Here Comes a New Wave of Billion-Dollar Hedge Funds
(Bloomberg) -- Hedge fund investors aren't giving up just yet.
At least five new hedge fund companies are on track to start with at least $1 billion this year, according to data compiled by Bloomberg, after eight firms started with a 10-figure sum last year. The industry hasn't seen this many mega-startups since 2005, when 13 funds raised a combined $19 billion.
Frustrated with the mediocre performance of some of the industry's old guard, investors hoping for higher returns are writing checks to a handful of new funds, including one run by Brevan Howard Asset Management veteran Chris Rokos and another headed by ex-Elliott Management Corp. star Didric Cederholm.
"Most hedge funds aren't any good, but if you can identify talent early, when they are hungry, you have the potential to generate outsized performance," said Adam Blitz, chief investment officer at Evanston Capital Management, which invests $5.4 billion in these private partnerships.
These new managers are beneficiaries of the poor performance of some established multi-billion-dollar firms, such as John Paulson's Paulson & Co., Carlyle Group LP's Claren Road Asset Management and Mason Capital Management -- which have either lost money or failed to make any over the last three years -- and the generally sluggish returns for the industry overall.
Hedge funds on average climbed 4.6 percent annually over the past three years, according to data compiled by Bloomberg. That's about three times the return of U.S. government debt yet far below the 18 percent gain of the Standard & Poor's 500 Index. At least one large investor, the California Public Employees' Retirement System, said it would exit its hedge fund investments, citing the costs and complexity.
The University of Texas Investment Management Co., which oversees money for the U.S.'s second largest university endowment, is one of the biggest backers of the new startups. It already has about $2 billion invested with what it calls "next generation" firms "with the objective of sustaining top-decile performance for years to come," Bruce Zimmerman, the endowment's chief executive officer, wrote in an annual report published late last year. He didn't return calls seeking additional comment on his new investments.
The new breed of managers tends to be seasoned professionals who have worked for years at larger firms, where they were proven money makers. They have been able to raise large amounts by getting big commitments from a few investors, mostly without having to give up any part of the equity in their firms to do so.
Four of the managers who started billion-dollar firms since the beginning of last year came out of the Ziff Brothers family office, which managed the wealth of Dirk, Robert and Daniel -- scions of William Ziff's magazine-publishing empire. The brothers began reorganizing how they manage their fortune after several key managers left.
David Fear, who ran the Ziff's London office, started trading at his Thunderbird Partners this year with $1.5 billion, according to a regulatory filing, and he chose to stop accepting any more money for the time being, said people with knowledge of the firm. His investors include the Ziff brothers, the University of Texas endowment and Charlottesville, Virginia-based Investure, an endowment money manager, according to the people, who asked not to be named because the firm is private.
Isaac Corre is getting at least one big check from a large investor. He's opening his New York-based Governors Lane to focus on event-driven investing in the next few months. George Soros's family office is putting in as much as $500 million, according to people familiar with the firm. Corre comes from Eton Park Capital Management, the hedge fund firm run by Eric Mindich, who himself was among the biggest startups ever, amassing $3.5 billion out of the gate in 2004.
Bankers expect that Rokos, who generated more than $4 billion as a trader at Brevan Howard, will raise billions when he starts his own firm later this year. Rokos recently settled a legal battle with his former boss, Alan Howard, over whether he could manage money for outside clients before 2018. As part of their settlement, Brevan, which posted its first loss last year, will have a financial interest in the yet-unnamed firm.
Some of the managers have come out of successful firms that limit the amount of money they take in, helping to spur interest in their alumni. Cederholm focused on fixed income and distressed investments at Elliott, which only periodically opens for new investments.
Cederholm is starting Lion Point Capital next month, according to a filing with the Securities and Exchange Commission. The firm will focus on buying and selling stocks, bonds, bank loans and other securities of companies going through corporate events including bankruptcies and restructurings.
Executives from the firms didn't return calls seeking a comment or declined to comment.
Investors have enthusiastically backed new funds before only to be disappointed.
Arvind Raghunathan, former head of Deutsche Bank AG's global arbitrage business, started his Roc Capital Management in July 2009 with more than $1 billion, only to return client capital four years later because of losses.
Pierre-Henri Flamand, a former Goldman Sachs Group Inc. proprietary trader, flamed out even more quickly. He opened his Edoma Partners in 2010, immediately raising $2 billion. Poor performance forced him to close shop just two years later.
Yet clients continue to seek out the next superstar.
"Finding that young talent is always at a premium," said Evanston's Blitz. "You are seeing household name hedge funds becoming big institutions -- it might be good for business but not for investors looking for differentiated returns."
To contact the editors responsible for this story: Christian Baumgaertel at firstname.lastname@example.orgPierre Paulden, Sree Vidya Bhaktavatsalam