The Reckoning on Round Hill Road

June 05, 2017   Michelle Celarier

Why hedge fund managers can’t give away a house in Greenwich, Connecticut.

  Illustration by Brown Bird Design. 

With their white siding, black shutters, and pillared porches, the colonial homes of Greenwich, Connecticut, evoke genteel New England and all the Yankee respectability that implies. But the town’s proximity to Manhattan, less than an hour away by commuter rail or town car, has made it an extension of Gotham, where fortunes are made — and sometimes lost.

As such, Greenwich has long been a town of arrivistes; almost half of its current home buyers hail from elsewhere. Every few decades wealthy newcomers refashion this tony suburb on Long Island Sound in the image of the latest moneyed class, their status clinched by a Greenwich address, be they the robber barons of the Gilded Age, the corporate CEOs of the 1960s, or, more recently, hedge fund moguls like Paul Tudor Jones II, Steve Cohen, and Ray Dalio.

No doubt Knighthead Capital Management co-founder Ara Cohen thought he, too, had arrived when, just a few short years after starting his hedge fund in 2008, he bought what has become the fifth-most-expensive house on the market in Greenwich today. The 16,863-square-foot, four-floor Georgian mansion, hidden on five manicured acres behind an iron gate on Clapboard Ridge Road, conjures the European aristocracy (or, as Sotheby’s International Realty puts it, "architectural details and tasteful refinements suggest pre-war substance and quality"). Yet Cohen’s imposing stone mansion isn’t old: Finished in 2011 with the requisite hedge fund accoutrements, it houses a home theater and a wine cellar, two swimming pools — one of them indoor, next to a sauna — a billiards room, and an elevator. A life-size chess set adorns the grounds.

But Ara Cohen’s gilded life apparently was short-lived. Almost as soon as Cohen moved in, his high-flying, New York–based hedge fund hit a bout of turbulence, ending 2011 with a 3 percent loss. Less than four years after completing his dream house, Cohen put the mansion on the market, listing it at $35 million in September 2015, the same year Knighthead ended up losing 10 percent. Last August, Cohen reduced the asking price to $29.5 million, for a house assessed at $10.9 million in 2014. Although Cohen’s distressed fund has begun to stanch the bleeding — it was up 9.5 percent in 2016 and continues to post gains as of March — his house is still for sale. (Cohen did not return a call for comment.)

The lofty price being asked for Ara Cohen’s mansion in Greenwich is surpassed by a few properties. One of them is Stanley Druckenmiller’s exquisitely restored antique jewel, 19.5-acre Sabine Farm. The former George Soros lieutenant recently listed the 12,000-square-foot home for $31.5 million. A New York City resident, he used his manor as a weekend pad. Druckenmiller has been outspokenly bearish on the stock market for more than two years, but clearly his pessimism doesn’t extend to Sabine Farm, which he purchased in 2004 for $23 million. Nothing has sold in Greenwich for more than $19.25 million since the beginning of 2016. (Druckenmiller did not return a call for comment.)

Then there’s the most expensive home on the market, which was once "Queen of Mean" Leona Helmsley’s massive Round Hill Manor, a 40-acre spread that the late hotel tycoon’s estate tried to sell for $125 million and finally accepted $35 million for in 2010. The new owners asked for $65 million in 2014 after extensive renovations but have reduced the price to $39.9 million.

That the Helmsley estate is now worth a pittance of its former asking price is a reminder of the fates that have met many of Greenwich’s elite, especially in the wake of the financial crisis. In 2014 local realtor Christopher Fountain renamed Round Hill Road — a 3.5-mile stretch that winds through town, bordered by low stone walls — "Rogue’s Hill Road" for the many scofflaws who have lived there. They include former Galleon Group CEO Raj Rajaratnam, now serving 11 years for insider trading, and Walter Noel, founder of Fairfield Greenwich Group, the main feeder fund for Bernie Madoff’s Ponzi scheme.

Few of the pricey estates in what is called the back country of the Round Hill Road area, north of the Merritt Parkway, are selling. Last fall there was a 128-month backlog on Greenwich homes listed for $10 million or more, according to a report by Hedgeye; prices must drop much further to clear the market, says Joshua Steiner, managing director at the Stamford, Connecticut, investment research firm.

That is slowly starting to happen. The most expensive sale in the back country this year was $13.5 million for 200 Guards Road, slightly less than half of the $28 million the seller (the retired widow of investment banker Stephen Weiss) was asking as recently as 2015. James Mossman, retired chief investment officer of Blackstone Group, sold his back-country estate (complete with an observatory with a retractable roof) earlier this year for $8 million, a 33 percent discount to its 2015 asking price of $12 million.

