Hedge Funds Facing Succession Challenge as Kovner Hands Off Caxton to Law
Kovner yesterday named chief investment officer Andrew Law, 45, to run his $10 billion Caxton Associates LP. Kovner, 66, who started the New York-based firm in 1983, told clients in a letter that he will retire by the end of the year to pursue personal interests. Peter D’Angelo, 64, the firm’s president and co-founder, will also step aside.
Caxton is confronting a difficult challenge for a growing number of hedge funds: managing succession in a business where success is built on the founders’ trading skill and reputation. Unlike private-equity firms such as Blackstone Group LP (BX), which transformed themselves from private investment partnerships into public, diversified asset managers, top hedge funds from Robertson’s Tiger Management LLC to Druckenmiller’s Duquesne Capital Management LLC returned investor money after the founders stepped back.
“Hedge funds haven’t done a great job at succession planning,” said Myron Kaplan, a partner at New York law firm Kleinberg, Kaplan, Wolff & Cohen PC who advises hedge funds. “The key is to institutionalize the firm and change investors’ perceptions of the fund as a single guru’s shop.”
In the past year, at least three top hedge-fund managers ceased investing client money. George Soros, the 81-year-old billionaire, told investors in July that he would turn New York- based Soros Fund Management LLC into a family office. Chris Shumway, 45, founder of Shumway Capital Partners LLC in Greenwich, Connecticut, said in February that he would return capital to clients. Druckenmiller, 58, shuttered his New York hedge fund in August 2010.
Hedge-fund legends including Robertson, 79, and Michael Steinhardt, 70, returned client money in 2000 and 1995 respectively.
“It’s a shame that franchise value is being dissipated and not realized by all the people involved, be it the founder, his employees and investors,” said Kaplan.
In contrast, the founders of the largest private-equity firms, many of whom are in their sixties, have diversified their businesses and sold shares to the public as part of their efforts to ensure the long-term survival of their companies.
Blackstone, the biggest private-equity firm, and Fortress Investment Group LLC went public in 2007. KKR & Co. gained a New York listing last year, and Apollo Global Management LLC did the same in March. Carlyle Group this month filed for an initial public offering.
At KKR in New York, co-chairmen Henry Kravis and George Roberts set up a management committee where they share oversight of the firm with younger executives who may one day run the business. Kravis, 67, said at the firm’s investor day in March that succession is on his and Roberts’ minds.
“You have to be assured that George and I think about this every day,” he said. “We talk about what will be the future at KKR and you can’t run any company, in our view, unless you build a very deep bench of people.”
Blackstone said in its 2007 IPO filing that President Tony James, 60, would succeed 64-year-old Chief Executive Officer Stephen Schwarzman if he steps down. Schwarzman started New York-based Blackstone in 1985 with Peter G. Peterson, 85, who retired at the end of 2008.
‘Ahead of Hedge Funds’
Private-equity firms raise money from investors to take over companies, financing the purchases mostly with debt, with the intention of selling them later for a profit. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
“Succession is one of the things where private equity is ahead of hedge funds,” said Daniel Celeghin, a partner at Casey, Quirk & Associates LLC in Darien, Connecticut, which advises asset-management firms. “They have an advantage because the nature of their businesses is more collaborative, decision- making is shared among teams.”
Buyout firms are also at an advantage, according to Celeghin, because the capital in their funds is locked up for longer periods, usually 10 years, compared with the common quarterly withdrawal notices for hedge-fund investors.
For succession to work at hedge funds, the founders must delegate responsibilities, communicate that to investors and ensure those with added responsibilities are more visible as well as recognized for their contributions, according to Eric Weinstein, who runs the $4 billion fund-of-hedge-funds business at Neuberger Berman Group LLC in New York.
“This must happen incrementally over a period of years or investors will take their money out following a change of control that can be viewed as sudden,” he said.
