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Hedge funds need smoother handovers; The sector’s stars tend to be mavericks with outsized egospower-sharers

August 29, 2013 6:36 pm

Hedge funds should invest in smoother handovers

By Gillian Tett

The sector’s stars tend to be mavericks with outsized egospower-sharers

This summer Glenn Dubin, the co-founder of the hedge fund Highbridge Capital Management, has been kicking back – a bit. The reason? Twenty-one years after the 56-year-old created the fund, Mr Dubin recently handed control of his $32bn “baby”, as he calls it, to a former Goldman Sachs banker, Scott Kapnick. But Mr Dubin has not stormed off in a tantrum. He is still working in Highbridge’s Manhattan office to support Mr Kapnick, his handpicked successor.

“We decided a long time ago we wanted to create a sustainable organisation that could last,” says Mr Dubin, who now carries the title “non-executive chairman”. “So,” he says, “we had to have a succession plan.” It remains to be seen how this will play out for Highbridge; thus far it seems commendably smooth, and there have been no redemptions (even though its different funds have had mixed results this year). But the crucial question that investors, regulators and hedge fund managers should ask is whether Highbridge is setting a model that other funds should copy.

For the grim fact is that when it comes to creating an orderly succession, most hedge fund leaders have done a dismal job. Some luminaries have hung on as they have grown older, convinced that no one else can replicate their genius. Others have passed the baton over to younger managers – only to see investors pull their money when the “star” leaves. But many others have decided that succession planning is simply so hard that they have either handed back money when they want to retire, or used their money to seed new ventures.

George Soros, for example, announced two years ago that he would close his Quantum Fund to outside investors, as he stepped back from investing. Stanley Druckenmiller, a celebrated macro fund manager, took a similar step in 2010. Julian Robertson closed his Tiger Management Group in 2000 and used some of that money to finance funds run by former Tiger partners. Oscar Schafer has done the same with his OSS Capital Management.

It is easy to see why this has occurred. Hedge fund stars tend to be entrepreneurs with outsized egos and maverick views. That does not make them natural mentors or power-sharers. And until recently, the investor base did not seem to mind about the ego factor; on the contrary, when the hedge fund industry first started swelling three decades ago, investors typically invested on the basis of “names” – and would withdraw their money if those stars disappeared. Indeed, for some investors, this entrepreneurial, fluid culture has always been a key attraction of hedge funds. If nothing else, it upholds the principles of capitalist creative destruction in a very practical way.

But what makes the Highbridge tale so relevant this summer is that behind the scenes – and the big personalities – the hedge fund world is changing. For one thing, it now has a much bigger role within the financial system: hedge funds currently command about $2.3tn worth of assets, and the leading funds have turned into behemoths.

The once-swashbuckling industry is also becoming more mainstream: not only are hedge funds moving into sectors formerly occupied by the banks, as the latter grapple with growing regulation, they are also raising more money from pension funds and public entities. These institutional clients tend to have much higher standards of corporate governance.

At the same time, hedge fund stars are maturing – in a literal sense. The consultancy Deloitte calculates that a third of the industry’s assets are managed by founding principals who – like Mr Dubin – will turn 60 in the next decade. So, the report says, “the $600bn question facing founders industry-wide is will my hedge fund liquidate when I step down, or will it live on because I actively prepared for my succession?” Not all those ageing stars necessarily want to think about this: a separate survey from Ernst & Young suggests that only a third of hedge funds consider succession planning an important issue. But the same survey indicates that two-thirds of investors are focused on this issue – and factoring it into allocation decisions.

So does that mean more funds will follow Highbridge’s lead and create a more rational plan? There are some straws in the wind. At Bridgewater Associates, for example, Ray Dalio has been developing young staff; so has Paul Singer at Elliott Partners, to name two well-known funds. But repeating Mr Dubin’s trick may not be easy. Mr Dubin and Mr Kapnick say their situation works well because they have good chemistry and complementary skills.

Highbridge also has a more institutional and mainstream culture than many of its rivals, since it is majority-owned by JPMorgan Chase and has tried to build a diversified investment strategy. Indeed, Mr Dubin says he and his co-founder always regarded themselves as business managers rather than investment stars. “We didn’t put our names on the door since we didn’t want it to be about us,” Mr Dubin explains. Mr Kapnick echoes that thought: “At a lot of funds it is about the names, which makes it harder to do succession planning.”

Of course, if the hedge fund industry keeps posting the type of mediocre returns, investor appetite for “name-based” – or ego-based – funds may wane. If so, that would probably lead to a more stable hedge fund world. But do not bet on that happening too soon; least of all at a time when the banking sector is being more heavily regulated and greyer in style. Hedge funds are now one of the few places left in finance where colourful characters still feel able to dance.

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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