Who says it’s hard to find good hedge fund managers these days? The key is to not overlook fledgling firms, as an awards dinner held this week at Manhattan’s Waldorf Astoria hotel showed. The event, sponsored by research and data firm S&P Capital IQ and investment firm New Legacy Group, honored emerging managers in nine categories that included specific strategies and geographic areas.
In a welcome address, Wall Street Journal reporter Gregory Zuckerman stressed the importance of paying attention to up-and-coming talent, joking that he grudgingly took a meeting with, and subsequently underestimated, a baby-faced hedge fund manager early in his career. That manager turned out to be Greenlight Capital founder David Einhorn. (Zuckerman noted that he also didn’t make much of an early meeting with Paulson & Co. founder John Paulson, who of course later became the subject of Zuckerman’s book The Greatest Trade Ever.)
The evening’s nominees and winners also heard from a panel of hedge fund managers who started their businesses within the past few years and are rapidly becoming household names: Scott Ferguson of New York–based Sachem Head Capital Management, a protégé of Pershing Square Capital Management’s William Ackman who has raised $1 billion in less than a year of being open; Richard (Mick) McGuire III, another Pershing Square portfolio manager, who now runs $2.5 billion out of his activist-oriented San Francisco–based firm, Marcato Capital Management; and former York Capital portfolio manager Alexander Klabin, whose New York–based Senator Capital Group now manages $6.7 billion and recently sold a minority stake to the Blackstone Group.
The trio spoke of the challenges of starting a business and running a portfolio at the same time. “The noninvestment side of the business is a huge burden,” said Klabin, who joked that co-founder Douglas Silverman is his “work wife.” When the firm launched in 2008, he and Silverman were not well-known, so taking seed money from Blackstone enabled them to get started, added Klabin. That turned out to be an extremely shrewd move given that the firm launched in July 2008.
Ferguson opted to do a founder’s share class rather than have a seed investor, meaning that early investors pay lower fees for a special share class set up for them. It’s an increasingly popular move that allows emerging managers to attract capital without giving away a portion of the equity or return stream, but it may not work unless the manager is already a known quantity.
McGuire — who has recently made headlines for his role alongside Daniel Loeb’s Third Point in that firm’s activist campaign against Sotheby’s — noted that when accepting seed money, “It takes an extra level of care to ensure no one person, including the seed investor, is in a favorable seat.”
Several emerging managers took home trophies for producing solid returns in their strategies in what was a lackluster year for hedge funds overall. Among the winners: Greenwich, Connecticut–based FrontFour Capital, an event-driven fund founded by a group of ex–Pirate Capital investment professionals; Los Angeles–based value investor Active Owners Fund; and the Tourbillon Global Master Fund, which won the global-focused category as well as the evening’s top prize for best emerging manager. Tourbillon Capital Partners, founded by SAC Capital Advisors and Carlson Capital veteran Jason Karp, launched early last year.
The winners might want to heed the advice of Avenue Capital Group co-founder Marc Lasry, who also took home an award for philanthropic leadership. Speaking at the event, Lasry said that successful hedge fund managers are “really helping society” by earning returns for people’s retirement accounts, but that managers are nevertheless overpaid for what they do. “You have an obligation to give back,” Lasry told the crowd.
Given that the attendees may have included the next John Paulson or David Einhorn, let’s hope they listened.
