Investors Are Fleeing Cerberus Capital Management

I guess this isn’t a big surprise but probably worth noting anyway and I do have an ulterior motive for writing this post which I shall divulge at the end.

At any rate, Cerberus, the giant operator of hedge funds not the mythical dog, is watching its investors leave in droves. Here is how the WSJ reports the news:

Investors in hedge funds run by Cerberus Capital Management LP, whose audacious multi-billion dollar bet on the U.S. auto industry went bust, are bolting for the door, clinching one of the highest-profile falls from grace of a superstar in the investment world.

Clients are withdrawing more than $5.5 billion, or nearly 71% of the hedge fund assets, in response to big investment losses and their own need for cash, according to people familiar with the matter.

“We have been surprised by this response,” Cerberus chief Stephen Feinberg and co-founder William Richter wrote in a letter delivered to clients late Thursday.

The client exodus is a reversal of fortune for Mr. Feinberg and Cerberus. The New York investment firm emerged as one of the most successful private-equity and hedge-fund firms over the last decade — an era when these vehicles for the rich used cheap money to snap up troubled companies and vowed that their financial wizardry would make their investors a fortune. But investments in those very assets — particularly Chrysler LLC and GMAC LLC — proved to be the Cerberus funds’ undoing.

Cerberus isn’t alone in seeing assets flee and its once-lucrative business crumble. The firm’s success and now its struggles mirror the bubble in so-called alternative investments over the past decade — and the air that has since come out of it.

That they are surprised that investors are voting with their feet may stand as testimony to the utter cluelessness of both men. Having invested several fortunes in industries that most undergraduates with a firm grounding in finance 101 could have told you would come to no good, Cerberus is quickly coming to be the Drexel Burnham of this generation of financiers. The real surprise is that 29% of their investors haven’t asked for their money back.

And why did I want to put up this post? Well, to be perfectly honest, with Cerberus shrinking into a perfectly harmless little hedge fund, I figured this might be the last time I get to use the picture of the “dog” and it is one of my favorites.

Comments

[Old Trader:]

Actually, this article (and a number of others appearing in SA today), is somewhat misleading, if what appeared in yesterday's Bloomberg news is accurate.

The fund under discussion is but one of a number of funds run/managed by Cerberus. This particular fund is the one that invested heavily in Chrysler and GMAC. According to the article I read, Cerberus has closed, or is close to closing, another new fund with $1B in capital to invest in distressed debt.

Aug 31 11:11 AM

[Mad Hedge F...:]

otup. The hedge fund industry is emergingfrom the ashes of 2008, and will inevitably grab a larger share of theinvesting public’s assets. Low interest rates and hero status made itway too easy for inexperienced, untested, and sometimes unscrupulousmanagers to raise new funds that charged management fees as high as 3%with a 50% performance bonus. Behind every “liar loan” was a bondmanager happy to soak it up through securitized Fannie Mae (FNM),Freddie Mac (FRE), or bank debt, shorting Treasuries against them, andthen leveraging the 40 basis point spread by 50 times to generate ahighly marketable 20% gross return. Never minds the risks. It was easymoney, as long as there were lots of liars, which mortgage brokersherded in by droves, and as long as spreads narrowed, which they didfor most of the 21st century. By the beginning of 2008, assets undermanagement soared to $2 trillion. The melt down that followed wiped outlarge numbers of funds, and raised gates for the survivors, makinginvestors wonder if they would ever get their money back. Total assetsplunged to $1 trillion in the blink of an eye through a combination ofredemptions and market losses. The new era that is emerging will bepopulated with humbled and chastened managers offering more disclosure,lower fees, no gates, and thanks to Madoff, oodles of third partyoversight. Their portfolios will have less leverage, be invested inmore liquid securities, and bring in lower returns. But the newgeneration will also offer investors battle tested strategies thatsurvived the 100 year flood. Bridgewater, with $37 billion in assets,is now the largest hedge fund, followed by JP Morgan with $36 billion,Paulson & Co. at $27 billion, DE Shaw showing $26 billion, andSoros still at a hefty $24 billion. Long track records and a Guccicachet will assure that these will prosper. Fees settling down to the1%/20% range. For the rest of us this means more capital bunching up inthe most successful trades, as we have already seen this year infinancials, China, oil, and copper. It is also going to be much harderto get new funds off the ground.

Sep 04 10:01 AM

[CMETALS:]

I was at the Richmond Airport last week and former Secretary of the Treasury John Snow got off his private jet with the two pilots. I bet this plane could carry about 40 people. This was not a little lear jet. You see how they blow money and you know the investors are getting the shaft.

Sep 13 07:11 PM