SAC’s Cohen Vying for Mets May Find Hedge-Fund Lesson in Red Sox’s Henry
Steve Cohen, the billionaire hedge- fund manager bidding for a minority stake in the New York Mets, might want to take note of what’s happened to rivals after they bought pieces of professional sports teams.
John Henry, owner of the Boston Red Sox, has seen assets in his futures trading firm John W. Henry & Co. shrink by 90 percent from their 2005 peak. Jim Pallotta, who bought a piece of the Boston Celtics in December 2002, closed his Raptor Global hedge funds in 2009 after two years of losses. Philip Falcone has lost almost three-quarters of assets in his Harbinger Capital Partners since becoming a non-controlling partner of the National Hockey League’s Minnesota Wild in 2008.
“Owning a team can be a function of ego, it is very high profile, and it could prove to be a distraction,” said Brad Balter, 40, head of Boston-based Balter Capital Management LLC, which invests client money in hedge funds. “As an investor I have to consider that.”
While there are lots of reasons that hedge-fund managers lose money, most of them related to volatile markets and unforeseen events, investors like Balter also look at how traders’ habits and performance change as their bank accounts expand. So far, Cohen’s wealth -- he’s ranked 114th on the Forbes list of the world’s richest -- hasn’t hurt returns of his $12 billion SAC Capital Advisors LP, which has averaged about 30 percent a year over almost two decades.
Lifelong Mets Fan
Cohen, whose firm is based in Stamford, Connecticut, declined to comment through a spokesman. His art collection boasts works by Vincent Van Gogh, Pablo Picasso and Andy Warhol, and his Connecticut mansion has a two-hole golf course and a basketball court.
A Mets fan since his childhood in Great Neck, New York, Cohen, 54, is competing against at least two other groups, including one formed by hedge-fund investor Anthony Scaramucci, for a stake of up to 49 percent of the team. The Mets’ owners, the Wilpon family, are seeking to maintain control of the franchise while covering losses and fighting a $1 billion lawsuit tied to the Ponzi scheme created by Bernard Madoff.
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.
Whatever the reason for buying, the practice seems to be addictive. Last October, Henry, 61, added Liverpool FC, England’s most successful soccer club, to his sports portfolio that once included the Florida Marlins baseball team.
Henry became the principal owner of the 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, JWH’s assets were dwindling, falling to $319 million as of April 15, from a peak of $3.4 billion in 2005. Major clients, including Merrill Lynch & Co., pulled money from the Boca Raton, Florida-based company in 2007 after two years of underperformance.
Henry’s funds buy and sell based on computer models he designed in the 1970s -- and which he hasn’t changed much since -- meaning he doesn’t need to spend his days glued to trading screens, said Kenneth Webster, the firm’s president. Returns have picked up since 2007, he said.
Pallotta, a Boston-based stockpicker who at his peak managed more than $11 billion, bought a piece of the Celtics in December 2002. Six years later, the team won the National Basketball Association championship. His investment business didn’t fare as well.
Pallotta, who started Raptor Global in October 1993, had returned about 19 percent on average annually until 2007, when he lost almost 9 percent of his client’s money, then his biggest annual loss ever. The next year, his funds tumbled another 20 percent. He closed his Raptor Global hedge funds in June 2009.
In the years since he bought a piece of the Celtics, Pallotta, 53, has also spent part of his fortune building a 21,000-square-foot mansion in Weston, Massachusetts. He too has added to his sports holdings, joining a group that bought AS Roma, an Italian soccer club, last week.
He’s now running a new stock fund, Raptor Evolution, with more than $200 million in assets. He also invests in private companies.
“Every investment helps me in what we are doing. Our network is our business,” said Pallotta, who says 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 added. “It’s absolutely the opposite.”
For Falcone, the 48-year-old head of New York-based Harbinger Capital Partners, his interest in owning a team comes from his pre-hedge fund days. He played professional hockey in Sweden for a year until a leg injury sent him to Wall Street. He climbed into the billionaire ranks after making a profitable bet on the collapse of the subprime loan market in 2007 and started spending his money immediately.
By February 2008, he had purchased Penthouse Publisher Bob Guccione’s 27-room townhouse on Manhattan’s Upper East Side for $49 million. He became a non-controlling partner of the National Hockey League’s Minnesota Wild in April of that year. His fund assets peaked two months later at $26 billion. He now manages about $7 billion. He declined to comment through a spokesman.
Some managers have been able to keep up performance after investing in teams.
David Tepper, 53, who runs the $16 billion Appaloosa Management LP in Short Hills, New Jersey, bought a 5 percent stake in the NFL’s Pittsburgh Steelers in September 2009. That year, his main fund climbed 130 percent. It returned about 30 percent last year and is up 10 percent so far this year. He declined to comment on his sports investment.
As the value of sports franchises rises, and the number of billionaire hedge fund managers grows, investors expect to see more traders sitting in owners’ boxes. They’ll be watching.
“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,” said Brett Barth, a partner at New York-based BBR Partners, which invests in hedge funds.
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