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SKARBECK: Hedge fund superstars take it on the chin

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Lauded as “masters of the universe,” the star investment managers overseeing the largest hedge funds built huge firms.

Many followers believed these managers, with their ability to go long or short and hedge their portfolios, could consistently produce positive returns, uncorrelated to the ups and downs of the broader securities markets.

The auras surrounding many of these financial titans have faded, though, shattered by the market meltdown. Huge losses have driven some out of business, while others have been left severely wounded.

Upon further review, many of these funds were not properly hedged portfolios, but instead were pools of money run by cowboy capitalists, making huge bets with borrowed money. That was the eventual source of their undoing.

On the heels of massive losses, waves of investors have requested withdrawals. Unfortunately, some funds employed tactics to delay or block those demands since their portfolios were chock full of illiquid and hard-to-value investments. As a result of the losses and illiquidity, investors such as pension funds and endowments have been rethinking the significant allocations they have made in alternative investments.

The endowments of Harvard and Yale universities had achieved excess returns for more than a decade from alternative investments, yet both sustained 30-percent losses last year.

Among the once-esteemed alternative managers, Cerberus Capital, run by Stephen Feinberg, has been trying to placate investors who want to withdraw $5 billion. That amounts to 70 percent of the firm’s assets after a 24.5-percent loss in 2008. Cerberus sustained huge losses investing in Chrysler and GMAC.

Ken Griffin, the wunderkind of Chicago-based Citadel Investment Group, had generated 26-percent annualized returns the past 17 years, but almost destroyed his firm with a 55-percent loss last year.

Citadel took out loans worth nine times more than its assets, and spent much of last year trying to raise cash to pay back lenders.

You may withhold your sympathy for Timothy Barakett, who earned $675 million in 2006, but closed Atticus Capital after losing 30 percent last year.

Then there is John Meriwether, who presided over the collapse of Long Term Capital Management in 2008, and was forced to close his second hedge fund after losing 44 percent from September 2007 to February 2009.

Elsewhere, Pequot Capital, at one time the world’s largest hedge fund under Art Samberg, liquidated in May after being cited by the Securities & Exchange Commission in 44 cases of potential insider trading and market manipulation.

We once noted—back in 2007, when the private-equity funds Blackstone and Fortress were going public—that those transactions were signs of investment hype typically seen at peaks. Yet, predictably, the consultants to pensions and endowments were at the time advising large allocations into alternative assets.

Now, ironically, as alternative investors seek to extricate themselves from their illiquid investments, they are likely to cut deals to sell to vulture investors at bargain prices.•

__________

Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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  1. Cramer agrees...says don't buy it and sell it if you own it! Their "pay to play" cost is this issue. As long as they charge customers, they never will attain the critical mass needed to be a successful on company...Jim Cramer quote.

  2. My responses to some of the comments would include the following: 1. Our offer which included the forgiveness of debt (this is an immediate forgiveness and is not "spread over many years")represents debt that due to a reduction of interest rates in the economy arguably represents consideration together with the cash component of our offer that exceeds the $2.1 million apparently offered by another party. 2. The previous $2.1 million cash offer that was turned down by the CRC would have netted the CRC substantially less than $2.1 million. As a result even in hindsight the CRC was wise in turning down that offer. 3. With regard to "concerned Carmelite's" discussion of the previous financing Pedcor gave up $16.5 million in City debt in addition to the conveyance of the garage (appraised at $13 million)in exchange for the $22.5 million cash and debt obligations. The local media never discussed the $16.5 million in debt that we gave up which would show that we gave $29.5 million in value for the $23.5 million. 4.Pedcor would have been much happier if Brian was still operating his Deli and only made this offer as we believe that we can redevelop the building into something that will be better for the City and City Center where both Pedcor the citizens of Carmel have a large investment. Bruce Cordingley, President, Pedcor

  3. I've been looking for news on Corner Bakery, too, but there doesn't seem to be any info out there. I prefer them over Panera and Paradise so can't wait to see where they'll be!

  4. WGN actually is two channels: 1. WGN Chicago, seen only in Chicago (and parts of Canada) - this station is one of the flagship CW affiliates. 2. WGN America - a nationwide cable channel that doesn't carry any CW programming, and doesn't have local affiliates. (In addition, as WGN is owned by Tribune, just like WTTV, WTTK, and WXIN, I can't imagine they would do anything to help WISH.) In Indianapolis, CW programming is already seen on WTTV 4 and WTTK 29, and when CBS takes over those stations' main channels, the CW will move to a sub channel, such as 4.2 or 4.3 and 29.2 or 29.3. TBS is only a cable channel these days and does not affiliate with local stations. WISH could move the MyNetwork affiliation from WNDY 23 to WISH 8, but I am beginning to think they may prefer to put together their own lineup of syndicated programming instead. While much of it would be "reruns" from broadcast or cable, that's pretty much what the MyNetwork does these days anyway. So since WISH has the choice, they may want to customize their lineup by choosing programs that they feel will garner better ratings in this market.

  5. The Pedcor debt is from the CRC paying ~$23M for the Pedcor's parking garage at City Center that is apprased at $13M. Why did we pay over the top money for a private businesses parking? What did we get out of it? Pedcor got free parking for their apartment and business tenants. Pedcor now gets another building for free that taxpayers have ~$3M tied up in. This is NOT a win win for taxpayers. It is just a win for Pedcor who contributes heavily to the Friends of Jim Brainard. The campaign reports are on the Hamilton County website. http://www2.hamiltoncounty.in.gov/publicdocs/Campaign%20Finance%20Images/defaultfiles.asp?ARG1=Campaign Finance Images&ARG2=/Brainard, Jim

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