These numbers can’t help but bring to mind another Greenwich downturn, when the estates built by the industrialists of the 1920s fell into disrepair during the Great Depression and a more subdued mood took hold. Says one former hedge fund executive of the woodsy, hilly area of town once so popular among titans, "It’s a ghost town."

The Status of Greenwich real estate is a window into the current world of hedge funds, one filled with huge ambitions, busted dreams, and no small amount of schadenfreude. Multibillion-­dollar funds have shut down, $100 million paydays have all but disappeared, and the funds that do survive increasingly employ machines instead of humans. "People are working harder, and they are making less money," James Aiello, chairman of the Greenwich Economic Advisory Council, says of the town’s wealthy residents.

Cozy Greenwich wasn’t always so glum. Just north of the New York State border, the town took off in the 1990s as a tax haven for hedge funds and the men who managed them, capitalists fleeing New York’s hefty state and city income taxes. But the spread has narrowed, and attempts by Connecticut to further raise taxes on Fairfield County’s wealthy come at a time when their earnings are faltering. "This industry is more fragile than you think," Bruce McGuire, president of the Connecticut Hedge Fund Association, told state legislators at a hearing on a bill to mandate a 19 percent surcharge on Connecticut’s richest citizens.

In recent years billionaires like Edward Lampert of ESL Investments, Paul Tudor Jones of Tudor Investment Corp., and Barry Sternlicht of Starwood Capital Group have moved their domiciles to Florida — meaning they must live there more than half of the year, even if they don’t want to, or can’t, unload their Connecticut properties. "You can’t give away a house in Greenwich," Sternlicht said at Institutional Investor and CNBC’s Delivering Alpha conference in 2016, adding that he moved to Florida in July of that year in part because "Connecticut got too close to the Manhattan tax rates. We used to have no taxes." (Connecticut first passed a state income tax in 1991, long before most of the current batch of hedge fund execs moved there.) Sternlicht asserted that high income taxes have made all of Fairfield County a "terrible" place to live.

Greenwich encompasses 62 square miles and has a population of slightly more than 60,000. Today more than 1,200 of the town’s homes are on the market, according to Sotheby’s. More than 250 of those are priced above $5 million, and 57 above $10 million.

Much of the current glut can be traced to overbuilding and speculation, led by the town’s flashiest developer, Antares Investment Partners, whose owners, James Cabrera and Joseph Beninati, became famous in Greenwich for helping Paul Tudor Jones find headquarters for his hedge fund and as partners in several upscale restaurants.

Beninati and Cabrera bought 26 back-country acres in 2004 and began building houses on them after raising $12.9 million from investors and borrowing $27 million from two banks. "There’s always a market for van Goghs, and there’s always a market for back-country mansions in Greenwich," Beninati told the New York Sun in April 2007. Even if the Antares partners’ hedge fund clients deserted them, Russian oligarchs would pick up the slack, they reckoned.

Antares’s leverage and the market crash did the partners in, and they were forced to sell their biggest property to settle investor claims. Beninati and Cabrera are now neighbors, living in their mansions on Mooreland Road, off the far end of Round Hill Road, and both of their homes have been on the market for years. Beninati tried to sell his Mediterranean-style villa for $26 million in 2012; it’s now listed for $12.9 million.

"There are still people doing speculations," says former Greenwich selectman Richard Bergstresser. "The problem is there aren’t any oligarchs or billionaires coming out to buy them." Bergstresser was one of several incensed citizens who lobbied against what he derided as a 30,000-square-foot "party" house that Russian airport mogul Valery Kogan wanted to build on Simmons Lane. The project was dragged out by Greenwich’s Planning and Zoning Commission until Kogan’s finances turned and he abandoned the project. Now the Chinese and the Russians have retreated from the market, in part because of the dollar’s strength and oil’s precipitous drop. Meanwhile, hedge fund tycoons are in a years-long slump, and few new billionaires are being minted.

Last year the average sale price for a Greenwich home was $2.2 million, according to Sotheby’s, a 9 percent drop from the previous year. The average was also lower than in 2005, when it hit $2.5 million, which then represented a 40 percent increase over two years. In 2005, 16 houses sold for more than $10 million. In 2014, 15 sold for that amount, but only five went for more than $10 million in both 2015 and 2016, according to the latest real estate report in Greenwich magazine.

