Former Peloton Co-Founder Convinces Soc Gen To Fork Over Money

Remember Peloton Partners, the $2 billion hedge fund that spectacularly lost all of its capital in early 2008, before the credit crisis really hit its stride?  One would think that the managers of a hedge fund that punted all of its investors' capital would be shut out of any money management opportunities in this difficult environment where even funds with good performance are battling redemptions.  But no.  The Financial Times reports that Geoff Grant, the co-founder  of Peloton has managed to raise approximately $130 million for a global macro fund, most of it from Soc Gen.  It's funny that a guy who missed one of the largest macro events of the last 50 years and was such a bad risk manager that he lost all of his investors' capital in about a month will now be running a global macro fund.   

Blowing up a hedge fund or a Wall Street trading desk and then quickly moving to another fabulous money making opportunity used to be a common theme.  The twisted thinking goes as follows: "he made a bunch of money before he lost it all, so he can make a bunch of money again."  For some reason, however, I thought that John Meriwether had finally put this ridiculous notion to rest.  After blowing up Long Term Capital and nearly taking down the entire financial system in 1998, Mr. Meriwether went on to found JWM Partners.  Everything was going swimmingly, until we hit another credit crisis, similar to 1998, but more severe.  JWM Partners dropped 43% through November 2008 and has halted redemptions.  The thing is, if you're going to suffer catastrophic losses every time the market has its big credit correction every 4-10 years, you have no business managing money.  You have learned nothing from your previous mistakes, and you're just a one trick pony who only makes money in bull markets.  Even a monkey can make money in a bull market.  The secret to being a good investor is making it though the bad times and being around to take advantage of good opportunities when markets get crazy.

So, Mr. Grant, you get a second chance.  Let's hope you learned your lesson the first time around.  As for Soc Gen, well, at least Mr. Grant's fund will be a better bet than the one they made on Jerome Kerviel.

Hedge Funds Struggle to Maintain Prestigious Image Amid a Barrage of Embarrassing Headlines

The reputation of hedge funds as a safe harbor for assets during market downturns has suffered numerous blows in the past year.  Through July, hedge funds were down 3.5% this year, according to data tracker Hedge Fund Research.  Investors may begin to ask themselves if the meager outperformance of the stock market is worth the risk of investing in a typically highly leveraged investment vehicle.  Remember Peloton Partners spectacular blow-out earlier in the year?  What about the seizure of Carlyle Capital by its lenders in March?  The number of internal hedge fund implosions and bailouts at investment banks in the past year (Bear Stearns, Citi, UBS etc.) have made it hard to believe that investment banks are still offered capital to manage.  The current CEO of Citi, Vikram Pandit, became a contender for the top post because Citi paid $800 million for his hedge fund Old Lane Capital despite unspectacular returns.  Since then, the fund has been shuttered due to disappointing performance and Citi has taken yet another writedown related to the restructuring.   

If you open the Wall Street Journal's Money and Investing section today, two highly embarrassing stories related to hedge funds may catch your eye.  First, a piece about how WexTrust Capital bilked a group of Orthodox Jews out of at least $100 million through an alleged ponzi scheme, followed by a story about an ex-UBS trader's hedge fund that has posted losses of 85% since the inception.  There is nothing funny about siphoning money from religious investors, many of whom based their investment decision on an uninformed Rabbi's personal recommendation.  The ex-UBS trader story, on the other hand, is kind of funny, although obviously not for any of the investors who have lost 85% of their money.  First of all, the founder of SRM Global, Jonathan Wood, managed to negotiate a five year lockup out of his investors when the fund was founded in September 2006.  Then he proceeded to invest in nearly every high profile flameout of the past year.  He was a big shareholder in Northern Rock, the U.K. bank that was bailed out by the Government.  Mr. Wood has since accused the U.K. government of using an unreasonable valuation process when it bailed out the bank, and that shareholders were shortchanged.  He also criticized Bank of America's bid for Countrywide as being too low.  The fund owned 8% of Countrywide as of early April.  Mr. Wood seems to have trouble accepting the ramifications of investing in insolvent financial institutions.  One can argue in Mr. Woods' defense that he merely picked the wrong sector to invest in.  However, the fund also owned Cheniere Energy, whose shares are down 86% for the year.  The energy sector has outperformed the overall market this year.  Yet, somehow, Mr. Wood managed to find the one energy stock that has posted a performance equivalent to a bank with subprime exposure.

Only one positive hedge fund headline has hit the papers this week, and it was related to an eye-popping compensation package.  Adam Levinson, the chief investment officer of the $8.8 billion global macro hedge fund was awarded a $300 million share grant by his bosses at Fortress Investment Group.  The fund has a solid performance history, although it is down 2% for the year.  Mr. Levinson reduced his profit-sharing interests in certain Fortress funds in return for the 31- million-share grant.  Mr. Levinson's trade of a huge chunk of equity in return for a reduced profit-sharing arrangement on a fund that is down on the year (i.e. profit = $0) is quite savvy.  Now that is great trade, for Mr. Levinson of course, not necessarily for Fortress' shareholders.  But if he routinely makes trading decisions such as this for his hedge fund investors then he is certainly worth the money.

Without a doubt, the large reputable hedge funds who have generated outsized returns to their investors for many years will continue to thrive.  In particular, the funds that saw the housing bubble from a mile away and managed to architect the right trades to profit from it will have no trouble raising capital.  But the days of raising $1 billion in a month just because you worked at a high profile investment bank are probably over.  Getting leverage of 100-to-1 from your prime broker will more than likely not be an option, making it harder to generate high enough returns to justify your fees.  Hopefully, the days of raising hundreds of millions of dollars on a Rabbi's recommendation are over too.  This is unfortunate for me alone, because I had a great investment strategy I was just about to pitch to my Rabbi this afternoon...

"Peloton says sorry for $2bn losses..."

but thanks for the fees you paid us last year!  According to the Financial Times, Peloton Partners, the formerly $2 bln, now worthless hedge fund, offered 7 reasons for its spectacularly swift decline.  It could have summed up nicely by telling investors to read "When Genius Failed", the book that gives the hilarious account of how Long Term Capital blew-out in 1998.  It's the same story, with slightly different details.  However, in what was called an emotional conference call, Ron Beller, co-founder, tried to score sympathy by sharing that staff and partners had invested $127 million in the fund and lost it all.  Granted, that is alot of money to lose and I feel sorry for them, but I'd like to point out that most of that money more than likely came from the fees that Peloton collected from its investors when it posted 87% returns last year.  Moral of the story?  Every 4-10 years a leveraged disaster occurs.  It's why Warren Buffett always has $40 billion in cash sitting around.  Because when spreads widen unexpectedly and everyone is dying to invest at amazing levels but can't because they are losing their shirts, my buddy Warren steps up to the plate and knocks it out of the park.  God, I love that man!