessa Selbst, Hedge Funds is Just a New Kind of Gambling

January 11, 2018 James Heinsman Hedge Fund News

Vanessa Selbst, the world’s most successful female poker player, is making the not-so-big switch to the world of high finance as she joins mega-hedge fund manager Bridgewater Associates.

Over the past 12 years Selbst has racked in a nice $11.9 million playing tournament poker. Although her new job has not been announced publicly, she did post on her Facebook page on December 31, that she started working at a hedge fund firm four months before, concentrating on trading research and strategy.

“The environment feels a lot like poker did back in the day — a bunch of nerdy kids collaborating to try to beat our opponents at a game,” Selbst said in her post. “It’s also really freaking difficult.”

Bluffing and doubling up at the poker table aren’t Selbst’s only qualifications to be part of the world’s largest hedge fund. The 33-year-old graduated from Yale University and also has a law degree. Selbst said that when poker started to feel too much like a “real job” she re-evaluated what kind of career she wanted. But hedge funds has had its own steep learning curve.

“Every day I think I’m getting the hang of it, the next day I fail at the next challenge,” she said. “It’s exhausting, exciting, and completely humbling.”

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Lawsuit Brought Against Managers for Poor Returns

January 1, 2018 James Heinsman In the News

Kentucky state taxpayers and the Kentucky Retirement Systems’ pension plans had a group of lawyers file on their behalf a lawsuit against KKR & Co., Blackstone Group and their founders. The lawyers are being advised by William Leach, who is a former class-action lawyer who, at the height of his powers engendered fear at corporations for his ruthless negotiating style.

The lawsuit alleges that the fund managers did not deliver the returns they were promised. The suit could be the gateway for further challenges to managers of alternative investment funds. The plaintiffs include a retired state trooper and a firefighter, who say that the fund managers misled them about their expensive and high-risk “black-box” bundles of hedge funds. The managers claimed, say the plaintiffs, that the funds were a safe way to provide high returns. Unfortunately the investments led to the pension system’s near bankruptcy, while the managers paid themselves their hefty, undeserved, fees.

“The claims are baseless,” Matt Anderson, a spokesman for Blackstone, said. “The Blackstone fund referenced in the complaint delivered to the Kentucky Employees Retirement System positive returns outperforming relevant benchmarks.”

KKR also denies responsibility.

“We take our fiduciary duty very seriously and believe that the allegations about our firm are meritless, misplaced and misleading,” said Cara Major, a spokeswoman for KKR.

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Carried Interest Will Not Go Away

December 26, 2017 James Heinsman In the News

Director of the National Economic Council Gary Cohn | 7/25/17 (Official White House Photo by Evan Walker)

Despite the best efforts of the White House and outspoken economists, the notorious tax loophole for the rich known as Carried Interest is still part of the tax code. The administration’s chief economic advisor, Gary Cohn, explained that the White House tried tirelessly to erase this hedge-fund loophole in the tax reform bill. Getting rid of carried interest is the one thing Cohn would change to the new tax plan, if he could.

“We would have cut carried interest,” he said at an Axios event. “We probably tried 25 times.”

Cohn laid the blame for this failure at the feet of Congress.

“We hit opposition in that big white building with the dome at the other end of Pennsylvania Avenue every time we tried … It is just the reality of the political system.”

The advisor said the lobbyists for hedge funds and private equity are just too powerful for lawmen to resist.

“The reality of this town is that constituency [hedge funds and private equity] has a very large presence in the House and the Senate. They have really strong relationships on both sides of the aisle,” he said. “We just didn’t have the support on carried interest.”

The loophole that remains in the Republican tax plan enriches hedge fund and private equity fund managers. Carried interest is the fund manager’s share of the fund’s profits, which is taxed at the lower capital gains tax rate of only 24 percent instead of at the usual, higher rate of almost 40 percent. According to the Congressional Budget Office the loophole costs taxpayers over $17 billion over ten years.

Some superstar investors are against carried interest, too.

Stanley Druckenmiller, the iconic hedge fund manager worth billions of dollars, said on CNBC that he is angered over the unfairness of the carried interest tax advantage.

“First of all, the billionaires lobbying the congressmen for this ought to be ashamed of themselves because we’re asking doctors and lawyers and other Americans in blue states to take tax increases so we can fund this kind of nonsense,” he said. “You have these multi, multibillionaires — with carve-outs — let’s be clear. Carried interest … you’re making money on somebody else’s capital. It’s not on your own. If that’s not income, I don’t know what is.”

Legendary investor Warren Buffet agrees. The following is a quote from an op-ed piece he wrote in the New York Times in 2011:

“While the poor and middle-class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as carried interest,” he wrote. “These and other blessings are showered upon us by legislators in Washington who feel compelled to protect us, much as if we were spotted owls or some other endangered species.”

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John Griffin’s Blue Ridge Fund Closing

December 20, 2017 James Heinsman Hedge Fund News

Despite two decades of mostly positive results, John Griffin has decided to close down his Blue Ridge Capital hedge fund, worth about $6 billion. Griffin is just one more high-profile investors to throw in the towel due to the lackluster performances in recent years of hedge funds generally.

Griffin got his start as a protégé of the hedge fund icon Julian Robertson of Tiger Management, over thirty years ago. He began his career as an analyst for Robertson, rising in responsibility until he became the president of Tiger in 1993. He stayed in that position for three years until he left to from Blue Ridge with $55 million starter funds. Twenty years later Griffin’s fund was worth $9 billion at its peak. The past four years has hit the fund hard, driving Griffin’s decision to get out now.

The hedge fund industry has been under extraordinary pressure in recent years with less expensive-to-manage index funds performing considerably better than hedge funds. Many well-known and respected investors have experienced poor performance of their funds.

“This can be a humbling business and many times we were tested, especially on the short side,” Griffin wrote in his letter to his clients, which was seen by Reuters. He added that he is “proud of how we earned our returns” over the past twenty years, returning an average of 15.4 percent each year at a time when the S&P 500 only returned 8.6 percent annually.

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