29 September 2020

The Star System is Still Shining at Hedge Funds

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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.

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.

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.

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. 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. 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.

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.

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.

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.

Click here to access the full article on Pensions & Investments. 

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