Richard Perry Walks Away, Hoping for a Shot at Vindication

  • Manager says he’d back Westhus and Shah if they start funds
  • Perry says mortgage bet could take a year or more to play out

Why Richard Perry Is Closing His Main Hedge Fund

Richard Perry can’t quite believe it’s over.

Despite three years of losses, falling assets and turnover of senior executives, despite even the news Monday that he was shuttering his flagship hedge 
fund -- he’s still looking for a bit of redemption.

Richard Perry

Photographer: Amanda Gordon/Bloomberg

His hope: That one of his acolytes will uphold the legacy of his 28-year-old business and that one of his biggest bets may yet pay off.

“I have this hope that someone says, ‘I love what you guys did, your team did things that were completely different, and how can I participate with them in the future?,’" Perry said in an interview on Monday.

The 61-year-old Perry, one of the original titans of the industry who returned an average of 15 percent a year for decades, is shutting his fund at a tumultuous time for the business, when managers both big and strong wonder whether they might well be next to close down. Pension funds and other institutions are pulling money at the greatest rate since 2008 and pressuring firms to lower fees.

‘Longer-Term’ Focus

“I had to be realistic, and it hadn’t been working for the last couple of years,” Perry said. “I decided that it would be better not to be in this mark-to-market world, and focus on longer-term investments.”

While he’ll be returning much of their money next month, Perry has told clients that he probably won’t be ready to sell a few of his investments for a year or more. Chief among them are preferred shares in Fannie Mae and Freddie Mac. Perry and other shareholders sued the government in 2013, saying it improperly diverted more than $130 billion in profit from the mortgage companies to the U.S. Treasury. That suit was dismissed in 2014. Perry appealed and is awaiting the judge’s ruling.

In 2007, when Perry’s firm oversaw $15 billion, no one would have guessed that less than a decade later the manager would be throwing in the towel. Even weeks before he made the announcement, people who know him speculated that Perry, a triathlete, was too competitive to quit.

Their skepticism was understandable. Perry didn’t have as high a profile as some other hedge fund managers, in part because he rarely spoke publicly about his investment ideas.

But he was the firm’s front man, well-known among chief executive officers, policymakers and heads of state. And he wasn’t shy.

Faded Jeans

At a charity event he hosted in 2007, visitors were able to view the vaunted Pop Art collection he amassed with his wife, Lisa, at their 6,400-square-foot (600-square-meter) penthouse on New York’s Sutton Place. The tour, which included pieces by Jeff Koons and Roy Lichtenstein, even went through Perry’s walk-in closet, where the jeans were arranged by level of fade, and into the bedroom, where a huge painting of a nude, with an abundance of pubic hair, graced the wall next to the bed. When one visitor expressed embarrassment about being in the private quarters of a near-stranger, another quipped: “This is Richard Perry we are talking about. He loves it.”

Perry started his career at Goldman Sachs Group Inc., where he landed a summer gig thanks to his father, Arnold, an office-machinery executive who played tennis with some Goldman partners. After graduating from the University of Pennsylvania in 1977, he joined the firm full time, eventually ending up on Robert Rubin’s merger-arbitrage desk. It was a breeding ground for future hedge fund managers including Eddie Lampert and Dan Och.

A decade later, realizing his money-making opportunities at Goldman were limited, he quit to start his own firm. Jimmy Cayne, his uncle and then-CEO of Bear Stearns Cos., was among those who encouraged him to do so.

Perry joined forces with Paul Leff, who then was a portfolio manager for Harvard University’s endowment. Leff’s more macro approach to investing would be a good balance to Perry’s bottom-up analysis, said money manager Seth Klarman, who advised him to hook up with Leff.

The two focused on merger arbitrage -- betting on whether an announced deal would occur -- and other corporate events. Perry would often meet with CEOs and suggest ways to increase shareholder value.

Always Available

Over time, they expanded the types of investments they did. In 2005, they lent money to Malcolm Glazer to buy the British soccer team Manchester United. And in 2012 they bought a majority stake in high-end retailer Barneys New York. He still owns a stake in the store.

Perry was, like most successful managers, intense. Employees said he was always available and would return e-mails within minutes. One colleague remembers him being out of touch only once, when he went to the British Virgin Islands for his 50th birthday. Leff agreed to answer any messages for him, Perry said.

The financial crisis presented scary times for the firm, as it did across the industry. In 2007 and 2008, the firm made $2 billion betting on the crash of subprime mortgages. Yet even though it predicted the mortgage crisis and was 40 percent in cash, the firm posted its first annual loss in 2008, dropping 28 percent. Unlike a lot of managers, who barred clients from withdrawing money, Perry allowed redemptions and assets tumbled to about $5 billion.

He wasn’t afraid to employ new tactics. In 2008, expecting that distressed credit would rally, he got rid of most of his equities team to focus on the money-making opportunity. Some good years followed and assets again climbed.

Todd Westhus, who joined Perry in 2006, helped oversee some of those profitable trades. The firm made a $2 billion windfall from betting against subprime mortgages during the financial crisis, $600 million on a four-year investment on Argentine bonds, and took profits on some Fannie Mae and Freddie Mac securities it bought for pennies in 2010, according to people with knowledge of the matter.

In 2012, Perry instituted a management change that eventually led to turmoil. David Russekoff was promoted to co-chief investment officer with Leff, who had until then held the job by himself. After disagreements with his new co-chief, including over whether the firm should start a low-volatility fund, Leff stepped down in early 2014, according to people familiar with the firm.

Westhus, Shah

Russekoff’s tenure as sole CIO lasted less than two years. He left Perry late in 2015, the firm’s worst year since 2008. Perry went back to a team approach, instituting a three-person committee made up of Westhus, Maulin Shah and Todd Gjervold to manage the money, with Perry acting as a senior adviser. Gjervold departed the firm in July, according to his profile on LinkedIn.

Investors said they were frustrated by the frequent changes at the top, as well as the firm’s losses and the nature of the trades, which some clients said weren’t unwound fast enough when they began losing money. Others said certain trades were too risky from the outset. Money losers including a failed merger by Williams Cos. and Energy Transfer Equity LP, a wrong-way bet on paper companies and another on Puerto Rican bonds. The fund lost 18 percent since the end of 2013, and assets fell to $4 billion as of August.

"The rewards have gone to those who can take a longer view and ride out the short-term volatility that has come with economic and political events," said Christopher Rossbach, who worked in Perry’s London office and is now chief investment officer at J. Stern & Co., a money manager based in London and Zurich. 

For now Perry waits. He says he’s ready to provide Westhus and Shah with capital if they decide to open their own firms. And he’s confident that his mortgage bet will pay off. In the meantime he’s feeling good about the last three decades.

“I don’t feel like being defensive or arrogant,” Perry said. “We provided capital in some difficult times to companies and countries and we were there when very few others were.”

— With assistance by Tom Beardsworth, Simone Foxman, Nishant Kumar, and Saijel Kishan

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