On Round Hill Road alone, ten houses are on the market. One of only two recent sales was a house owned by a woman whose husband is in prison for beating her into a coma with a titanium bat — another infamous Greenwich character. It sold last year for $4.2 million (down from its $11.75 million asking price in 2014) to an unnamed person via a limited liability corporation; realtors say LLCs now account for 75 percent of all buyers. In other luxury markets LLC owners became skittish after a U.S. Treasury Department crackdown in Manhattan, Miami, and Los Angeles that forced title companies to reveal the LLCs’ true owners to the government. The feds discovered that some 30 percent of the owners were connected to suspicious transactions that they consider red flags for money laundering.

Greenwich, and more broadly Fairfield County, are home to more hedge funds than anywhere in the U.S. except New York City. Politically, there is a bipolarity over the value of such flamboyant neighbors.

The Connecticut Hedge Fund Association estimates the state has 420 funds with a combined $750 billion in assets, out of an industry total of $3 trillion in the U.S. Yet the wealth is concentrated in just a few funds; only 23 manage more than $1 billion, down from a peak of 30 in 2008, according to data provider Absolute Return. The robust minority of Connecticut hedge fund assets are centered in just two firms: Greenwich-based AQR Capital Management, located in a nondescript glass block of an office building next to the train station, with 722 employees, and Bridgewater Associates, which employs about 1,500 in Westport.

The respective billionaire founders of the firms, Cliff Asness and Ray Dalio, live in some of Greenwich’s priciest real estate. Asness, who made his debut on the Forbes billionaires list this year and ranks 22nd on the 2017 Alpha Rich List, built his megamansion on Conyers Farm, another historic back-country tract of land, once owned by Edmund Converse, a founder of U.S. Steel. Dalio, a Rich List perennial worth an estimated $15.3 billion, lives in an expensive waterfront area. Paul Tudor Jones, whose fund’s assets sit at $10 billion, was one of the first hedge fund titans to build a megamansion — fashioned after Thomas Jefferson’s Monticello in a nod to Jones’s Southern roots — on the water in Belle Haven. Though he still owns the house, Jones moved his domicile to Palm Beach, Florida, in 2015. He is worth $4.7 billion, according to Forbes, making the loss of his tax income a big hit to Connecticut.

Not surprisingly, Connecticut is doing all it can to keep AQR and Bridgewater in the state. Last year AQR (which has $70 billion in hedge fund assets) received $35 million in loans and grants to help expand and add jobs. Bridgewater, which with $122 billion is the world’s largest hedge fund, got $22 million in grants and loans to keep it from leaving the state, and could get an additional $30 million in tax credits.

At the same time, Connecticut raised its top income tax rate to 6.99 percent, just below New York’s 8.82 percent, and the state legislature is considering a 19 percent surtax on income generated through providing investment services and fees. The legislation is being pushed by progressives across the tristate area and recently came out of committee in the Connecticut legislature, much to the chagrin of the hedge fund industry.

"Many Connecticut firms or their founders came from New York and may well have decided to set up their firms there," the Connecticut Hedge Fund Association’s McGuire said in the recent hearing on the legislation. "They chose Connecticut in part because of the favorable relative tax climate. Therefore, one could argue that Connecticut’s investment management industry is populated by exactly that type of person that will move based on tax policy. If this surcharge on all investment management fees is approved, we believe that a certain percentage of firms (and/or their founders) will leave Connecticut for other states. Florida for example, is actively courting this industry."

Supporters of the legislation, including unions and their progressive allies, aren’t buying the argument. "The fact is Connecticut is throwing money at hedge funds, which are supposed to be the bleeding edge of capitalism and can make money in any environment," says Mike Kink, executive director of the Strong Economy for All Coalition, who has been involved in a similar lobbying effort in New York. He disputes the notion that Greenwich’s real estate downturn is the result of rising taxes. "The fallout in Greenwich is more about speculative excess and over-the-top consumption than government policy."

But changes in the industry are worrisome to everyone who depends on it, from real estate agents and developers to lawyers, accountants, bankers, and restaurateurs.

"A big trend in money management is computer automation — that is, using computer programs instead of people to make trading decisions," says McGuire, pointing out that Bridgewater and AQR are well-known quant shops. "Other firms, like Tudor Investment in Greenwich, are following this trend."

Quant analysts, not to mention machines, don’t get the kind of bonuses that traders or portfolio managers once did — bonuses that allowed them to pay cash for multimillion-dollar mansions. "Guys who once got bonuses of more than $1 million are now earning only $250,000," says one hedge fund executive. Many of those people, now either underemployed or unemployed with few high-paying prospects, are struggling to meet the "nut" of a Greenwich lifestyle that typically includes hefty membership dues in one of several local clubs.

