LDN - Business

Once golden, Robert Rubin's hedge fund proteges lose some luster

[March 27, 2017] By Svea Herbst-Bayliss and Lawrence Delevingne

BOSTON/NEW YORK (Reuters) - Learning to invest on Goldman Sachs' risk arbitrage desk, made famous by leader Robert Rubin, was once seen as a fast track to fortune. But the band of hedge fund protégés who mastered their trade under the former Wall Street star and U.S. Treasury Secretary have stumbled in recent years.

The latest to falter is Eric Mindich, who announced on Thursday that he would shut his hedge fund firm Eton Park Capital Management LP following a 9 percent loss in 2016 and a sharp decline in assets.

Mindich is one of several ex-Goldman traders who worked on the bank's 'risk arb' desk, pioneered by Rubin in the 1970s and 1980s, who have fallen on hard times. Others include Richard Perry, who six months ago decided to shutter his 28-year-old enterprise, as well as Eddie Lampert, Daniel Och and Dinakar Singh, whose own firms have lost billions of dollars in assets.

Their struggles are part of a broader dip in the hedge fund industry, marked by a slew of fund closures due to poor performance, controversies and fee pressure from investors.

But they also represent the end of an era: Goldman, for decades Wall Street's pre-eminent investment bank, no longer breeds such hedge fund scions because regulations brought in after the 2008 financial crisis - chiefly designed to reduce risk - have inhibited the type of trading it can do.

Shakil Riaz, global chief investment officer for Rothschild Asset Management, said the faltering of Rubin acolytes is symptomatic of trends that have taken hold after the crisis.

"The old ways of hedge funds taking money out of the markets just are not as effective anymore," said Riaz, a three-decade veteran of the industry. "It really is an evolve-or-die world."

More investors chasing the same set of limited opportunities, persistently low interest rates and the rise of low-cost index funds delivering solid returns have combined to make it hard for Goldman's former stars to stand out.

Rubin, now 78, joined Goldman in 1966 and spent 26 years there, eventually co-managing the whole bank. He left in 1992 and went on to be U.S. Treasury Secretary between 1995 and 1999 under President Bill Clinton.

On his way up the ladder, he turned the risk arb desk — which placed bets with Goldman's own money on the likelihood that corporate actions, like mergers, would occur — into a money-making machine.

Goldman is known for putting as much power into the hands of risk managers - who keep a tight rein on the bank's exposures - as much as the traders making the bets, a rare situation on Wall Street, which tends to breed more balanced, rounded investors. Working at Goldman also helped members of the risk arb desk forge connections with investors and line up financing and clearing services, which every fund needs.

But over the past several years, some of the savviest and best-connected hedge fund managers have hit hard times.

The former Goldman arbitrage traders have been unable to successfully navigate the post-crisis financial world because they became too fixated on certain investments or simply did not want to deal with tougher fund-raising conditions and being more accountable to investors, longtime associates and observers told Reuters.

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Eric Mindich, Founder and CEO of Eton Park Capital Management attends a session at the World Economic Forum (WEF) in Davos January 29, 2010. REUTERS/Christian Hartmann

"They were such big, sought-after names at the time and everyone was romanced by the Goldman-Rubin pedigree," said Michael Hennessy, co-founder of investment firm Morgan Creek Capital Management LLC. "But the markets have radically changed from that prior environment. Post-crisis, a lot of these people are struggling."

Goldman declined to comment. Spokespeople for Rubin and the hedge fund managers either declined to comment or did not respond to requests.

TOUGH TIMES

Mindich worked on Rubin's desk in the late 1980s and in 1994 became the youngest person to ever be named a partner at Goldman, at age 27.

A decade later, he levered what he learned at Goldman to launch Eton Park with a record $3.5 billion. Its assets peaked at $14 billion in 2011, but now it manages about half of that.

Perry's firm closed similarly, after assets declined from a peak of $15 billion in 2007 to about $4 billion in September 2016. Perry attributed the closure to broad challenges in managing a hedge fund today.

Singh's TPG-Axon Capital Management LP had just $1.6 billion as of July 2016, a fraction of the $13 billion it managed in early 2008, because of market bets that went the wrong way. Singh was part of the Goldman risk arb operation after Rubin as co-head of the bank's principal strategies investment unit.

Lampert saw most of his outside investors exit years ago when he concentrated bets on troubled retailer Sears Holdings. At the end of December 2015, his ESL Investments listed $2.8 billion in assets, down from $15 billion at its peak.

A number of pension funds have exited Och's Och-Ziff Capital Management Group LLC <OZM.N> after modest returns and a criminal investigation that ended with last year's guilty plea by a subsidiary to conspiracy to commit bribery in Africa. Its overall assets have shrunk by 30 percent to $33.6 billion over the last two years.

Defenders of the Goldman risk arb tribe point to the success of Farallon Capital Management LLC, launched in 1986 by Rubin protégé Thomas Steyer. Although Steyer retired in 2012, Farallon is now run by another Goldman alumnus, Andrew Spokes, and is performing well, with $22.1 billion under management at the end of 2016.

Gregg Hymowitz, chief executive of hedge fund investor EnTrustPermal Management LLC, said Rubin and his former employees are "some of the smartest investors of our time."

"It's a mistake to extrapolate from recent disappointing performance their investment prowess," said Hymowitz, who also worked at Goldman and has invested with Och and has known Mindich and Singh for years. "I wouldn't bet against any of them."

(Reporting by Svea Herbst-Bayliss and Lawrence Delevingne; Editing by Lauren Tara LaCapra and Bill Rigby)

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