Wednesday, February 15, 2012

Where's the Bacon?

Kate Kelly of CNBC reports, A Secretive Hedge Fund Legend Prepares to Surface:
It’s a humbling time for Louis Moore Bacon. The 55-year-old founder of the $15 billion Moore Capital Management — and one of the premier hedge fund investors of the past two decades — just weathered his second down year in the past four after a particularly ragged run in the markets.

His onetime heir apparent recently launched his own fund and a spate of negative publicity in the past few years has raised questions about his management.

Amid the tumult, the Dodd-Frank legislation now requires Moore and other large hedge funds to register with the Securities and Exchange Commission and provide details about their risk management, trading, and disciplinary records. Bacon is loath to reveal any of it.

That has prompted him to reconsider the way he has done business for more than 20 years, according to associates. Some, in fact, believe that in the coming years Bacon may transform Moore into what’s known as a “family office,” a far smaller operation primarily managing Bacon’s own capital as opposed to that of outside investors. “Louis has been talking about becoming a family office for at least two years,” says one investor, adding that Bacon considers the new disclosures required by the Dodd-Frank Act to be “a problem.”

Says a Moore official: “We are registering.” The official adds that the company will send an initial round of paperwork to the SEC in the coming days.

Additional details on Moore’s inner workings are liable to throw a spotlight on the troubles it has grappled with in recent years. Over the past twelve months, several prominent traders have jumped ship to start their own hedge funds, and employees fear layoffs and additional departures in the coming months, say people familiar with the matter.

In 2010, the Commodity Futures Trading Commission fined Moore $25 million, one of the largest financial penalties in the agency’s history, for failing to supervise a trader who allegedly manipulated the metals markets. (Moore neither admitted nor denied liability.)

And other sensational headlines — including the arrest two years ago of a London-based Moore trader as part of a U.K. insider-trading probe and the discovery of a dead man in the hot tub at Bacon’s Bahamas estate — have garnered unwanted attention. (To be fair, the arrest of Moore’s London trader, who has denied wrongdoing, was reportedly in connection with trades made for the man’s personal account, not for Moore funds. And Bacon was not implicated in the Bahamian death; the man, who managed Bacon’s estate, reportedly died of a heart attack.)

Most troubling, however, have been Moore’s lackluster numbers. For 2011, its flagship fund, Moore Global Investments, dropped 2.2 percent, raising questions about Bacon’s ability to navigate such treacherous markets. After a painful 2008, in which the fund fell 4.6 percent and investors pulled some $5 billion, Moore has sought to attract stickier money from pension funds and other more conservative institutional investors who are likely to stay the course, say people with close knowledge of the firm. But the missed opportunities of last year are giving some clients pause.

“It’s trying,” says Brad Alford, an Atlanta-based money manager who invests in Moore and several other hedge funds. He is disappointed in nearly all of them. “The years that we needed hedge funds to perform the most — in 2008 and 2011 — they failed us miserably,” Alford says.

Moore’s imminent SEC disclosures, alas, will not reveal the reasons for that failure. By March 30, any hedge fund adviser with at least $150 million under management must submit an initial round of documents to the SEC, disclosing inner workings that have largely been kept under wraps.

Basic details, like the gross assets of the firm, the disciplinary history of key players and the minimum amount of capital required to invest, will immediately be published on the SEC’s web site. More sensitive information, including nuggets about specific investments and leverage, which don’t have to be provided until later this year, will be made available only to the SEC and the Treasury Department. (They’ll use that information for their ongoing assessments of whether multi-billion-dollar fund companies like Moore pose systemic risk to the U.S. markets.)

It’s not the sort of punch list Bacon, who likes to spend the vast majority of his time trading, is eager to share. Indeed, even in an industry known for its guardedness, Bacon stands out in his desire to reveal as little as possible. Most telephone calls at Moore, which has major offices in both New York and London, have historically not been recorded, say people who have worked there.

Employees sign non-disclosure agreements, and e-mails have traditionally been deleted after just two weeks. (Under Moore’s CFTC settlement, certain e-mails and other records must now be maintained for a longer period.) During meetings with analysts or even investors, say people who have attended them, Bacon, who often draws the blinds in his private office, frequently turns to his lieutenants to answer questions, often sitting silently through the presentations.

When Bacon founded Moore in 1989 with a $25,000 inheritance from his mother, it was a different era. The idea of trading on a “macro” basis—making essentially global bets on everything from equities in the U.S. to European bonds, metals and Asian currencies — was a relatively new concept, and big market disruptions could lead to massive returns.

