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December 7, 2009

Time Flies When You’re Hedging Funds

By Spear's

Only yesterday they were the pariahs of the business world, but hedgies are bouncing back quickly and are eager to reinvent themselves, says William Cash
‘THIS TIME LAST year it felt like Armageddon. Everyone was predicting the end of the hedge fund industry as we knew it,’ says Deirdre Brennan, the glamorous publisher of FinAlternatives, a daily hedge-fund newsletter read every morning by the world’s top managers.

‘Right after the Lehman Brothers collapse I went to lunch with a portfolio manager who is well known for throwing lavish cocktail parties at his huge $10 million New York SoHo loft. He told me that not only was he not in the mood to socialise, but that he also feared he may have to sell his beloved abode. “But then again, who could afford my place now?”’

In London in September 2008, the mood was no different. The once-so-cocky, Maserati-driving hedge-fund brigade suddenly found themselves — along with investment bankers — the enfants terribles of the global financial crisis. Their (formerly) wealthy clients were still paying a pricey two per cent fee for the privilege of being financially flayed alive as even the most respected funds suffered painful losses.

But while the guilt-ridden banks and bankers continue to be in the firing line for their continuing greedy bonus culture (despite being bailed out by the taxpayer), seemingly having learnt nothing, the hedgies (or at least those who have survived) are re-emerging fitter, leaner, hungrier and more lethally opportunistic at getting seriously rich again. In short, while bankers continue to be portrayed as greedy opportunists, the hedge-funder is being rehabilitated.

The recent pickup in M&A deals — such as the Cadbury takeover bid — and the sharply reduced number of players in the hedge-fund game means there are now opportunities galore for smart and opportunistic hedgies to make (or remake in many cases) vast fortunes. In many ways, more so than even the golden days of 2005-06, it has never been a better time to be a hedge-fund manager again in London — so long as you have a successful track record, haven’t been burnt by Madoff (like Nicola Horlick), and haven’t been guilty of ‘gating’ your clients’ cash by preventing them redeeming money they invested with you in good faith.

NOW THAT THE dust is settling on the new landscape, investors are increasingly realising that with interest rates low, anybody who wants to make a meaningful return will have to start looking at hedge funds in a new light.

Suddenly there now seems to be a new mood on Hedge Row. ‘All the doom and gloom has suddenly faded, especially in London, where the most talked-about new hedge launches in years are happening,’ says Brennan, who tracks hedge-fund start managers. ‘Funds are hiring again, and investors are looking to start writing big cheques again. And that very same manager who looked like he was about to commit hara-kiri last fall from his SoHo loft just sent me an invite to his Halloween costume ball.’

It’s actually never been a better time to be an ambitious, ruthless hedgie; especially as the profession seems to be having its pariah status lifted. According to Alan Miller, who made a personal fortune of around £65 million running a hedge fund for New Star, it is almost respectable to be a hedge funder again. ‘They’ve moved up from most hated species on the planet,’ he says.

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David Yarrow, a well-known and highly respected hedge-fund manager whose Clareville Capital’s Pegasus Fund has continued to do well despite the climate, has a self-made fortune, although his father ran the Yarrow shipyard in Glasgow for 30 years. ‘It’s actually quite fun now that a lot of the cowboys and rubbish have gone,’ he says.

Yarrow, 43, has long had the unenviable responsibility of looking after the cash of many of his mentors and friends (he had eighteen ushers at his wedding), whose ranks include the likes of former F1 team owner Eddie Jordan, Carphone Warehouse tycoon Charles Dunstone and Jonathan Marland (former Treasurer of the Tory Party). ‘It is a meritocracy — as long as you have treated your customers with respect, there are great opportunities going forward.’

This mood was reflected at last month’s 2009 Morgan Stanley ‘capital introductions’ hedge-fund conference, which was hosted this time in Rye, upstate New York. ‘There was definitely a change of mood,’ says my hedgie source. ‘They had record attendance, and the poolside talk was of which new funds and fund managers people wanted to invest in.’

IN LONDON, THREE major new funds being launched by experienced ‘star’ managers are being keenly watched as evidence that London is fighting — certainly on Hedge Row — to win back the crown of financial capital of the world. (Significantly, the sequel to Oliver Stone’s Wall Street currently being made, called Money Never Sleeps, originally featured Michael Douglas as Gekko re-incarnated as a reformed London-based hedge-fund manager. It will be intriguing to see if Gekko remains based out of London when filming is complete.)