At Caxton, one of the first hedge funds that sought to profit from macroeconomic trends, Kovner started preparing clients for the change about three years ago when he promoted Law, who joined the firm in 2003, to the new role of CIO. Law manages about 20 percent of the assets, including leverage, of the main Caxton Global Investment fund, or about $3.5 billion, and has been the main contact for investors.
The fund has returned an average of 21 percent a year since inception, compared with an average gain of 11 percent including dividends by the Standard & Poor’s 500 Index. The $7 billion fund had one losing year, in 1994, when it fell 2.5 percent. In Kovner’s time at Caxton, the S&P fell in five calendar years, including a 37 percent drop in 2008.
“I felt that I didn’t need to leave and start my own hedge fund because Bruce had a vision for the firm that meant that I had the opportunity to prove myself,” Law, who is based in London and will continue to split his time between the U.K. capital and New York, said in an interview in Caxton’s Park Avenue office. Kovner declined to be interviewed for this article.
Shumway found out the hard way just how quick investors are to pull their money when he named a new CIO in November and told clients that he plans to step back from managing money. Shumway had sold a stake in his firm to a buyout fund run by Goldman Sachs Group Inc. early last year and said at that time that he planned to set up a partnership.
Within months of the November announcement, clients asked to redeem $3 billion, prompting Shumway to return all outside money by the end of the first quarter. A Tiger Management alumnus whose firm oversaw more than $8 billion before shutting, he now runs a family office and invests in new hedge funds.
‘Lack of Trust’
“I don’t recall staying with a hedge fund after the main manager stepped away,” said Peter Rup, CIO of New York-based Artemis Wealth Advisors LLC, which invests in hedge funds for clients. “It’s down to a lack of trust in the ability of the successors to step up, so as an investor, why take the risk?”
Other funds have struggled to find and keep the right successor. Soros went through four investment chiefs after the departure of Druckenmiller, his right-hand man from late 1988 until 2000. Keith Anderson, his CIO since 2008, left after Soros said he would return all client money.
Louis Bacon, the 55-year-old founder of Moore Capital Management LP in New York, in the past three years hired senior traders including Greg Coffey and Jean-Philippe Blochet. Blochet quit after 17 months to pursue philanthropy. Bacon hasn’t publicly named a successor.
“Succession is not something that some managers want to think about,” said Joel Press, founder of New York-based Press Management LLC, who advises hedge funds on succession planning. “It takes a lot of time, effort and creates additional pressures to running their businesses.”
Tudor Investment Corp., the $11 billion hedge fund run by Paul Tudor Jones, hasn’t announced a succession plan, according to two people familiar with the matter. Jones, 57, who started his main fund in 1986, told AR Magazine last year that he had no intention to cease trading or retire in the following five years. Tudor is based in Greenwich, Connecticut.
Leon Cooperman, the 68-year-old founder of $6 billion hedge fund Omega Advisors Inc. in New York, said he doesn’t lose much sleep over succession planning. The hedge fund, which employs 35 people, has a “deep bench of talent,” he said in a telephone interview, referring to Vice Chairman Steven Einhorn, 62, who has been with Omega since 1999, and co-directors of research Sam Martini, 36, and Jon Aborn, 39, who joined in January.
“Succession is not on my mind,” Cooperman said. “I want to be able to match someone like George Soros” who is investing past the age of 80, he said.
Among the funds that have managed to reduce the dependence on their founders, many follow strategies that distribute investment decisions among groups of traders or use computer models, rather than relying on a single trader. Och-Ziff Capital Management Group LLC (OZM), the $30 billion New York company that went public in 2007, is a multistrategy firm that invests in a broad range of assets from stocks to real estate.
James Simons, the 73-year-old founder of Renaissance Technologies Corp. in East Setauket, New York, last year turned over responsibility for his firm, which uses computer models to invest the firm’s $20 billion in assets, to former co-presidents Bob Mercer, 65, and Peter Brown, 56.
