John Meriwether (LTCM), Nicholas Maounis (Amaranth), Jeffrey Larson (Sowood), and Philip Falcone (Harbinger) all have something in common: they are Hedge Fund has-beens.
Although Falcone’s Harbinger Capital has not blown up completely, Harbinger now only manages 3 billion in assets compared to its peak of 26 billion in 2008, and its largest investment just went bankrupt.
Years of poor investment returns and investor withdrawals have weighed down on Falcone’s ability to take large bets and move markets; however, the recent failure of LightSquared, of which Harbinger owns a majority stake, may be the nail in the coffin for the hedge fund manager’s reputation.
Has Falcone sealed his fate as a wash-up?
Falcone threw about 3 billion into LightSquared and it’s currently 40% of his fund. After making such a large illiquid bet, Harbinger invoked a lock-up provision to make his investor’s capital sticky. This only infuriated his investors and made the list of redemptions longer. Falcone sold much of his other assets to meet the redemptions, creating the outsized concentration in LightSquared that now exists.
Well, his reputation will undoubtedly be ruined in the eyes of major hedge fund backers after this one. His AUM may even fall to a modest figure of 1 billion or less. Out of the business once and for all? Not unless he gives up.
After all, hedge fund managers blow up and reinvent themselves all the time. Nicholas Maounis is still managing money. John Meriwether is now running his third hedge fund – JM Advisors.
Then there are people like Jim Cramer who make their hedge fund money and go off to do something much less stressful. I even have a of couple personal friends who got out of the hedge fund game to go back to school and get a Ph.D or move to Coasta Rica to enjoy an early retirement.
Falcone made his name and most of his money in a wild bet shorting subprime mortgages. Maybe he got lucky and made the right bet at the right time, but I wouldn't be surprised if he made more huge bets in the future that actually pan out.
Finally, let’s not forget that life’s not so bad when you are a billionaire. I am sure there is not a monkey out there who wouldn't swap places.
What lessons do you guys draw from this story? Would you consider Falcone irrelevant after this most recent fall out? What would you do if you were in his shoes?
What an epic fail. But we can at least thank him for giving us the incomparable Lisa Marie Falcone.
How do you define success ?
A guy who manages billions of dollars is a success.
Would you be happy if you made a fortune, but were considered a wash up or looser by your former peers? Maybe, but that depends on your personality. For some people leaving a legacy of success can be just as important as the money.
Also, he will certainly still be wealthy but he might not be a Billionare by the time this mess is over. How much of his wealth was tied into the success of Harbinger and LightSquared? How many shareholders will file lawsuits? Will there be any significant SEC charges against him for misconduct?
The opinion of his peers are irrelevant. They are mostly jealous bottom feeders. Just like the rest of the wannabe players/haters out there. I have great respect for him. He made and manages billions. All the people that invested money with him were aware of the risks. As for leaving a legacy, Some people don't care about leaving a legacy.
I think it's entirely fair to not respect someone who's made a billion dollars and that have nothing to do with jealousy. I respect a lot HF manager's processes and careers. But not this clown.
In my opinion, most people are driven to gain the respect of their peers, but again it depends on your personality.
He made billions, but there is a stigma because his biggest winner was a huge subprime bet. He has consistently shown poor judgement in recent years culminating in him making a big mistake which was doubling down and essentially betting all his chips on a losing (and illiquid) bet.
As I mentioned in the article, I am sure he could start a new fund and continue to manage money in the future, but maybe he should consider doing something else.
Fallen stars are very interesting.
Without being too technical, Falcone had a background in high yield investing (even gave the professional hockey thing a shot) but made his money betting against subprime. After he impeccably timed one of the greatest trades of all time, it's almost like he felt empowered to chase home run after home run with suicidal abandon to the point that all normal ideas of risk management go out the window. Letting a single company and idea become your entire portfolio, especially when the payout is so fundamentally uncertain just runs contrary to all sane portfolio and risk management. I know there are a lot of people in the banking and fundamental crowd here that would disagree and claim that his understanding of the company/regulation should have been his risk management and he had the ability to change that in court and you should always stick to your best ideas, but for now it remains a pipe dream. It was an incredibly interesting trade, and probably would make a fascinating book at some point. But if you are running your own money/client money, and derive your living from it, saying "trust me, i got this one company" just isn't very intelligent. Maybe he lost his wits after swimming in a shitload of money, but a decent human being should have just returned money if they could no longer manage it effectively or had any interest in doing so.
This is drastically different from say a LTCM --being massively short vol, and levering up massively to deliver attractive returns on small spreads in a glorious effort to be the greatest singles hitter of all time is the opposite of trying to slug it out. The most amazing thing is that Meriwether blew up multiple times, to the point where the easy conclusion to draw is that some people just never learn.
The best narratives involve a meteoric rise, a fall from grace, and the thing we love most in America is redemption. Can't wait to see Falcone's next trade.
Add Paulson to the list?
This is how you make it big, kiddos. Take huge risks with other people's money.
Paulson has definitely been fading from the spot light, but he hasn't blown up. Paulson has a better organization and has been a portfolio manager since the mid 90s. Paulson will probably forever live in the shadow of his subprime bets but he has made a couple of other good trades as well such as his bet on gold. Falcone is a trader by upbringing and a trader by nature.
Maybe the biggest difference between Paulson and Falcone is that Paulson is a better relationship manager and organizational leader. He understands how to keep his clients (as well as his staff) happy even when he is losing money.
I will pass on that one. He can keep his place.
Sounds like Mr. Goodbread has a little penis envy....
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