In humbled hedge fund field, arrogance is so 2008

BOSTON (Reuters) - When Israel Englander, the normally press-shy hedge fund manager, wrote late last year to his Millennium Management investors, he sounded like a changed man.

"They say necessity is the mother of invention, and out of necessity, we've substantially reinvented how we present ourselves to investors," said Englander in the October 30 letter.

These days, Englander is shedding some of the ultra-secrecy that has long veiled his $7.5 billion hedge fund and providing investors with more information than they have ever received before. Twice a year he will send clients copies of Millennium's audited financial statements and reports detailing the fund's trading exposures.

In different ways, other big name hedge fund managers are also seeking to reinvent themselves by taking previously unheard-of steps both to sell themselves to new investors and hang on to existing ones.

Often that means attending breakfast meetings with wealthy customers of Wall Street's brokerage houses, going on golf outings with prospective clients and holding more frequent client conference calls.

For some managers like Englander, taking these steps is a response to the worst financial crisis in decades. That crisis decimated industry assets and left many investors with a dim view of the $1.4 trillion hedge fund industry.

Others like industry heavyweights John Paulson and Steven Cohen are putting on a more investor-friendly face in response to the whiff of scandal and bad publicity.

Managers' efforts to polish their images also come as government officials and average investors around the world are blaming hedge funds for kicking some stock prices lower, crushing currencies and manipulating commodity prices.

These makeovers are one way managers are bracing themselves for the likelihood of new rules and oversight by U.S. politicians and securities regulators.

TREPIDATION

It is fair to say that most managers are taking these steps reluctantly and with great trepidation. The traditional view among many investors has been that hedge fund managers are often arrogant, and that nothing rankles them more than having to explain to clients what they do to make money.

But as the industry moves mainstream and bus drivers, teachers and policemen are indirectly investing their nest eggs with them through pension funds, "hedge funds have to act like asset managers who communicate with their investors and not like hedge fund managers who sometimes don't," said Carrie McCabe, who founded Lasair Capital after running Blackstone Alternative Asset Management and FRM Americas.

This week Paulson, whose $32 billion hedge fund had been lionized in much of the financial media for correctly betting that the housing bubble would burst, has been forced to engage in a good deal of damage control.

The 54-year-old manager, who traditionally holds only two big investor meetings every year, hastily organized several conference calls to soothe clients' nerves in the wake of a lawsuit filed by the Securities and Exchange Commission accusing Goldman Sachs Group (GS.N) of fraud.

Goldman is alleged to have failed to disclose that a 2007 security linked to fortunes of subprime housing loans was constructed in a such a way that it was more likely to fail and generate a big payout for Paulson's fund.

The SEC has not charged anyone from Paulson's fund with wrongdoing in the matter. But the lawsuit has tarnished some of Paulson's once prescient-looking bet on the housing bust that netted his firm $15 billion, including $4 billion for him personally.

Paulson took to the phones as investors began inundating him with inquiries about the SEC's April 16 lawsuit against Goldman.

During one 30-minute phone call, Paulson, who ranks 45th on the Forbes list of billionaires this year, described the details of the trade and his firm's role in seeking out Goldman to arrange it. More importantly, the soft-spoken former Bear Stearns investment banker assured clients that no one at the firm was being targeted by the government.

Paulson also issued a 2-1/2 page-letter that outlined the parameters of the transaction and more or less reiterated the points he made with investors on the phone. On Wednesday, after another call, Paulson told investors that that was the last one and that we would now go back investing.

CHARM OFFENSIVE

For now, the strategy appears to be working. But the manager will not know for sure until he learns how many investors put in requests by month's end to withdraw their money at the end of the second quarter.

"The world is changing and you can't just go and bury yourself," said Bradley Alford, whose Alpha Capital Management invests with Paulson. "This was a complicated trade which he painstakingly walked through and answered all questions. He treats his limited partners as true partners, not just another client."

Similarly, Alec Litowitz's Magnetar Capital, which oversees $7 billion, fired off its own letter to investors defending its strategy for laying bets on the U.S. housing market. Magnetar sent out an 11-page letter that was a point-by-point response to a long and critical article about Magnetar by ProPublica, an online investigative news service.

At Renaissance Technologies LLC, whose flagship Medallion Fund has posted average returns of 45 percent a year since launching in 1988, the company's new co-CEOs are also turning over a new leaf after the firm's secretive founder, James Simons, retired this year. Lackluster returns at the firm's newer funds have prompted a review of their future and led Peter Brown and Bob Mercer to speak and meet more frequently with investors to keep them apprised of possible plans.

Citadel Investment Group, which boasts one of the industry's best-ever records but suffered 50 percent losses during the financial crisis, mounted strong returns last year that its founder, Kenneth Griffin, has taken great pride in announcing to some would-be investors in person. The normally reclusive manager has been setting up more meetings and the charm offensive is bearing fruit as the firm raised more than $1 billion in new cash in the first months of 2010, people familiar with the firm said.

Investor roundtables have also gained some traction with billionaire managers, including Bruce Kovner, who are now quietly sending out invitations to top clients to share a meal.