David Shaw, founder of D.E. Shaw & Co., in 2002 handed running of his $21 billion hedge fund to a six-person committee. Shaw, 60, sold a stake in his firm to Lehman Brothers Holdings Inc. in 2007 and spends most of his time as chief scientist at D.E. Shaw Research, which conducts research in computational biochemistry.
“For some firms, we have to ask whether it’s a real transition,” said Kaplan, whose firm is counsel to hedge fund Elliott Management Corp. “Are the founders still running their firms from the shadows, did they share a fair amount of equity and have an appropriate profit-sharing arrangement in place?”
Israel Englander, 62, founder of Millennium Management LLC, has held talks about selling a minority stake in his firm, according to a person briefed on the matter. Englander, who told a conference in November that he plans to be in the business until he’s about 80 years old, started New York-based Millennium in 1989 and stepped away from directly trading money five years later. The firm has more than 110 portfolio managers who oversee $10.8 billion in assets.
At Bridgewater Associates Inc., 62-year-old founder Ray Dalio in the past year started sharing his role as chief executive officer with Greg Jensen, 37, David McCormick, 46, and Eileen Murray, 53, before relinquishing that position in July when he became “mentor.” Dalio retained his CIO role, which he has shared with Bob Prince since 1986. Bridgewater oversees $122 billion out of Westport, Connecticut.
Arrangements such as Dalio’s, where the founder gradually shares responsibility with co-executives rather than handing them over entirely, have been popular with a number of other funds.
Paul Singer, the 67-year-old founder of Elliott Management, a $17.4 billion hedge fund in New York, last year promoted Jon Pollock, 47, to co-CIO. Singer last year created a four-person board of directors that would take control of the hedge fund if Singer were to no longer run the business.
Mark Kingdon, 62, who started Kingdon Capital Management LLC in New York in 1983, told investors in 2009 of his plans to step down by the age of 70 and last year set up a four-person committee, which includes CIO Richard Rieger, to help with the $4.6 billion firm’s succession process.
At SAC Capital Advisors LP, founder Steven A. Cohen manages less than 10 percent of the firm’s capital, with the rest allocated to about 125 portfolio managers, according to a person familiar with the fund. Last year Cohen, 55, picked four senior traders to help select investments for the $3 billion he personally oversees. An eight-person team that includes the SAC Capital’s head trader oversees the running of the $14 billion hedge fund in Stamford, Connecticut.
“Management committees are not the most important part of the succession process,” said Press. “Managers must also think about equity, compensation and governance.”
Investors in Paulson & Co., the $35 billion hedge fund run by John Paulson, were told at a Paris event in June that Andrew Hoine, 37, director of research, would become CIO if the 55- year-old billionaire were to step away from the business, according to a person with knowledge of the matter. Paulson has told clients that age 70 would be a good time to retire, said two investors who asked not to be named because the fund is private.
Paulson owns more than 75 percent of his New York-based firm, while Hoine is one of four employees who each have a stake of less than 5 percent, according to a regulatory filing in March.
“Even with a lot of institutionalization, many hedge funds are to a large extent one-man shows,” said Ronan Cosgrave, portfolio manager at Pacific Alternative Asset Management Co., an Irvine, California-based firm that invests in hedge funds on behalf of clients.
Officials for the hedge funds declined to comment.
At Caxton, Law oversees 26 trading teams, which trade a range of assets from commodities to currencies to profit from economic trends. Seven of those teams are based in London, where they manage more than half of the firm’s risk. Starting next year, Law, who will be chairman and CEO, plans to institute an operating committee to run the day-to-day business of the firm, which has 220 employees worldwide.
Learning From Kovner
Kovner and D’Angelo will remain investors in the fund and will retain “substantial minority stakes” in the firm, Law said. Law, who has no plans to move to New York, said his trading style has always been similar to Kovner’s, and he’s learned some valuable lessons, such as understanding markets and cutting risk when they seem to make no sense.
“Most transitions fail due to lack of profitability and personality issues,” Law, a former head of Goldman Sachs’s proprietary-trading business in London, said in the interview. “When you don’t get the markets right, that’s when people fall out.”
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