By Michelle Celarier
The news that Kenneth Griffin’s Citadel
finally crossed its high-water mark earlier this year — three years
after it fell more than 50 percent during 2008 — might seem encouraging
for the many hedge funds that find themselves once again under water. Or
maybe not.
After last year’s drubbing, some 62 percent of the
funds in AR’s database are in that predicament, and most of those had
climbed out from under the 2008 mess long before Citadel did. They fell
down again in 2011. Some of these are pretty big — 8 percent have assets
greater than $1 billon. And there is still a sliver — about 13 percent —
that never recovered from the financial crisis. The average size of
those funds is a little less than $300 million. It’s amazing some of
these are still hanging on. Being below the high-water mark means a fund
isn’t earning lucrative performance fees. As a result, the theory goes,
the fund struggles to pay talent, not to mention appease investors who
want to be made whole.
Changes in the industry over the past
decade, however, have made the high-water mark dynamic less important to
many. For the 200-plus funds with $1 billion or more in assets,
management fees alone can keep the lights on — and then some. One hedge
fund honcho whose multibillion-dollar fund shut down in 2008 says that
he got the biggest payday of his career that year, thanks to the
management fees collected before the fund’s demise.
Citadel is an
extreme example. It passes on its costs to investors instead of
charging the standard 2 percent management fee. That may have helped
give Griffin enough financial flexibility to keep paying key employees
during Citadel’s three-year crisis period. Moreover, some 20 percent of
fund capital was held by employees, including Griffin, all of whom
worked tirelessly to bring the fund back.
Few fund managers are
in such a luxurious position. One may be John Paulson, whose Paulson
Advantage fund fell 36 percent last year. Paulson also has a ton of his
own money invested in his funds due to the windfall he made shorting the
subprime housing market in 2007. But Paulson’s huge growth in assets
followed his fame, and many of the investors who’ve signed on in recent
years have probably lost much of their initial investment. Perhaps in
hopes of recouping it, they are sticking with Paulson, who last year was
able to keep redemptions to a minimum without hefty lockups. And at $23
billion in total assets, his firm is so large that even its management
fees, which are as low as 1 percent on some funds, will keep it humming
along.
But there appears to be a time limit on patience, and
other big-name managers who’ve been around much longer haven’t been
quite so lucky. Mark Kingdon is one of them. Kingdon is one of the
oldest hands in the business, having launched his global equity firm in
1983.
Even after losing 18 percent last year, Kingdon’s offshore
fund boasted an annualized return of 15 percent. That may not have
meant a lot to many investors, however. Last year Kingdon’s assets
shrank by about 42 percent — more than twice the decline in performance —
so it’s clear investors were abandoning ship. The firm now manages
about $3 billion, down from its peak of $6.75 billion in 2008. Even so,
Kingdon can survive because insiders, including Mark Kingdon, own more
than 20 percent of the fund, according to individuals close to the firm.
This year it’s bouncing back, along with the stock market. Kingdon was
up 10.36 percent through February 24.
Another old-timer, Warren
Mosler, was harder hit. The iconoclastic Mosler started his credit fund,
III (originally Illinois Income Investors), in 1982. He was once
considered one of the industry’s most brilliant thinkers. III now
manages $1.6 billion, according to its web site, down from a height of
$4 billion in early 2008. Its III Fund, which lost 53.8 percent in 2008 —
its only down year — was still below its high-water mark as of January
1, despite making money the past three years. With a management fee of
only 1.5 percent, III is in a tougher spot than many of its peers.
Kingdon
and Mosler both have been around longer than either Griffin, who
launched Citadel in 1990, or Paulson, who founded his first fund in
1994. And all four have more staying power than those who may decide
it’s easier to throw in the towel than try to claw back to their
high-water mark.
Many funds are likely to have help in making
that decision. For while investors were still pumping money into hedge
funds last year, despite poor performance, this year the money is
starting to come out. In January, a month in which hedge funds made
money but still lagged the S&P 500, investors pulled $15.2 billion
from them, according to BarclayHedge and TrimTabs Investment Research.