Ultimate hedgie goal may be taking no outside cash

March 8, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Carl Icahn was already a member of the multibillionaires club. Now the former corporate raider-cum-hedge fund manager is joining an even more elite group. Icahn will hand back the $1.8 billion or so of other people’s money that he has looked after for six years and focus solely on managing his own billions.

Another member is Stanley Druckenmiller of Duquesne Capital Management, who last year decided to shutter his firm. Another, Renaissance Technologies’ Jim Simons, long ago closed his famed Medallion Fund to outside money (though he created a different vehicle open to all).

It’s not hard to see why it’s an attractive option, especially in the wake of the financial crisis. There’s no need to make time or information available to anxious investors; your own money doesn’t take flight at short notice; and when you have billions anyway, shrinking a bit won’t rob you of future opportunities to make good money.

In a letter sent to investors, Icahn essentially said as much. He said though it might sound “corny,” he was more bothered by losing money for others than for himself. Indeed, other investors account for only a quarter of his funds because he didn’t prevent them fleeing in 2008, when Icahn — like nearly all investment firms — posted losses.

There’s a cost to keeping the firm an insider-only affair. Those outside funds would have made Icahn $44 million annually at the 2.5 percent management fee he charged. And if they’d closed this year with a 10 percent gain, Icahn’s firm would have made another $44 million by taking 25 percent of the profits.

Then again, by reducing the size of his pot, Icahn may be able to make higher returns on the $5 billion he’s still got. Druckenmiller felt his fund had gotten too big to make the kind of returns he wanted. Some studies suggest that over the long term the largest funds struggle to beat somewhat smaller, more nimble brethren.

So if the slimmed-down Icahn can make 12 percent this year instead of 10 percent, he will still be ahead — and he made 15 percent last year and 33 percent the year before. Moreover, he doesn’t have to take phone calls from skittish investors and write them letters. To a wizened billionaire, that alone may be worth the money.

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