market folly

In quite an interesting development, James Pallotta's hedge fund Raptor Capital Management will shut down for the time being. Readers will be familiar with Raptor because we had just started tracking them in our hedge fund portfolio series. Unfortunately, their spot on our list will be vacated for the time being until they decide to return. Pallotta sent out a letter to investors where he suspended redemptions and said they will be winding down the funds as they return capital to investors starting in July. Pallotta said, "I intend to step back from day-to-day investing for a few months to spend valuable time crafting an optimal investment strategy in order to capitalize fully on the next several years' developing investment opportunity set."

So, while Pallotta may be closing shop for now, it does sound like he has intentions to return fresh and with a solid game plan. He continued, "Consistently, in recent years, I have conveyed my skepticism regarding the sustainability of certain aspects of the industry's structure and short term focus. (There is) a place for a model which aligns the interests of investors and managers toward the goal of truly-shared compounding of superior risk-adjusted returns over time." It sounds as if in addition to crafting a new investment strategy, that Pallotta is crafting a new fund structure as well. He wants investors to keep money in place for multiple years, a setup used in many private equity funds.

He must feel that this would allow him to make long-term investment decisions, rather than worrying about near-term performance. Additionally, he wouldn't have to worry as much about redemption requests, a fear that was realized in the hectic year of 2008 as investors demanded their money back. This will be interesting to monitor whenever he decides to return.

Additionally, we found it interesting to note that Pallotta will apparently provide seed capital to a few analysts who will be starting their own hedge funds, in a move similar to that of hedge fund legend Julian Robertson (who did so with the Tiger Cubs).

Raptor's funds were pretty much flat for the year through May in terms of performance, according to the letter. Our only look at Raptor's performance was included in our March hedge fund numbers, where we saw Raptor -1.34% for the year at that time. We began tracking Raptor because it was being spun-off from Paul Tudor Jones global macro fund Tudor Investment Corp. Pallotta was responsible for all of the solid performance in their equities fund (called Raptor there as well). Pallotta spun off the fund and we followed him due to his solid track record of returning 13.85% a year from 1993 until 2008 while at Tudor. Raptor managed $9 billion in its peak at Tudor and currently manages around $800 million. You can view some of Raptor's portfolio here.

Raptor joins the growing list of prominent hedge funds to shut down amid the crazy markets of 2008 and 2009. Just last week we detailed the closure of Art Samburg's hedge fund Pequot Capital. 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).

Here is James Pallotta's letter to Raptor investors (RSS & Email readers will need to come to the blog to view it):