A four-person team that formerly worked for Kenneth Griffin’s Citadel has launched a new event-driven fund for Neuberger Berman.
The Principal Strategies Group began trading on October 20, according to a letter obtained by Alpha and sent to clients by Joseph Rotter, who heads up the group. The fund currently has $209 million in assets under management. Two of the other ex-Citadel employees serve as senior partners: Judd Arnold and Sean Badcock.
Rotter left Citadel more than a year ago and joined Neuberger Berman in February, operating out of Chicago, where Citadel is based.
The new fund fashions itself as a market-neutral, event-driven strategy focused on mergers and acquisitions and various catalyst-driven situations. It is currently 147 percent invested. It also claims to have a zero beta and a negative 3.8 percent correlation to the Standard & Poor’s 500 stock index.
“Our hedging construct, which is intended to insulate us from macro events, has performed well and as anticipated,” Rotter states in the letter. “In addition, our relative overweight allocation to risk arbitrage further protected our portfolio from the recent market dislocations and allowed us to tactically exploit new opportunities.”
Rotter says he is excited about the prospects for a “robust” mergers and acquisitions environment in 2017, stressing that “significant regulatory and tax reform may spur a new cycle of deals.”
He also anticipates “significant opportunities to capture alpha” from stock picking and hedging.
The letter provides a rare insight into the low-profile hedge fund operations at Neuberger Berman, founded in 1939. The firm runs credit hedge funds and long-short funds, including tailored accounts for clients. In addition, it manages more than $4 billion in so-called 1940 Act hedge funds — also known as liquid alternatives — concentrated in long-short and absolute return strategies.
In addition, Neuberger Berman has launched several private equity funds that make passive investments in hedge fund firms and other alternative investment managers under the Dyal Capital Partners name. It closed its first fund in December 2012 after raising $1.28 billion. It generally seeks to take stakes of between 12 percent and 20 percent in firms with assets between $1 billion and $6 billion.
Early investments included a minority stake in Pinnacle Asset Management, a New York–based, commodities-focused alternative investment firm that had $2.3 billion under management at the time, and Capital Fund Management, a $5.1 billion quant fund group based in Paris. In March 2015, Barry Rosenstein’s JANA Partners sold a 20 percent stake to Dyal.
One major investor in Dyal has been the New Jersey State Investment Council, which describes itself as a lead investor in the first two Dyal funds. It invested $200 million in Dyal Capital Partners I and another $200 million in Dyal Capital Partners II. “Both generated strong returns and cash flows,” according to a memo from Christopher McDonough, a director at the State of New Jersey Division of Investment. His September 2015 memorandum proposed an investment of up to $200 million in Dyal Capital Partners III, which invests in private equity funds, and up to $100 million in a related co-investment separate account managed by Dyal. McDonough said, “The Dyal funds have demonstrated strong risk-adjusted returns since inception.” According to reports, Dyal III finally closed to investors after raising more than $5 billion.
As of March 2015, Dyal I had enjoyed a net internal rate of return of 15.22 percent, while Dyal II boasted a 24.25 percent net IRR, according to the New Jersey Council’s memo.
Another institution that has invested in Dyal’s funds is the University of Michigan. It invested in Dyal Capital Partners I, Dyal Capital Partners II, and Dyal Columbus Co-Investment Partners, and in February committed $50 million to Dyal Capital Partners III. California’s Alameda County Employees’ Retirement Association is also an investor in Dyal II.