The largest launch is the new Tyrus Capital operation, based in Grosvenor Place and run by Lebanese-born Tony Chedraoui, who used to run Deephaven’s highly successful European Event Fund. In 2008, a year in which many funds were ravaged by losses, his fund was up 15 per cent; no wonder he has been able to raise $500 million. Another fund being closely watched by potential investors (who include high-net-worths, banks and family offices) is called Theleme and run by Patrick Degorce, formerly a top manager at Chris Hohn’s TCI fund.

But the new fund that is perhaps creating the biggest buzz is called Belay Partners, run out of offices in Chelsea by founding partners Harry Tyser, formerly of New Star, and Daoud Zekrya, formerly with Marshall Wace, old hands who have worked together in various guises for nearly twenty years. Tyser is well known in the industry for his contrarian investment views which have reaped envious results over the past two years.

When the market was collapsing, Bloomberg ran a story on Tyser’s exceptional performance with the headline ‘Not all hedge funds are losers’. Now aged 41, with a wife and three children, and not having lost money for his clients in eight years, he is exactly what investors are looking for right now: somebody with experience and a few battle scars to show.

‘Belay is being closely watched,’ says a top analyst with a bank who looks for new investment opportunities. ‘They are exactly what the market is looking for right now, a nimble, boutique fund unencumbered by any baggage. No history of “gating”, no Madoff, no “side pocketing” or suspended redemptions. They are all about returning investor trust, which is what the industry needs right now. What is appealing is that they don’t have a “benchmark mentality”.’

HEDGE FUNDS HAVE actually benefited from the financial crisis in various ways at the expense of the banks. For financial markets to exist, there has to be somebody providing financial capital-risk. Because governments (i.e. taxpayers) will not stand for banks taking the scale of risks they did before, it has opened up a golden new opportunity for hedge funds. ‘Hedge funds are not supported by the taxpayer — if a hedge fund goes bust it just goes out of business. There is no instance of a hedge fund being bailed out by taxpayer,’ says Wilson.

Many hedge funders have, however, had to reinvent themselves several times in their careers following blow-ups or a series of losses. But in the rough-and-tumble hedge-fund world, such blows to ego and reputation are all taken as part of the roller-coaster ride.

As David Yarrow says: ‘If I have a reputation in the City for anything, it is for being a fighter in tough times. Sometimes you have to loosen yourself for a while, remove the monster from within, and be normal again. The best managers are the ones who can remove the monster when they have to.’

When I ask Yarrow if he ever gets annoyed that hedge-fund managers have been tarnished by the actions of bankers, who were the real arsonists of the financial firestorm that blew through the world in 2008, he says, ‘No. I think we are all pretty thick-skinned. You have to be in this business.

‘I do think there is prejudice here against any form of success. There is a very different attitude in America, where by and large it is applauded. That’s because we’re British.’

Could a Madoff scandal ever happen in London? ‘All I can say is that people know where I live. If the end buyer doesn’t know where the manager lives, it’s not a good sign.’

How well are these titans of finance really coping with their newly adjusted status as the pariahs of finance? One extremely sexy female hedge-fund marketer I spoke to, who knows them all both socially and professionally, said: ‘They are not really as tough and ruthless as they like to make out. Many are just geeks at heart.

‘Many only went into hedge funds because they were insecure in the first place; they wanted to use money as a way of getting the girls they never got at college, or because they were more into work or maths than partying. Most are pretty vulnerable and have found it very difficult to cope.’

IN WALL STREET, there is a famous scene in which the young, hustling Charlie Sheen character, Bud Fox, is led in handcuffs out of the trading floor after being busted for insider dealing. As he is escorted out, his boss says to him that when you find yourself falling into the ‘abyss’ the only thing that will get you out is ‘character’.

And to be fair, many of the alpha hedgies whose stars fell so spectacularly from the firmament have dug deep to find the reserves of ‘character’ that have seen their funds bounce back and their reputations restored. Examples of funds which have shown this financial Dunkirk spirit include the Tosca fund.

For many, especially those with no jobs and no prospects, they have had plenty of time to think about what they really achieved in the last Mayfair gold rush. Many made money — loads of it — but it’s gone. Spent on divorce, on starting a new fund, or eaten up by the losses of last year.

Yet the real problem is that, like gambling, running a hedge fund is often a form of addiction. Once in the game it’s difficult enough to beat the house — but even more difficult to leave.

When I called up one former star performer who was wise enough to quit a year or so ago after making himself a fortune, and I asked him if he missed the game, he said: ‘I’m happy because I made a lot of money by leaving. Admittedly, I do often wonder if I would be so happy to be out of Hedge Row had the credit markets not melted down. The fact that they did melt down made my decision appear perfect — at least, that is what I tell my wife.’

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