Even the most exclusive club has members it would rather not talk about. In the hedge fund industry, such a club consists of those elite vehicles managing more than $1 billion in assets. The members they would prefer to forget are funds that no longer exist, mostly due to liquidation.
Connecticut is a global capital of super large hedge funds, with 29 funds managing $150 billion, says the Connecticut Hedge Fund Association.
Back in 2007, on the eve of the financial crisis, there were 14 Fairfield County-based funds in the top 100, when the cutoff was $4.8 billion in assets, according to the May 2007 issue of Institutional Investor”™s Alpha magazine.
After the crisis hit, three of the funds, Tontine Associates, FrontPoint Partners and Pequot Capital Management, shut down. Counting Fairfield Greenwich Group, based in New York but closely associated with Greenwich via founder Walter Noel, four top Fairfield County funds closed their doors (see table).
The high dropout rate is in line with industry trends. Ken Heinz, president of Chicago-based Hedge Fund Research, says 2008 saw the highest number of liquidations in the history of the industry, noting that in the United States, some 850 hedge funds closed their doors in 2008, compared with 375 the year before.
In the immediate aftermath of the financial crisis, he said in an interview, the overall attrition rate ”“ which measures liquidations as a percentage of the total number of hedge funds ”“ soared to 10 percent, double what it was before the crisis hit.
What happened to the departed funds? Only a fraction get any notice in the press, according to Heinz.
“In most cases, (liquidation) occurs after an extended period of underperformance by the fund.”
The “experience of liquidation,” Heinz said, normally has three phases ”“ an extended period of underperformance, followed by significant redemptions, then employee attrition, when “some or all of the employees” jump ship.
Fairfield County”™s billion-dollar dropouts are more dramatic than most. Here are five of the most noteworthy.
Level Global Investors
While not in the top 100, Level Global was nevertheless in the billion-dollar-plus class. It was one of four hedge funds raided by authorities in November 2010 in a still-continuing investigation into insider trading. Three months later the fund told investors it would shut down, citing the pressure of the probe and investor redemptions.
The Greenwich-based hedge fund managed roughly $3 billion at the time of the raid. It said in a letter to investors that it planned to liquidate its funds by March 31, 2011 and return cash to investors.
“The government has commenced what may be a lengthy inquiry with no set timeline. This process, even when it leads to the positive outcome that counsel expects, nonetheless threatens to undermine our ability to meet our fiduciary responsibility to our investors,” wrote co-founder David Ganek.
Level Global was the first big hedge fund to become a casualty of the federal government”™s crackdown on insider trading. So far, the probe has resulted in charges against at least 56 people.
Tontine Associates
Greenwich-based Tontine Associates L.L.C., the high-flying investment firm run by Jeffrey Gendell, liquidated hedge funds Tontine Capital Partners L.P. and Tontine Partners L.P. in November 2008 after the funds lost more than two-thirds of their value.
Tontine had been one of the industry”™s best performers with its funds returning an average of 38 percent annually since inception. But its fortunes took a turn for the worse after the financial crisis. Tontine Capital Partners plunged 77 percent through October 2008, while Tontine Partners fell 67 percent through September.
“The combination of falling commodity prices, massive anticipated hedge-fund redemptions and the seizing up of the credit markets cause an enormous dislocation in our portfolios,” Gendell wrote in a letter to clients. “We are embarrassed by this performance and we remind you that we eat our own cooking as we are the largest investor in each of our strategies.”
At the onset of the 2008 financial crisis, the firm managed $7 billion.
FrontPoint Partners
FrontPoint oversaw $7 billion in November 2010, before Chip Skowron, a co-manager of its health care portfolio, was alleged by prosecutors to have traded on insider information.
Clients rushed to withdraw money from Greenwich-based FrontPoint after the allegations and the firm shut down the health care funds co-managed by Skowron. Firm-wide assets fell $4.5 billion by January 2011.
Founder Steve Eisman said shortly thereafter that he planned to shut most of the firm”™s funds and restructure its business. Eisman gained prominence after he was profiled by Michael Lewis in his book “The Big Short: Inside the Doomsday Machine.” Eisman was known for betting against subprime mortgages. According to Lewis, he once told a Japanese CEO that his company”™s financial statements were the equivalent of toilet paper.
Pequot Capital Management
Pequot Capital Management, run by well-known investor Arthur J. Samberg, closed its doors in 2009 amid an investigation into insider trading in Microsoft shares.
“Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction,” Samberg said in a letter to investors. “With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business.”
The Pequot investigations became highly controversial after a former Securities and Exchange Commission lawyer alleged he was blocked from taking testimony from John J. Mack, then the chairman of Pequot. The SEC closed the case without finding that Mack did anything wrong.
In 2007 Pequot had assets of $6.5 billion.
Fairfield Greenwich Group
Though its address is New York City, the group is closely associated with Fairfield County via founder Walter Noel, a prominent Greenwich resident.  The group”™s Fairfield Sentry fund was one of many feeder funds that gave investors portals to record-setting fraudster Bernard Madoff.
When Madoff was arrested, the Sentry funds had more than $7.2 billion invested in his fraudulent investment advisory operation. On July 20, 2009, Justice Edward Alexander Bannister granted the request to liquidate the Fairfield Sentry funds, whose assets had dwindled to less than $70 million.
