Weeks after Shumway and Level Global returned capital to shareholders, Carl Icahn has decided to liquidate the outside investor interests in the hedge fund he started in 2004. Icahn currently runs the $7 billion fund, of which $1.7 billion is outside capital. He has asserted that he simply does not want to be responsible for losing other people’s funds if there is another financial crisis. As the end of quantitative easing nears, Icahn could be dreading the worst. Recently, Oaktree also returned about $3 billion from a large distressed fund and Baupost announced that it would be returning 5% of capital to investors. On the other hand, Appaloosa just announced that it will be investing in other hedge fund strategies. Many managers are worried as the market has rallied 95% over the past two years, a remarkable rally.
Icahn’s fund rallied 33% in 2009 and 15% in 2010. The fund was up 8.7% in the first two months of 2011.
According to Marketwatch, Carl Icahn is returning all outside money from his $7 billion hedge-fund firm because the activist investor doesn’t want to be responsible for losing other people’s money if there’s another financial crisis, according to a letter he sent to clients.
“While we are not forecasting renewed market dislocation, this possibility cannot be dismissed,” Icahn wrote in the letter, a copy of which was obtained by MarketWatch Tuesday.
Bargains for stock investors
Value-stock investors can find buying opportunities in any market climate. Michael Scanlon, co-manager of John Hancock Large Cap Equity Fund, talks about three stocks he sees as bargains: Microsoft, Sirius XM and Lazard.
“Given the rapid market run-up over the past 2 years and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis,” he added.
“After careful consideration of all relevant factors, we have determined to return all fee paying capital to investors,” Icahn also said.
A strong rebound in equity and credit markets over the past two years has left fewer investment opportunities, encouraging several hedge-fund managers to return cash to outside investors.
David Tepper is planning to return money after his Appaloosa Management generated big gains in 2009 and 2010.
“The point is we’re not an asset gatherer,” Tepper said in a MarketWatch interview last week. A final decision partly depends on what happens in the markets, he noted.
“The world could blow up and we won’t return money because there’ll be more opportunities,” Tepper said. Read about his tentative plans to back other hedge-fund managers.
Baupost Group, a top value investing hedge-fund firm run by Seth Klarman, said in November that it planned to give back about 5% of its capital to investors because rising markets have reduced the number of profitable opportunities. Read about Klarman’s decision here.
Icahn’s hedge funds returned 33.3% in 2009, before fees, and 15.2% in 2010. In the first two months of 2011, they were up 8.7%, he noted in his letter to investors.
“Based on the past 2 years and 2 months we are ending on what I consider to be a high note,” Icahn wrote.
Icahn has been an activist investor in his own right for many years. In 2004, he launched a hedge-fund business, just as activist hedge funds were hitting their stride.
A low point for Icahn’s hedge-fund foray came in 2008, when the funds lost money in the global financial crisis.
“While it may sound ‘corny’ to some, the losses that were incurred by investors in our funds in 2008 bothered me a great deal more, in many respects, than my own losses,” Icahn wrote. “Perhaps this is because over the years I have become inured to dealing with large ‘paper’ losses for myself.”
In the midst of the crisis, many hedge funds limited investor withdrawals or froze redemptions completely. Icahn didn’t do that and his investors pulled a lot of money out.
“Rather than liquidating positions that we believed in, we infused our own new capital into our funds which provided cash for withdrawing investors,” Icahn explained.
That meant Icahn’s own money and money from other partners of the firm made up a lot more of the capital in his hedge funds.
Fee-paying assets now total $1.76 billion, about a quarter of total assets of roughly $7 billion, Icahn noted.
Alistair Barr is a reporter for MarketWatch in San Francisco.
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