A Secretive Hedge Fund Legend Prepares to Surface
It’s a humbling time for Louis Moore Bacon. The 55-year-old founder of the $15 billion Moore Capital Management — and one of the premier hedge fund investors of the past two decades — just weathered his second down year in the past four after a particularly ragged run in the markets.
His onetime heir apparent recently launched his own fund and a spate of negative publicity in the past few years has raised questions about his management.
Amid the tumult, the Dodd-Frank legislation now requires Moore and other large hedge funds to register with the Securities and Exchange Commission and provide details about their risk management, trading, and disciplinary records. Bacon is loath to reveal any of it.
That has prompted him to reconsider the way he has done business for more than 20 years, according to associates. Some, in fact, believe that in the coming years Bacon may transform Moore into what’s known as a “family office,” a far smaller operation primarily managing Bacon’s own capital as opposed to that of outside investors. “Louis has been talking about becoming a family office for at least two years,” says one investor, adding that Bacon considers the new disclosures required by the Dodd-Frank Act to be “a problem.”
Says a Moore official: “We are registering.” The official adds that the company will send an initial round of paperwork to the SEC in the coming days.
Additional details on Moore’s inner workings are liable to throw a spotlight on the troubles it has grappled with in recent years. Over the past twelve months, several prominent traders have jumped ship to start their own hedge funds, and employees fear layoffs and additional departures in the coming months, say people familiar with the matter. In 2010, the Commodity Futures Trading Commission fined Moore $25 million, one of the largest financial penalties in the agency’s history, for failing to supervise a trader who allegedly manipulated the metals markets. (Moore neither admitted nor denied liability.)
And other sensational headlines — including the arrest two years ago of a London-based Moore trader as part of a U.K. insider-trading probe and the discovery of a dead man in the hot tub atBacon’s Bahamas estate— have garnered unwanted attention. (To be fair, the arrest of Moore’s London trader, who has denied wrongdoing, was reportedly in connection with trades made for the man’s personal account, not for Moore funds. And Bacon was not implicated in the Bahamian death; the man, who managed Bacon’s estate, reportedly died of a heart attack.)
Most troubling, however, have been Moore’s lackluster numbers. For 2011, its flagship fund, Moore Global Investments, dropped 2.2 percent, raising questions about Bacon’s ability to navigate such treacherous markets. After a painful 2008, in which the fund fell 4.6 percent and investors pulled some $5 billion, Moore has sought to attract stickier money from pension funds and other more conservative institutional investors who are likely to stay the course, say people with close knowledge of the firm. But the missed opportunities of last year are giving some clients pause.
“It’s trying,” says Brad Alford, an Atlanta-based money manager who invests in Moore and several other hedge funds. He is disappointed in nearly all of them. “The years that we needed hedge funds to perform the most — in 2008 and 2011 — they failed us miserably,” Alford says.
Moore’s imminent SEC disclosures, alas, will not reveal the reasons for that failure. By March 30, any hedge fund adviser with at least $150 million under management must submit an initial round of documents to the SEC, disclosing inner workings that have largely been kept under wraps.
Basic details, like the gross assets of the firm, the disciplinary history of key players and the minimum amount of capital required to invest, will immediately be published on the SEC’s web site. More sensitive information, including nuggets about specific investments and leverage, which don’t have to be provided until later this year, will be made available only to the SEC and the Treasury Department. (They’ll use that information for their ongoing assessments of whether multi-billion-dollar fund companies like Moore pose systemic risk to the U.S. markets.)
It’s not the sort of punch list Bacon, who likes to spend the vast majority of his time trading, is eager to share. Indeed, even in an industry known for its guardedness, Bacon stands out in his desire to reveal as little as possible. Most telephone calls at Moore, which has major offices in both New York and London, have historically not been recorded, say people who have worked there.
Employees sign non-disclosure agreements, and e-mails have traditionally been deleted after just two weeks. (Under Moore’s CFTC settlement, certain e-mails and other records must now be maintained for a longer period.) During meetings with analysts or even investors, say people who have attended them, Bacon, who often draws the blinds in his private office, frequently turns to his lieutenants to answer questions, often sitting silently through the presentations.
Bacon Founded Moore in 1989 with a $25,000 inheritance from his mother.
When Bacon founded Moore in 1989 with a $25,000 inheritance from his mother, it was a different era. The idea of trading on a “macro” basis—making essentially global bets on everything from equities in the U.S. to European bonds, metals and Asian currencies — was a relatively new concept, and big market disruptions could lead to massive returns.
In Moore’s first full year, for instance, a prescient bet that Saddam Hussein would invade Kuwait generated an 86 percent return, according to a letter Bacon penned to commemorate Moore’s first two decades. Thirteen years later, the same letter explains, Bacon’s accurate predictions on the market events surrounding the Iraq war would help his flagship fund return a performance of 35 percent.
Those sorts of calls have produced a stellar record — Bacon’s flagship fund has averaged 18.8 percent returns since inception in 1989 — and they elevated Bacon’s reputation, giving him a place among the most elite hedge fund managers. He was part of the most important troika in macro trading along with Paul Tudor Jones of Tudor Investment Corp. and Stanley Druckenmiller of Duquesne Capital Management.
But the market turmoil of the past couple of years has made the trends harder to predict. Close correlations between stocks and indices, for example, have limited opportunities for big and successful trades. The actions of central banks, whose policies have helped shore up flailing economies in the U.S. and in Europe, can swing stocks and bonds on a dime. Financial institutions have taken longer than expected to recover, and one of the few lucrative investments has been one of the least daring in the book: gold. Unsurprisingly, the average hedge fund fell 5.1 percent in 2011, according to Hedge Fund Research, with macro managers declining 3.9 percent.
Between the market dislocations and the new SEC regulations, some of the hedge fund titans are beginning to bow out. Druckenmiller downshifted to a family office, as did George Soros (arguably the godfather of macro trading, but not an active hedge-fund manager recent years).
Converting his operation to a family office may not be as easy for Bacon as it has been for some of his peers. Unlike Soros Capital Management, which made the switch in recent months after returning less than $1 billion of the $25 billion it oversaw, Bacon, whose net worth is reportedly about $1.4 billion, relies on outsiders for the majority of his capital.
He also enjoys some of the highest fees in the hedge-fund business: 3 percent of the assets in Moore’s flagship fund as a management fee, and, in good years, the right to pocket 25 percent of the fund’s annual returns before sharing a penny with investors.
Bacon’s success as a trader over the years required both resources and discipline, say people who have worked with him. Before the Internet brought news to his desk at the flick of a button, he had copies of Barron’s, the weekly market tabloid, flown to his London office from the U.S. via courier. Nowadays, say people familiar with the matter, the bedside tables in his numerous properties are set up so that he can scan market data immediately upon waking without lifting his head off the pillow. A technology worker in Moore’s midtown Manhattan office travels frequently to make sure the bedside data feeds are in good working order.