It may be "a function of ego"—and it tends to send investment performance sliding
John W. Henry, founder of futures trader John W. Henry & Co., became the principal owner of the Boston Red Sox in 2002. Two years later the team won its first World Series in 86 years. Three years after that it chalked up a second championship. While the Sox were winning, the firm's assets were dwindling, falling to $319million as of Apr.15 from a peak of $3.4billion in 2005.
James Pallotta, a Boston-based hedge fund manager who at his peak oversaw more than $11billion, bought part of the Boston Celtics in December2002. Six years later the basketball team won the National Basketball Assn. championship. In June2009, following two years of losses, he closed his Raptor Global hedge funds.
The trend hasn't gone unnoticed by hedge fund investors. "Owning a team can be a function of ego, it is very high-profile, and it could prove to be a distraction," says Brad R. Balter, head of Boston-based Balter Capital Management, which farms out money to hedge funds. "As an investor, I have to consider that." Words to bear in mind for Steven A. Cohen, the billionaire hedge fund manager who is bidding for a minority stake in the New York Mets.
Of course, there are plenty of reasons hedge fund managers lose money, and most have to do with unexpected events like, say, a global financial crisis. The average hedge fund tumbled almost 20percent in 2008, mostly in the last quarter of the year, following the bankruptcy of Lehman Brothers.
Investors such as Balter are watchful for signs fund managers have become less attentive to their day jobs. "We don't begrudge managers getting rich, but we want to invest with people who are motivated and are concentrating full-time on managing money," says Brett H. Barth, a partner at New York-based BBR Partners, which invests in hedge funds.
Cohen, 54, oversees $12billion at his SAC Capital Advisors in Stamford, Conn. A Mets fan since his childhood in Great Neck, N.Y., Cohen is competing against at least two other groups, including one formed by hedge fund manager Anthony Scaramucci, for a stake of 25percent to 49percent of the team, which hasn't won a World Series since 1986. The Mets' owners, the Wilpon family, are fighting a $1billion lawsuit filed by the trustee trying to recover money for victims of the Ponzi scheme created by Bernard Madoff.
Cohen, who declined to comment, has been enjoying his status as a billionaire for years. His art collection boasts works by Van Gogh, Picasso, and Warhol, and his Connecticut mansion has a two-hole golf course and a basketball court. So far his lifestyle hasn't hurt his returns, which have averaged about 30percent a year over almost two decades, one of the best records in the industry.
For a billionaire fund manager, buying a stake in a sports team might be about "fulfilling a childhood fantasy, showing the world you've made it, or buying out of boredom," says Brad Klontz, a financial psychologist and associate research professor in personal financial planning at Kansas State University in Manhattan, Kan.
In October, Henry, 61, added Liverpool FC, the English soccer club, to a sports portfolio that also once included the Florida Marlins baseball team. Henry's funds buy and sell based on computer models that haven't changed dramatically since Henry designed them in the 1970s. That means Henry doesn't need to spend his days glued to trading screens, says Kenneth Webster, the firm's president. Webster says returns have picked up since 2007, after two years of underperformance.
Pallotta, 53, has also added to his sports holdings, joining a group that bought AS Roma, an Italian soccer club, last week. Pallotta, who started Raptor Global in October1993, had returned about 19percent on average annually until 2007. That year his funds tumbled 8.5percent, followed by a 20percent drop in 2008. He's now running a new stock fund, Raptor Evolution. "Every investment helps me in what we are doing—our network is our business," says Pallotta, who adds that his investments in the teams are passive. His minority stake in the Celtics involves going to two board meetings a year—after market hours. "It's not a lack of focus," he says. "It's absolutely the opposite."
For Philip Falcone, 48, head of New York-based Harbinger Capital Partners, his interest in owning a team predates his hedge fund career. He played professional hockey in Malmö, Sweden, for a year, until a leg injury sent him to Wall Street. He became a billionaire after making a profitable bet on the collapse of the subprime loan market in 2007 and started spending his money immediately.
By February2008, Falcone had bought Penthouse publisher Bob Guccione's 27-room townhouse on Manhattan's Upper East Side for $49million. He became a noncontrolling partner of the National Hockey League's Minnesota Wild in April of that year. His fund assets peaked two months later at $26billion. He now manages about $7billion. Falcone also declined to comment.
Not all managers have seen their performance suffer after investing in sports. David Tepper, 53, who runs the $16billion Appaloosa Management in Short Hills, N.J., bought a 5percent stake in the Pittsburgh Steelers in September2009. That year his main fund climbed 130percent. His fund returned about 30percent last year and is up 10percent so far this year—meaning the Steelers haven't kept him from scoring.
The bottom line: Some notable hedge fund managers have compiled spotty performance records after buying sports teams.