During the historic crash of 2008, even the most reputable, well-capitalized hedge fund managers raised the gates to protect their funds from panicked investors scrambling for liquidity.
Not Loeb Capital Management, the hedge fund operation of Loeb Partners Corp., the family office that oversees the Loeb family fortune. Loeb Partners is majority owned by Thomas Kempner Sr., a grandson of Carl Loeb, who founded the brokerage that merged with Rhoades & Co. in 1937; that combined firm was acquired by Shearson Hayden Stone in 1979 in a landmark Wall Street deal. Shearson Loeb Rhoades, which in 1979 was the world’s second-largest investment bank, was later sold to American Express Co.
Loeb Capital, which manages outside money alongside its own cash, is once again gaining attention — this time as one of the few funds that staunchly honored all redemption requests at the height of the financial meltdown late last year.
Gideon King, a partner at Loeb Capital as well as its CEO and CIO, saw the signs of a looming crisis early last year and began preparing for it before the near-collapse of Bear Stearns Cos. jolted markets in March.
“This was a historic breakdown that would define portfolio managers,” the 39-year-old executive tells Institutional Investor . “When I looked at the multiple of assets-to-equity at Bank of America, Citigroup and Bear, I was shocked — it viscerally hit me just how leveraged the system had become, and I realized that if you went straight down with the market, your reputation as a low-volatility portfolio manager would be sullied and wouldn’t come back.”
King, who joined Loeb in 1993 and took over its flagship multistrategy fund in 1999, began raising cash in anticipation of a flood of redemption requests. Investors would soon start demanding liquidity wherever they could get it, he believed, and Loeb needed to be ready.
“I said, ‘We are going to become the bank for our investors, and we have to sell.’ I don’t find compelling or acceptable all the letters from hedge funds that wrote that due to the unprecedented levels of illiquidity and volatility, we’re going to gate you,” King says. “Managing money is about anticipation.”
He ramped up the selling at Loeb in March 2008, modeling worst-case redemption scenarios and then selling securities to raise cash to be able to meet any requests. As part of this analysis, he modified the firm’s holdings as necessary. “At differing levels of redemptions, one has to make sure that the pro forma portfolio remains well diversified,” explains King.
At the end of 2008, Loeb’s funds received redemption requests equal to 40 percent of total assets. King declines to disclose the firm’s total assets under management but says that the bulk of assets are in its multistrategy funds (one onshore and one offshore), which hold a total of $500 million. Its other funds include onshore and offshore long-biased funds, which were also hit with redemptions.
Like most fund managers, King is disappointed that he didn’t start selling sooner. The onshore multistrategy fund, which trades in credit, equity risk arbitrage and related situations, experienced its first down year in 2008, when it lost 12.5 percent. On the heels of 21 years of 13 percent annualized returns net of fees, that was a blow. The multistrategy funds, which at their peak, in late 2007, had assets of $1.1 billion, had fallen to $500 million by this January.
The funds have been making a comeback this year, though, partly because by November King had raised enough cash to meet redemption requests and make new investments at some of the market’s lowest points. The hedge fund’s A-class shares were up 7.6 percent this year as of May 29. Clients have committed $13 million for the month of June alone, says Sean Flynn, vice president of marketing.
With its stellar track record for meeting redemptions in 2008, Loeb should have an easy time luring new cash, contend the firm’s executives. “Your behavior in a crisis is the only time anything counts,” says Flynn. The firm aims to grow total assets under management to about $1 billion, but it could handle as much as $2 billion, he adds.
Michael Price, a pioneer in activist investing and until 2001 the chairman of the Franklin Mutual Advisors and Mutual Series Fund, says he respects King for the fundamental analysis he does on securities and the fact that he can do well without using much leverage. “I would put money with Gideon just to have a dialogue with him,” he says. “They do very intense work, deep analysis — and if you take 2008 out, he’s done very well.”
Bruce Lev, managing partner and general counsel for Loeb Partners, says that in addition to its track record for redemptions in 2008, Loeb offers full transparency (it provides information on portfolio positions in real time) and a fee structure that aligns managers’ fees with investors’ gains (a management fee is not paid until clients earn at least 6 percent). Loeb Capital has never enacted gates or refused redemption requests. It also has an independent valuation team, auditor and administrator.
The multistrategy funds invest in corporate restructurings such as hostile and nonhostile takeovers, activist deals and commercial-mortgage-backed securities. The funds’ diversification is meant to protect investors, King says. Individual positions range from 0.5 to 1.5 percent of total assets. “A lot of people talk about illiquidity as the reason to put up gates, but in fact it’s really illiquidity plus a lack of diversification” that leads to gates, he says, explaining that a 5 percent position can quickly become a 10 percent one if a fund suffers heavy investor withdrawals. “Knowing that all assets can go to zero, we try to diversify.”
THE FACTS
NAME: Gideon King
POSITION: CIO Loeb Capital Management
APPOINTMENT: 1999–present
WHAT WE KNOW: In early 2008, King anticipated investor withdrawals and hopes to seize on that track record.
