It looks as if Philip Falcone’s financial hole may
be widening. Once one of the hedge fund industry’s
most successful managers, the Harbinger Capital Partners
founder and CIO who once made $1.7 billion for himself in 2007
by investing in subprime loans is apparently having trouble
making ends meet.
|| Harbinger Capital's Philip Falcone
Falcone and his wife Lisa, herself a recent headline-grabber
in the tabloid press, have been borrowing money against their
vast real estate properties, according to Bloomberg News. They were said to have
pledged their $39 million Caribbean villa to Fortress Credit,
the same group that provided a mortgage to Michael Jackson on
his Neverland Ranch at the height of his financial troubles.
The couple also reportedly used their two Manhattan townhouses
as collateral for about $25 million of personal loans.
The once high-flying hedge fund manager’s
problems stem in large part to his outsized bet on failed wireless network LightSquared.
Harbinger once managed $26 billion, but the assets are now down
to about $2.9 billion. Falcone’s reversal of
fortune highlight the fall from grace of some of the wealthiest
hedge fund managers, many of whom qualified for
Alpha’s 2007 Rich List, a ranking of the
industry's 25 biggest earners.
As it turns out, 2007 proved to be a career highlight for
luminaries such as John Paulson, who produced $3.7 billion
in gains from subprime investments, and Passport
Capital’s John Burbank III, who pulled $370
million in profits that year, also from subprime.
But 2007 also was the year several managers peaked. Eleven
of the Rich List Class of '07 dropped off the rolls altogether.
For example, after 2007, Joseph DiMenna’s
Zweig-Dimenna Associates’ International Fund lost
money in four of the ensuing five years. Its only profitable
year was 2010, when it eked out a 0.21 percent gain, according
to hedgefundnews.com. In 2007 DiMenna made $450 million.
Eight of the individuals among the 2007 Rich
List’s top 25 are no longer running hedge funds.
In some cases, the individuals retired successfully and stopped
accepting outside money.
Centaurus Energy’s John Arnold, the natural gas
whiz turned billionaire, for instance, packed it in at the age
of 38. Arnold joined a small circle of wealthy individuals who
pledged to donate a big portion of their fortune under Bill
Gates’ Giving Pledge.
In 2011 George Soros decided to return all outside money to
investors. Outside investors accounted for only about $750
million of the more than $25 billion in Soros’
Quantum Endowment fund.
Several years ago Henry Swieca retired from Highbridge
Capital Management, the highly successful multistrategy hedge
fund firm he co-founded with childhood friend Glenn Dubin and
subsequently sold to JP Morgan Chase. Dubin remains deeply
involved as chairman and CEO of Highbridge.
Others in the Class of '07 either downsized or retired
altogether. Cantillon’s William von Mueffling, who
made $410 million in 2007, closed his hedge funds and chose to
concentrate on being a long-only investor. In 2011 Chris
Shumway, the former Tiger Management senior managing director
who made $400 million in 2007, shut down Shumway Capital
Partners after a rash of investor redemptions that followed his
decision to hand over most of the portfolio management to Tom
Similarly, late last year, John Kleinheinz told clients he
is shutting down Kleinheinz Capital Partners, which has about
$2 billion in assets. The value investor has had a tough time
of late. From 2003 through 2007 his hedge fund, Global
Undervalued Securities Fund, generated double-digit returns,
according to the hedgefundnews.com. In 2007 Kleinheinz made his
only appearance on the Rich List when he earned $380 million,
ranking number 22. However, the following year he lost 32.7
percent. He did better the succeeding years, with 18 percent
and 22 percent returns. But he lost 25 percent in 2011 and was
roughly flat through June of this year.
Then there is Timothy Barakett who started Atticus in 1995
at the age of 26. For a while he was one of the top performers.
In 2005, 2006 and 2007, his Atticus Global fund was up 22
percent, 36.5 percent and 25.4 percent, respectively, while
Atticus European, run by David Slager, was up 62 percent, 44.5
percent and 28 percent, respectively.
During those three boom years, the pair topped our annual
ranking of the 25 highest earning hedge fund managers. Barakett
made a combined $1.63 billion during the three-year period,
including $750 million in 2007, while Slager made $940 million,
including $450 million in 2007. However, at the end of the
third quarter of 2008, Atticus’ European fund was
down 42.5 percent for the year, while the Global fund lost 27.2
percent. Redemptions came pouring in and the
firm’s survival was rumored to be in doubt. The
two funds, though, still finished the difficult year down 40
percent and 25 percent, respectively.
In August 2009 Barakett, a one-time star for the Harvard
hockey team who still holds the NCAA Division I Record for
game-winning goals in a single season, shut down Atticus,
telling investors he planned to spend more time with family,
pursue philanthropic interests and establish a family office to
manage his own capital and charitable foundation. He now heads
TRB Advisors, a private investment firm founded in 2010. He
does not have outside clients. TRB invests directly in public
and private markets, and according to its website focuses on
liquid market opportunities, special situations and select
strategic external managers.
Slager has suffered the same fate of many of those fleeting
supernovas. In 2009 he and Nathaniel Rothschild, another top
earner at Atticus, co-founded Attara Capital to manage
Atticus’s $1.2 billion European fund. Last year
they shut down the firm due to adverse trading conditions and
difficulty raising new money from investors, according to news
reports at the time.
On a brighter note, assuming the Bloomberg report on the
Falcones’ recent borrowings is true, none of the
other folks have had to borrow against real estate assets to
Falcone perhaps has had the most painful fall of any hedge
fund manager in recent years. Besides his financial woes,
Falcone faces civil fraud charges. The Securities and Exchange
Commission accused him in June of using client assets to pay
$113 million in personal taxes and manipulated bond prices,
among other allegations. The case is pending.
Falcone declined to comment for this