Following the departure of haloed superstars such as Peter Lynch and William H. Gross, mutual fund managers have often adopted a “Three Musketeers” attitude: team efforts through and through. But solo “star power” still thrives in the hedge fund industry.
Hedge funds have kept their iconic founders in the media limelight, since “investors still clamor for access to funds run by legendary investors, managers with extensive press coverage or with reputations earned through outstanding performance,” according to David Shukis, managing director and head of global investment services at Cambridge Associates LLC. Stars are bait for big fish institutional investors. These brand-name investors leverage their national exposure to generate shareholder value, enticing savvy investors during bear market conditions.
• William A. Ackman, CEO of Pershing SquarePershing Square Capital Management LP, $11.6 billion;
• John A. Paulson, president, director and portfolio manager, Paulson & Co., with $22.9 billion;
• David M. Einhorn, president and director, Greenlight Capital Inc., $11.4 billion;
• Daniel S. Loeb, founder and CEO, Third Point LLC, $14.8 billion;
• Barry Rosenstein, managing partner and co-portfolio manager, JANA Partners LLC, $10.7 billion.
Nowhere does the star mentality shine brighter than when a portfolio manager hangs his own shop sign. “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,” says Joseph Larucci, a partner at Aksia LLC. For instance, when Matthew K. Sidman left Highfields Capital Management LP to start his own venture, Three Bays Capital LP, his start-up’s assets leapfrogged from $500 million to $1.4 billion in just three months.
Not all hedge funds survive the retirement or departure of their founder. Ray Nolte, chief investment officer at SkyBridge Capital II LLC, notes that “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.”
Many hedge funds survive the supernovae of their star founder departure by carefully grooming their institutional client base. However, more institutional cash flow requires a growing support network, a spider web of risk management, legal services, client service, compliance processes and more. Michael Goodman, managing partner of alternative investment specialist recruiter Long Ridge Partners Inc., New York, says the figurehead investor might have “his thumbprints all over the firm, but investment decisions are more likely now to be handled by committee.”
Yet too often the limelight casts shadows on the supporting cast. Goodman says that some funds try to “obscure the fact that the star is no longer the key player in managing the fund. 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.”
Stephen L. Nesbitt, CEO of Cliffwater LLC, has a quick caution. “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.”
Succession planning is key for the endurance of high-dollar hedge funds. Many funds still rely on the exposure and clout of their legendary founders, but all stars, even the brightest ones, burn out.