Looking back on Harbinger’s LightSquared gamble and questions about Paulson

October 04, 2011   Rob Copeland

AR also revisits Lazard’s lessons learned

One year ago

»» Phil Falcone’s now famous bet on LightSquared, a fledgling wireless broadband network, drew the attention of investors who worried the illiquid bet accounted for too large a percentage of his assets.

At the time, Falcone would not disclose what percentage of Harbinger Capital Partner’s $3.4 billion flagship fund was invested in LightSquared. Some investors predicted that as long as the fund continued to move toward such a singular concentration, redemptions from the fund would increase. They might not have foreseen, however, that those redemptions would be paid out in highly illiquid LightSquared equity. Roughly 80% of Harbinger’s net asset value is now tied up in LightSquared.

LightSquared has since attracted more attention outside the hedge fund world. The Aircraft Owners and Pilots Association, for instance, has been rallying its members to oppose the interference that the implementation of LightSquared’s wireless network could mean for global positioning systems around the country. And President Barack Obama has been accused of trading political donations from Falcone for favorable regulatory rulings in favor of the wireless network.

See also:
Harbinger investors still waiting for Q1 redemptions to be paid

»» John Paulson weighed the challenges of following up on his legendary bet against the U.S. subprime mortgage sector. As AR asked in its October 2010 cover story, would success spoil the now world-famous investor?

Success may or may not be to blame, but something certainly has spoiled for Paulson & Co this year. Its $5.3 billion Paulson Advantage Plus fund was down 34.16% for the year through August, compared with a 4.42% drop for the AR event driven index. Paulson has been forced to explain his ill-advised investments in China’s Sino-Forest, as well as his persistent long bets on U.S. financial stocks, which have tanked this year. He warned investors to expect more volatility ahead in their returns. The firm has $35.2 billion under management, down 2.2% from six months ago.

Paulson has also become a favorite topic for the Wall Street Journal, which has closely tracked the firm’s troubles. Last week, the Journal reported that vulture investors are circling his assets, trying to predict what he might be forced to sell if investors ask for their money back in large numbers. They have until the end of the month to put in their redemption orders for the end of the year.

See also:
Paulson avoids Sino-Forest questions at Paris confab
Paulson to host Vegas jaunt for Advantage investors
Paulson hires PIMCO vet for investor relations

Five years ago

»» Lazard Asset Management’s hedge fund business was still recovering from the defection of star manager William von Mueffling and was back up to $3.5 billion in assets after falling to as low as $900 million from its $3.8 billion high three years earlier.

Von Mueffling was joined by several of the people who had helped manage several billion of Lazard’s hedge fund holdings. Firm leaders were sanguine, insisting they would concentrate on stability for the years ahead, as opposed to recruiting another big name manager to shoot for mega returns. Three years later, that strategy paid off, as Lazard was able to watch from the sidelines when von Mueffling’s Cantillon Capital Management shut down its $3.5 billion hedge fund business in September 2009 to focus on long-only investments (von Mueffling has since reportedly raised additional long-only funds.)

At Lazard, assets grew modestly until recently. The firm shot up to $6.07 billion in the latest AR Billion Dollar club ranking, up 36.71% from one year earlier. Returns for the firm’s $3 billion Emerging Income fund have been mixed. The fund is up 1.25% this year through August, above the AR Composite Index’s gain of 0.42%, but gained only 3.73% in 2010, compared with 9.05% for the benchmark.

In addition, Lazard’s $1.2 billion Rathmore strategy, up 1.43% this year after a 16.83% gain in 2010, is nominated in the arbitrage and convertibles category for the 2011 AR Awards, to be held Nov. 10 at the Mandarin Oriental in New York City.

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