Greenwich realizes it needs to diversify from its reliance on the financial sector to lure future moneymakers like biotech or technology companies. It is embarking on a marketing campaign to improve the image of the town, which, coincidentally or not, was recently named one of the top 12 vacation spots in the world by Expedia for its fine restaurants, public beaches, and local museum — a designation that raises eyebrows from even the staunchest Greenwich boosters. The next thing you know, there will be a bus tour of the homes of the rich and infamous.

Even if the billionaires leave, many changes they’ve brought to Greenwich will remain. The massive building spree during the recent boom led more than a dozen homes of historical significance to be torn down. Demolitions are continuing: The local historic preservation committee reviewed more than a dozen during one meeting last fall, according to the minutes.

Although hedge fund executives aren’t involved in local politics or preservation attempts, many have made sizable contributions to the community. Former hedge fund kingpin Steve Cohen, whose Greenwich mansion is one of the biggest in the back country, is a patron of the local Bruce Museum and donated an estimated $1.5 million to build (over the opposition of neighbors) a soup kitchen run by Christ Church Greenwich. Dalio launched the Greenwich Town Party festival, which brings in famous musical acts each summer. Since the festival’s launch six years ago, Dalio has donated about $5 million to the event. Jones, in what seems a quaint act of noblesse oblige, opens up his home to the town folk at Christmas.

None of this impresses longtime residents like Bergstresser, who calls the Town Party a tragic bore. One elderly, gray-cashmere-clad woman, who moved to Greenwich 50 years ago, blames the town’s changes on the hedge fund managers. "Their houses are too big, they are too close to the road, they have too many cars, and the trophy wives are vulgar," she confided at a recent function held at Round Hill Community Church.

The church was packed to hear famed educator and author Jonathan Kozol, an indication that while Greenwich may trend GOP, many residents are what once were called Rockefeller Republicans — socially liberal, economically conservative. More than half the town voted for Hillary Clinton in the recent presidential election; about a third identify as independents. These days the wealthy project a more subdued vibe, in contrast to the Gatsby-esque feel of the pre–financial crisis era, when cigars and tuxedos dominated the social scene, says the hedge fund association’s McGuire.

Indeed, there is a new wave of home buyers in Greenwich. There still are plenty of midlevel hedge fund professionals, but they came of age in the financial crisis and have a different set of expectations. Now married with children, they are exiting Tribeca or Brooklyn for the suburbs, moving in search of good public schools and houses in the previously down-market neighborhoods of Riverside and Old Greenwich. Instead of following Steve Cohen up Round Hill Road, they are following their friends, says a real estate agent. The hot areas are near the water and within walking distance of the train, for a quick commute to Manhattan. Properties under $2 million are selling the fastest, according to Centric Property Group and GGP, which notes that there was a 20 percent bump in sales during the first quarter. Much of the action is centering on condos, co-ops, and the neighborhoods of Cos Cob, Old Greenwich, and Riverside.

"It’s a lifestyle adjustment," says Jeff Jackson, a real estate agent with Centric. "This generation of wealth has a different idea of where to spend money than your father’s hedge fund."

The Millennials moving from Brooklyn are urbanites; they want to walk to a corner café, know their neighbors, and watch their kids playing outside, Jackson says. They also want new homes with the latest in energy-saving technology, from insulation to windows, as well as outdoor fire pits and glass NanaWalls that fold open to the elements. Great estates are just too costly to maintain.

The new arrivals are rich but less showy. They eschew precious antiques and grand gardens in favor of fluffy white sofas, art deco replica chandeliers, and leather dining room chairs sold at the local Restoration Hardware. The store opened in 2014 in what once was the Greenwich Post Office, an imposing neoclassical building on the National Register of Historic Places that sits on a triangle in the center of town. Its interior was gutted to turn it into a furniture showroom.

The transformation of the post office capped a wholesale remaking of downtown’s central Greenwich Avenue to cater to hedge fund money, with most of the mom-and-pop stores giving way to Rodeo Drive–type brands like Ralph Lauren and Hermès, and — what else? — a Tesla showroom. A local pizza parlor was replaced by a TD Bank.

Near one end of Greenwich Avenue, Saks Fifth Avenue took over what once was a Woolworth store, a popular hangout for children decades ago. "When I was a kid, I could go down and pick out a gerbil and have hot cocoa with my grandma," recalls lifelong resident Charles Halsey, a 57-year-old hedge fund executive. "It wasn’t To Kill a Mockingbird, but it was very low-key."

It may never be that way again. Nowadays, Greenwich kids are more likely to be found at the Apple Store (which replaced a local cinema) or holed up in their mansions, alone in the dark, watching movies in the basement.

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