New Hedge Fund Uses the Do-Over Option

On April 14, I wrote about hedge funds that terminate after a bad year to avoid having to work their way back to breakeven. Last week, I read a story about a hedge fund portfolio manager, Greg Coffey, who works at GLG Partners (GLG), and manages $7 billion in emerging market funds. He recently resigned from the firm and will be walking away from about $250 million in unvested shares and cash awarded to him as "golden handcuffs."

Coffey's main fund is GLG Emerging Markets earned a 60% in 2006 and 50% in 2007. These returns are quite good, but many emerging market mutual funds did just as well in that period, especially those invested in China.

But Coffey's fund has got off to a bad start in 2008, and it is down about 15% year to date. So Coffey has decided to launch his own hedge fund using the "do-over" option, to make the 15% shortfall go away. I would hope that investors moving from his GLG Partners fund would be smart enough to negotiate an arrangement where the first 17.5% in appreciation is free from incentive fees, but I doubt it will happen.

When you look just at the percentages, Coffey's record looks pretty good even after the 15% drop. But most likely his assets under management in 2005 and 2006 were fairly small and grew rapidly going into 2008. So looking at dollar weighted returns, it is quite possible that Coffey actually lost money overall, or made very little.