In Moore’s first full year, for instance, a prescient bet that Saddam Hussein would invade Kuwait generated an 86 percent return, according to a letter Bacon penned to commemorate Moore’s first two decades. Thirteen years later, the same letter explains, Bacon’s accurate predictions on the market events surrounding the Iraq war would help his flagship fund return a performance of 35 percent.

Those sorts of calls have produced a stellar record — Bacon’s flagship fund has averaged 18.8 percent returns since inception in 1989 — and they elevated Bacon’s reputation, giving him a place among the most elite hedge fund managers. He was part of the most important troika in macro trading along with Paul Tudor Jones of Tudor Investment Corp. and Stanley Druckenmiller of Duquesne Capital Management.

But the market turmoil of the past couple of years has made the trends harder to predict. Close correlations between stocks and indices, for example, have limited opportunities for big and successful trades. The actions of central banks, whose policies have helped shore up flailing economies in the U.S. and in Europe, can swing stocks and bonds on a dime. Financial institutions have taken longer than expected to recover, and one of the few lucrative investments has been one of the least daring in the book: gold. Unsurprisingly, the average hedge fund fell 5.1 percent in 2011, according to Hedge Fund Research, with macro managers declining 3.9 percent.

Between the market dislocations and the new SEC regulations, some of the hedge fund titans are beginning to bow out. Druckenmiller downshifted to a family office, as did George Soros (arguably the godfather of macro trading, but not an active hedge-fund manager recent years).

Converting his operation to a family office may not be as easy for Bacon as it has been for some of his peers. Unlike Soros Capital Management, which made the switch in recent months after returning less than $1 billion of the $25 billion it oversaw, Bacon, whose net worth is reportedly about $1.4 billion, relies on outsiders for the majority of his capital.

He also enjoys some of the highest fees in the hedge-fund business: 3 percent of the assets in Moore’s flagship fund as a management fee, and, in good years, the right to pocket 25 percent of the fund’s annual returns before sharing a penny with investors.

Bacon’s success as a trader over the years required both resources and discipline, say people who have worked with him. Before the Internet brought news to his desk at the flick of a button, he had copies of Barron’s, the weekly market tabloid, flown to his London office from the U.S. via courier. Nowadays, say people familiar with the matter, the bedside tables in his numerous properties are set up so that he can scan market data immediately upon waking without lifting his head off the pillow. A technology worker in Moore’s midtown Manhattan office travels frequently to make sure the bedside data feeds are in good working order.

Bacon brings almost as much discipline and organization to his personal life as he does to his investing. His assistants routinely serve him sushi and a green shake containing apples, spinach and cucumbers to stay lean, says someone who has observed his meal preparation. One longtime assistant negotiates annual spending allowances with the elder of his children individually, say people familiar with the matter. Once they’ve agreed on a number, the assistant invites the child in for a sit-down meeting with his or her father, during which Bacon usually signs off on the terms.

Bacon has created a culture at Moore of long hours and exacting standards. Of the numerous portfolio managers Moore has employed over the years, only about a dozen have been given $1 billion or more to manage, with the lion’s share being handled by Bacon himself. And traders, who earn a base salary of $250,000 a year at most, live in fear of having their capital and resultant bonuses scaled back if they make a bad trade and aren’t given time to earn back losses.

“Louis wants to make sure that if you have a bad stretch, he can get rid of you,” says one fixed-income trader who walked away from a potential job at Moore because of those concerns. “Louis feels like he’s the manager of the Yankees. He can have a different team every year and they can still win the World Series.”

Bacon is non-confrontational. At times he has used indirect methods to get his message across, say associates and people who have worked for him. In contrast to a rival like SAC Capital founder Stevie Cohen, who is famously vocal when he disagrees with a subordinate’s trade, say these people, Bacon finds a more subtle way to undo what he views as the potential damage: He sometimes retreats to his office and places an opposing trade, a tactic that hedge fund mavens call “fading” a colleague.

Such countermoves would often pop up on internal documents showing the positions contained in the macro funds that Bacon managed, says one person who worked for him — making it obvious to Moore insiders whom he was undermining that week. Richard Axilrod, the No. 2 at the flagship fund, would often laugh about it, say people who have witnessed the conversations. “Oh, Louis is hedging out so and so,” one of these people recalls Axilrod saying.

