Harbinger Capital Partners hired Peter Jenson, a former controller at Citadel Investment Group LLC in Chicago, as chief operating officer...
" Harbinger hired Peter Jenson, a former controller at Citadel Investment Group LLC in Chicago, as chief operating officer."
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"Falcone Starts Fund as Harbinger Client Money Remains Locked Up
By Katherine Burton - March 20, 2009 00:01 EDT
Philip Falcone, Harbinger Capital Partners
March 20 (Bloomberg) -- Philip Falcone, who runs the $7 billion Harbinger Capital Partners LLC, is starting a hedge fund that draws on his background in distressed securities, even as investors are locked into his biggest fund.
The Credit Distressed Blue Line Fund will buy troubled loans and bonds, and bet against higher-rated debt, the New York-based firm said in a March 16 letter to investors. The firm’s flagship $5 billion Harbinger Capital Partners Fund I limited withdrawals to 65 percent of its assets last year because of private-equity investments, which are harder to sell than publicly traded stocks.
“We hired Falcone because he was the best distressed investor on the planet, and then he morphed into an equity manager who took big bets with an activist bent,” said Brad Alford, head of Alpha Capital Management LLC in Atlanta and an investor in Harbinger Capital Partners. “Now, he decides to launch a credit fund while 35 percent of our capital is stuck in private equity.”
Harbinger’s assets have fallen about 73 percent from a peak of $26 billion in mid-2008 because of investment losses and client withdrawals. Capital Partners I declined 28 percent last year, exceeding the 19 percent average loss for all hedge funds, according to Chicago-based Hedge Fund Research Inc.
Charles Zehren, a spokesman for the fund, declined to comment on the new fund and the letter, a copy of which was obtained by Bloomberg News.
Equity Investments
Falcone, 46, started his main fund almost eight years ago to focus on distressed debt. Bonds are considered distressed if they yield 10 percentage points more than Treasuries with similar maturities, indicating investors are concerned that the issuer will default.
They typically buy such debt to bet that a company can renegotiate loan agreements to avoid bankruptcy or to reap gains in liquidation.
Falcone later diversified into equity investments that included stocks of companies going through changes such as mergers or spinoffs, and private-equity holdings. He also takes concentrated positions in companies.
Falcone last year became a 20 percent owner of newspaper publisher New York Times Co., which he is pushing to sell assets and pursue digital businesses.
Investors in Capital Partners may ask Falcone to let them switch to the new fund and not pay fees until their losses are recovered, said Brad Balter, head of Boston-based Balter Capital Management LLC, who invests in hedge funds.
“In this environment, everything should be done to benefit the investor,” he said.
Revenue Drop
Last year was the worst on record for hedge funds, which lost about $600 billion in assets because of sour investments and client withdrawals.
More than 18 percent of all hedge-fund assets, managed by 5 percent of firms, were subject to some sort of withdrawal restriction last year, according to Peter Douglas, principal of Singapore-based consultant GFIA Pte.
Harbinger’s fee revenue has fallen since 2007, when the flagship fund more than doubled on gains by metals companies and wagers against mortgages. The firm managed about $11 billion at the end of 2007.
Clients who were invested in the fund in 2008 won’t have to pay the 20 percent performance fee until their losses have been recouped. The fund, which climbed 5.6 percent in January and February, needs to rise 39 percent to make them whole.
Falcone is starting the distressed fund to “seek to capitalize on the current dislocation in the credit markets,” he wrote in his letter. The new fund will buy credit-default swaps, which act like insurance against loan going bad.
It will purchase devalued high-yield bonds, bank loans and trade claims, which are debts that a bankrupt company owes to its suppliers. The fund won’t borrow money to make purchases, nor will it buy stocks.
$1 Billion Cap
Harbinger expects the fund to be capped at $500 million to $1 billion, and to wind down after the credit crisis subsides.
Falcone will manage the Blue Line fund in the same way as the main Capital Partners fund between its start in June 2001 and March 2004, when the last distressed-credit cycle ended.
During that time, the fund returned about 22 percent a year, on average. Since inception, it’s climbed about 20 percent, compared with a loss of 4.9 percent for the Standard & Poor’s 500 Index.
In the main fund, Falcone is shifting capital to distressed debt and will make the same credit investments as in the new fund. He’s been shifting money out of equities, though he will continue to own stocks.
Harbinger will ask shareholders to vote on new fee and redemption policies at a meeting scheduled for March 27.
Trimming Positions
The fund is proposing reduced management and incentive fees for investors who agree to have their money initially locked up for two years rather than one.
So far this year, Falcone has trimmed positions in iron-ore producer Cliffs Natural Resources Inc., cable-television provider Cablevision Systems Corp., truckmaker Navistar International Corp. and coal producer Consol Energy Inc, the letter to investors said.
Falcone has also covered some of his bets on falling shares of metals producers and diversified financials stocks. He unwound some of his positions in credit-default swaps on sovereign debt and monoline bond insurers, the letter said.
He’s staying put with his largest equities positions, including the New York Times stake and a 25 percent holding in power producer Calpine Corp.
Private-Equity Fund
The fund added to its credit positions, including trade claims on an energy company, which Falcone bought for 50 cents on the dollar, and credit default swaps on European retailers, consumer products and service companies.
Falcone also started a private-equity fund with a Korean company as an anchor investor, according to the letter.
The Global Opportunities Breakaway Fund LP has a five-year term, and will draw down capital as it makes investments.
Harbinger plans to open a Singapore Office as part of the management of the new fund, the letter said.
Harbinger earlier this year bought back an undisclosed stake from Birmingham, Alabama-based Harbert Management Corp. Harbert oversees about $9 billion, according to its Web site.
Separately, Harbinger hired Peter Jenson, a former controller at Citadel Investment Group LLC in Chicago, as chief operating officer. The hiring was reported March 18 in Hedge Fund Alert.
In February, Harbinger hired Omar Asali, who was previously co-head of Goldman Sachs Hedge Fund Strategies, to be responsible for global portfolio strategy and portfolio analytics. He will also assume certain risk management duties, the letter said. "
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