When to give back the Bacon

My last two posts both were both very critical of ethics in the markets. Today I would like to give some praise. Louis Bacon, manager of a very large fund ($8Bn) of assets has decided to give back a quarter to investors. It is, in essence, admitting defeat. And that is something investment professionals seem to be very loathe to do.

Hedge funds do not like to give back money to investors, even when the investors themselves request it. More assets under management (AUM) means reduced management fees and less prestige. Giving back money also immediately says that you are unable to make money, that you are stumped, that the money is better invested elsewhere. Mr Bacon is giving up about $60m a year (but don’t praise him too much; he is worth over a billion. He is not giving up anything he cannot do without).

Mr Bacon, after recent poor returns, does admit that he just can’t make money in the current environment, not with such a large pool of assets. His fund seems to focus on macro-economic strategies, meaning it makes bets on macro-economic factors affecting countries as whole. Most notably, in this environment, that includes everything affecting the sovereign debt crisis. With all the government intervention and decisions by Ms Merkel (prime minister of Germany) and Mr Draghi (head of the European Central Bank) sending markets up and down, but with no decisive actions being taken, Mr Bacon feels he cannot make a bet on the market movements. He needs to bet something big will happen. And it just won’t happen. Probably Mr Bacon feels he cannot figure out what’s going to happen next, but he hasn’t gone quite as far as admitting that.

A large fund is not as agile as a smaller fund. With a smaller fund Mr Bacon will be able to take smaller positions that have a larger impact on the overall performance of the fund and be able to move in and out of positions more quickly. Hedge funds normally charge a performance fee – if the increase in performance is high enough it may offset the loss of the management fee mentioned earlier.

 Mr Bacon cares for his image. That is why he’d rather try to make a decent return on a smaller fund than poor returns on a larger fund. However, admitting his inability to profit from current market conditions is quite laudable for a man who made his fortune placing bets on other international events equally as murky. He also seems to take his responsibility as a custodian of other people’s money seriously. He cannot give the performance expected and so he has his investors put their money elsewhere. Unfortunately, for many, admitting the limits of their abilities does not seem to come as easily.

References 

• Chung, J. (2012). Louis Bacon to Return $2 Billion to Investors. Wall Street Journal. Retrieved August 3, 2012, from http://blogs.wsj.com/deals/2012/08/01/louis-bacon-to-return-2-billion-to-investors/ Herbst-Bayliss, S. (2012).
• Big hedge funds seen unlikely to diet after Bacon slims down. Reuters. Retrieved August 3, 2012, from http://www.reuters.com/article/2012/08/02/us-hedgefunds-idUSBRE8711VN20120802 Thomas Jr., L. (2012).
• Too Big to Profit, a Hedge Fund Plans to Get Smaller. Dealbook. Retrieved August 3, 2012, from http://dealbook.nytimes.com/2012/08/01/hedge-fund-titan-plans-to-return-2-billion-to-investors/