NEW YORK Hedge fund industry icon Arthur Samberg's startling decision to shut Pequot Capital shows how a firm's reputation matters as much as its returns.
For decades Samberg, who founded Pequot more than two decades ago, delivered strong performance no matter how markets behaved, enticing investors to funnel in so much cash that the firm managed $15 billion in its heyday in 2001. When the U.S. government last year reopened a probe into allegations of insider trading in Microsoft Corp (MSFT.O), skittish investors left quickly.
"These days investors only want to put money with someone who is squeaky clean," said Jaeson Dubrovay, who heads the hedge fund group at New England Pension Consulting.
Indeed other hedge fund firms may consider closing down as managers worry about being drawn into financial regulators' closer reviews and as investors demand more details on how the traditionally secretive $1.3 trillion industry earns money, investors and analysts said.
Samberg broke the news to stunned employees and investors late on Wednesday, telling them that the $3 billion hedge fund firm was shutting down immediately because the probe was distracting him and had "cast a cloud over the firm."
The 68-year-old stock picker, known for wooing top talent to his firm and for often being compared with George Soros and Julian Robertson, now plans to retire, insiders said.
Only a year ago at the end of March 2008, Pequot was a well-respected, profitable firm that managed $6.4 billion, investors with the firm said.
When losses piled up in the industry late in 2008, Samberg, a savvy trader, sidestepped the worst to leave Pequot funds down 16 percent, less than the average hedge fund's 19 percent drop. This year Pequot gained 1.8 percent through April, beating the Standard & Poor's 500 Index .SPX 2.5 percent loss.
Still Pequot's assets dwindled faster than the drop in returns suggest they should have, signaling a dramatic change in how investors react to potential problems at a firm.
When news of the probe first broke three years ago, investors were reassured by Samberg and Pequot's steadfast denials of any wrongdoing.
The government soon closed the case without bringing charges even as controversy swirled over the firing of a government lawyer who says he was prevented from interviewing Samberg's friend John Mack, the powerful head of Wall Street investment bank Morgan Stanley.
Now the mood is very different for hedge fund investors who have been burned by the failures of hedge funds Amaranth Advisors and Sowood Capital Management and Bernard Madoff's $65 billion Ponzi scheme.
Pension fund trustees want to play it safe and chief investment officers acknowledge they would rather pull out at the first whiff of potential trouble.
"In today's atmosphere, investors will not tolerate anyone who might be the subject of an investigation," said Boston University law professor Tamar Frankel.
Pequot is the most prominent hedge fund to close down this year, industry analysts said, speculating however that others might follow suit as public calls for tighter oversight of the loosely regulated industry grow.
"Maybe we will see other large funds shut down before they too are investigated," Boston University's Frankel said.
(Reporting by Svea Herbst-Bayliss; Editing by Richard Chang)