August 2, 2012 / 10:26 PM / 5 years ago

Big hedge funds seen unlikely to diet after Bacon slims down

BOSTON (Reuters) - Hedge fund titan Louis Bacon’s surprise move to slim down his fund in order to boost returns has industry experts debating whether other big managers will follow suit.

“This is the question that every investor who has money with a manager who oversees $10 billion or more is going to have to ask,” said Charles Gradante, co-founder of the Hennessee Group, which invests with Bacon’s $15 billion Moore Capital Management.

But the quick answer may be that the 56-year old industry titan’s step will be an isolated decision made by a billionaire who has delivered double-digit returns over two decades through the first Gulf War to the market rebound in 2009.

“This is not the beginning of a trend,” said Peter Rup, chief executive and chief investment officer at Artemis Wealth Advisors, adding “We would view firms returning capital as the better managers who take their fiduciary duty very seriously, but we don’t see a secular return of capital here.”

By trimming the money Bacon oversees by himself, he is bringing the size of his own portfolio into line with the funds managed by competitors at Caxton Associates, for example.

Indeed Bacon, who squarely blamed European politicians for current difficult market conditions, may be following not leading here, several investors said.

Some investors have wondered why Bacon, whose fund was flat through the first half of the year, waited so long to move. After all, he has returned money to investors before and seen performance pick up again. And others have done the same.

Last year, hedge fund Brevan Howard returned $2 billion and promised to cap the fund’s size at $25 billion while high profile fund managers including Paul Tudor Jones, Steven Cohen, and Daniel Loeb have closed their doors to new clients.

But even though pension fund managers, who oversee a bulk of the money earmarked for hedge funds, are now saying they prefer to employ smaller, nimbler hedge funds, it is unlikely that big ones will go on a crash diet any time soon.

Fees are a key reason for the reluctance, said investors who mused that managers tend to get used to the money they can earn.

“It is naive to think that a lot of people will walk away from those fees,” Artemis’ Rup said.

In this case, Bacon, who charges a 3 percent management fee, is turning his back on earning roughly $60 million a year, something many of his investors are applauding him for.

At the same time, industry investors wonder about a bigger question -- does this mean the outlook for so-called global macro hedge funds that pursue big currency and interest rate bets is so clouded that one of the best is scaling back?

Already some of the industry’s biggest players are facing losses this year. Brevan Howard’s Master fund is off roughly 1 percent while Bridgewater Associate’s macro-focused fund is off about 2 percent this year.

“This is a shot over the bow where (Bacon) is saying ‘I am not seeing the opportunity, how are you seeing it’,” said Brad Alford, chief investment officer at Alpha Capital Management. “At least one guy is saying it and at least his portfolio is long integrity and short self interest.”

Reporting By Svea Herbst-Bayliss; Editing by Tim Dobbyn

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