Hard Times for Harbinger Capital’s Philip Falcone

March 26, 2013   Stephen Taub

The once high-flying hedge fund manager may be in a deep financial bind, report suggests.

   Harbinger Capital's Philip Falcone
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.

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 Wilcox.

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 raise cash.

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 story. 

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