Then again, some at Moore suggest Bacon hasn’t been tough enough on errant employees. After all, the CFTC specifically cited the firm for failing to supervise a trader who the CFTC cited for allegedly manipulating the prices of platinum. That trader was allegedly Christopher Pia, one of Bacon’s first hires and arguably the second most powerful person at the firm at the time. (Pia, who subsequently left and founded his own hedge fund, himself reached a parallel settlement last July, agreeing to pay a $1 million fine without admitting or denying liability.)

As for Moore, it’s not clear who — if anybody — would succeed Bacon should he step down. Many regarded Greg Coffey, a former GLG Partners trader hired in 2008, as the most likely successor. But that speculation was scuttled in November when Coffey announced the launch of his own eponymous fund.

In truth, Coffey inhabits a grey zone: He continues to invest some Moore money (despite disappointing returns), uses the firm’s trading functions and is technically still a Moore employee. People familiar with the matter say Moore fixed-income trader Paul Yablon could be the next to start his own fund. Yablon denies it, saying “there is no plan to do anything of the kind.”

Having no successor in place is another reason it could make sense for Bacon to turn Moore into a family office. Either way, many of Bacon’s associates expect him to hang tough – even though, in his mid-50s, the founder could reasonably be considering retirement.

With his youngest child still a toddler, says friend and investor Charlie Krusen, Bacon has joked that “he’s tied to the grindstone for the next 18 years” if he hopes to put all his kids through college. Bacon “has a great work ethic,” Krusen says, “and he’s never going to lose your money. And I’d like to invest with him for the next ten years.” But unless Krusen discovers that he and Bacon are long-lost cousins, he may not get that chance.

This isn't the first time the spotlight was cast on Louis Bacon. In April 2010, Jonathan Prynn of the London Evening Standard wrote an article, Meet cash king Louis Bacon: the richest hedge fund manager in London:

A secretive financial tycoon has been named as London's first self-made hedge fund billionaire, after his fortune grew by £450 million in a year.

US-born Louis Bacon tops this year's hedge fund rich list, with estimated wealth of £1.1 billion, up 69 per cent.

The workaholic financier, described by one commentator as a “Gordon Gekko de nos jours”, is the leading beneficiary of a dramatic year of recovery for London's hedge fund industry.

According to The Sunday Times Rich List 2010, published this weekend, the top three hedge fund bosses have seen their personal wealth rise by more than £1 billion in the past 12 months, as financial markets have emerged from the 2008 crisis.

Mr Bacon founded and runs Moore Capital. At its discreetly opulent offices in Curzon Street staff can keep in touch with the markets at trading screens while they work out in the office gym.

The premises were raided last month by the Financial Services Authority and Serious Organised Crime Agency when an employee was arrested in an operation against alleged insider trading.

Mr Bacon, 53, is married to Canadian socialite and art adviser Gabrielle de Heinrich Sacconaghi. The couple wed in a civil ceremony — his second marriage — at his Manhattan apartment in February 2007.

Friends of Mr Bacon, a squash and polo fanatic, include Arpad Busson and supermodel Jodie Kidd, who also plays polo.

Known for his daredevil trading strategies, he is reputed to be even more powerful than George Soros, the investor who bet against the pound in the 1992 ERM crisis.

He owns a £10 million house in Knightsbridge, homes in Manhattan and Colorado, a Long Island estate, private polo grounds in England and New York state, and a Scottish grouse moor.

He is the first London hedge fund manager to reach billionaire status as an individual. Nat Rothschild of Atticus Capital was listed as a member of the £1.4 billion Rothschild dynasty in 2008, but he inherited much of his riches.

Mr Bacon is number 49 in the overall rich list.

The next richest hedge fund boss, placed 57th, is Robert Miller, 76, founder of Hong Kong-based Sail Advisers. He saw his wealth rise by £200 million to £950 million.

Alan Howard, 46, who co-founded Brevan Howard, is at no 66. His wealth rose £500 million to £875 million.

Since that article was written, Brevan Howard has done exceptionally well, delivering solid results. In late January, Bloomberg quoted Howard saying that 2011 choppy markets will be repeated in 2012:

Brevan Howard Asset Management LLP, the $32.6 billion hedge fund co-founded by Alan Howard, predicted market volatility this year will match that of 2011 as governments in Europe and the U.S. cut spending and growth in emerging economies slows.

“Enthusiasm for additional stimulus appears to have come to an end,” London-based Brevan Howard wrote in a note today. “The largest economies are in a liquidity trap and emerging markets are slowing markedly. Financial markets and the economy are at the mercy of the convergence of these positive and negative forces in 2012.”

