market folly

Well known hedge fund Pequot Capital Management is shutting down. Prominent investor and fund manager Art Samberg wrote in a letter to investors that, "Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction ... I have concluded that Pequot can no longer stay in business." Pequot was under SEC investigation regarding an insider trading allegation with Microsoft (MSFT). The incident has dragged on and on and has hung a dark cloud over Pequot's door. As such, investors became spooked and potential investors weren't arriving in the droves that they used to. And, as we all know, assets under management (AUM) are key to survival in hedge fund land. A tarnished image certainly does not help that.

This brings a sad end to Pequot's illustrious run where they managed $15 billion at their peak, but more recently managed around $3 billion. Samberg and Pequot have seen annualized gains of 16.8% after fees over a 22 year timespan; a record that speaks for itself and more than doubles that of the S&P 500. We had covered Pequot's portfolio in the past as part of our hedge fund portfolio tracking series, where we are currently in the midst of examining their Q1 2009 holdings. Additionally, we also presented the March commentary from Byron Wien of Pequot. However, it doesn't look like we'll be covering Pequot this time around.

Unfortunately for the investing world, Samberg has now decided to hang it up and retire. We ponder though, whether Samberg would have the desire to start new and afresh after dissolving the fund that was causing him headaches. But, after the overhang of ongoing investigations and distractions, it appears that Samberg has had enough and is ready to relax. Pequot still has $1 billion tied up within their Special Opportunities fund and their Matawin fund, which will continue to exist with their current managers.

Pequot is yet another fund on a growing list of prominent names that have been forced to close their doors. We previously covered Jeffrey Gendell's Tontine Associates blowup. Gendell had been a highly regarded and respected investor, but the crisis of 2008 became too much for 2 of his funds as illiquid positions and mounting losses overcame him. His firm still remains alive for the time being, managing the remainder of their funds.

Further back in time, we also noted that Dwight Anderson's Ospraie hedge fund blew up. Anderson is well known for his time both at Tiger Management and Tudor Investment Corp. But, just recently, we learned that Anderson will be back with 2 new Ospraie funds, which prompted us to wonder when investors will ever learn.

Overall, 2008 was definitely a bleak year in hedge fund land. A few other notable closures we've covered on the blog include Satellite Asset Management and Okumus Capital. (See the list of other 2008 closures here).

The prime distinction here between Pequot and the others is that Ospraie and Tontine closed due to large losses, while Samberg felt that Pequot would never be able to overcome their now tarnished image. In the end, such an image became equatable to large losses, as his fund has suffered the same fate as countless other funds. The hedge fund graveyard continues to expand.

This only goes to show that 2008/09 and beyond will be humbling for many fund managers out there. Many previously prominent names have been brought to their knees. After all, they're untouchable... until they're not.

Here's Samberg's letter to investors:
(RSS & Email readers will need to come to the blog to view the slidedeck)