James Tisch, who invests in hedge funds to boost returns at Loews Corp. (L), said he avoids managers with the largest pools of money and sleeps better at night knowing he doesn’t face the same prospect of client withdrawals.
“We are very wary of managers that have $10 billion, $15 billion, $20 billion, because you have to wonder, how can they generate outsize returns with so much money,” Tisch, Loews’s chief executive officer, said today at the Bloomberg Hedge Funds Summit in New York. “We are constantly looking and probing and trying to find the new guys on the street, the people that aren’t loaded to the gills.”
Tisch, 60, and his family have built Loews into a $17.7 billion business by investing in hotels, energy companies and insurer CNA Financial Corp. (CNA) Most of Loews’s investment portfolio is held by CNA, which gets to oversee money for years in some cases before paying claims and can raise cash by selling more policies. Managers of the largest funds are “really insecure,” because clients can demand their money back, he said.
“They’re phenomenally jealous of me, believe it or not,” Tisch told Bloomberg Television’s Stephanie Ruhle at the event. “They say to me, Jim, you’ve got permanent capital. Your money can’t leave. But all these other guys if they have a bad quarter, a bad year, boom! Look at SAC Capital.”
Investors have been withdrawing money from funds overseen by Steven A. Cohen’s SAC Capital Advisors LP as the U.S. government intensifies its probe of insider trading at the Stamford, Connecticut-based firm.
SAC may be left with less than $1 billion from outside investors after yesterday’s deadline for redemptions, according to four people with knowledge of the situation who asked not to be identified because the information is private. Cohen’s firm was once among of the most successful in the hedge-fund industry, with returns averaging 25 percent since 1992.
Hedge funds trailed global stock markets for six straight months through April amid a rally in equities. John Paulson, who made $15 billion in 2007 for investors when he predicted the U.S. housing market slump, faltered more recently on his wagers on gold and macroeconomic developments. Paulson & Co.’s assets have slid more than 50 percent from a peak of $38 billion in 2011 when it was one of the world’s biggest hedge funds.
Tisch said the fees hedge funds charge are worth it for his company, because the managers have expertise that would be expensive to recreate in-house. Placing money also gives Loews access to a breadth of trading strategies, he said.
More than $47 billion of Loews’s $53.2 billion in investments were at CNA at the end of March, according to the company’s most recent quarterly filing. Most of the insurer’s holdings are in fixed-income securities such as corporate bonds and municipal debt.
The Federal Reserve has kept interest rates low to help spur the economy. That’s punished insurers that invest in bonds, because as securities in their portfolios mature, the companies struggled to reinvest at yields that can generate the same amount of investment income.
Tisch said CNA’s strategy is mostly to “grin and bear” the low interest rates. Rather than bet on equities or infrastructure, the insurer is using a hedge fund portfolio valued at about $2.5 billion to cushion bond rates that are near record lows. That helped boost investment income 11 percent to $2.28 billion in 2012 from a year earlier.
“We’ve made the decision to invest in hedge funds as the ‘spice in our soup,’ that’s going to add to the earnings,” he said.
To contact the reporter on this story: Noah Buhayar in New York at email@example.com.