Brevan Howard’s biggest fund, the $26.6 billion Master Fund, returned 12 percent last year after it made a bullish bet on U.S. Treasuries and U.K. gilts based on a view that increasing market risk would prompt investors to pile into the safest assets. The firm is expecting 2012 to “mirror the ups and downs” experienced in 2011, when the Standard & Poor’s 500 finished little changed after tumbling as much as 19 percent from an April high.

Global efforts to attack government debt with budget cuts will come with risks that may threaten economic growth, Brevan Howard said in the note. It was published by BH Global Ltd., (BHGG) a publicly traded company that raises money for Brevan Howard’s hedge funds.

“We are about to witness an unprecedented policy move,” the firm said in the document. “Fiscal austerity is being prescribed as the cure following the bursting of the credit bubble. Unfortunately, there is no historical example of when this approach has been successful.”

Traders Hired

Economic growth in the years after the 1929 stock market crash was triggered by stimulus and “sizable depreciations in the exchange of currencies,” Brevan Howard said.

The firm hired about 30 traders in 2011 and plans to “look for opportunities to further enhance its global pool of trading talent” this year, according to the document.

The Master Fund was the firm’s best performing hedge fund in 2011, while the Brevan Howard Emerging Market Strategies Fund was the worst with a loss of 6.1 percent, the note said. Hedge funds posted an average loss of 4.9 percent last year, according to data compiled by Bloomberg.

Howard, 48, founded Brevan Howard in 2002 with four other traders from Credit Suisse Group AG’s proprietary fixed-income trading desk. The Master Fund has never posted a negative calendar year return since its inception in April 2003.

In order to work at shops like Brevan Howard you have to be part of an elite group of traders. Howard is notorious for pulling the plug quickly on any trader who experiences a drawdown of 5% (or so I am told...leaves little room for error).

But these aren't easy markets and even the best hedge fund managers are having a tough time adapting and surviving. And with the SEC pushing for more transparency and reforms, getting support from large pension funds, the days of ultra-secretive hedge fund managers are over.

Hedge funds that can't or refuse to adapt to the new regulatory environment will either convert to family offices or disappear. It's that simple. But few have the deep pockets of a Soros to convert to a family office, so most of them will comply with the SEC and the new disclosures.

Will Louis Bacon survive and thrive in the new world of hedge funds? I don't know but I wouldn't count him out. Guys like Bacon are money making machines. It's embedded in their DNA but that doesn't mean they are infallible.

The fact that he's still able to charge 3 & 25 in his flagship fund tells you that his investors are loyal and still believe in him (personally think it's an outrage for any hedge fund manager to charge such high fees). Recently, Bacon's fund invested $800 million in a hedge fund begun last year by two of its former traders.

Don't know about his personal style of managing and don't care as I have no aspirations of working at Moore Capital or other similar shops (although do love sushi and green shakes!). All I know is that very few hedge fund managers are part of an elite group. No matter what happens in the future, Louis Bacon is one of them.

Below, John Paulson, the billionaire money manager who’s vowed to restore his hedge fund to profitability after the worst year of his career, may have to take a cue from rival Ken Griffin. Paulson’s $28 billion firm, Paulson & Co., will need to generate a 104 percent return to recoup a 51 percent drop in one of his largest funds after wagers on a U.S. recovery went awry.

Until he hits that mark, Paulson will have to forgo his 20 percent performance fee, and will collect only his 1.5 percent management fee. It has taken Griffin, the billionaire founder of Citadel LLC, three years to recover most of the 55 percent he lost for investors in 2008. Erik Schatzker reports on Bloomberg Television's "InsideTrack."

In a letter to investors, Paulson now warns that Greece may default by the end of March, triggering the breakup of the euro. “We believe a Greek payment default could be a greater shock to the system than Lehman’s failure, immediately causing global economies to contract and markets to decline,” the hedge fund said. The euro is “structurally flawed and will likely eventually unravel,” it said.

Alberto Gallo, head of European credit strategy at Royal Bank of Scotland Group Plc, agrees, saying Greece will have "a hard default". He speaks on Bloomberg Television's "InBusiness With Margaret Brennan."

Investors wanting to keep abreast on the latest developments in Greece should read Andreas Koutras' latest comments, European ambivalence and The Choice of Hercules. I'm suffering from a bad case of 'Greek and eurozone fatigue' and had my fill of Samaras, Papandreou, Merkel and the rest of the incompetent hypocrites in Athens and Berlin.

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