This week, everyone’s talking about John Paulson. The hedge fund manager, known for making a killing off of the housing bubble, was asked to face investors on a call with Bank of America prompted by his fund’s consistent dismal performance.At least, that’s what it seemed like. Citigroup severed a $410 million relationship with Paulson just last week. The Street is beginning to worry.
But before anyone hits the panic button, know that history has shown us that circumstances must be far more dire than a few redemptions for a hedge fund to go completely under.
We’ve compiled a list of the most dramatic collapses in hedge fund history so you can see for yourself. Paulson isn’t anywhere close to these guys — at least, not as far as we know.
*Thornton McHenry also contributed to the reporting of this piece.
The Beginning: Founded by Samuel Israel III in 1996
The Height: In 2003, the funds claimed to have made $43 million. Israel told investors that Bayou would grow to roughly $7.1 billion by 2006.
The End: Bayou was revealed as a Ponzi Scheme in 2005, when the SEC requested that the court freeze the defendants' assets and accused them of claiming to have made $43 million in four hedge funds in 2003 when they actually lost $49 million.
When Bayou was unmasked as a fraud in 2005, many people lost a lot of money but the media was given the pleasure of meeting Sam Israel, a bizarre character who, after conning almost half a billion dollars from investors, faked his own suicide in 2008 before being eventually recaptured and sentenced to 22 years in prison.
Returns on investments at Bayou were neither made public nor genuine as it was discovered that Israel created a dummy corporation to audit his own fund.
The Beginning: Founded by James Dondero and Mark Okada in 1993.
The Height: The 'Crusader Fund' had annualized average returns of 12.7% and held $1.5 billion in 2006.
The End: Wound down the 'Crusader Fund' in October of 2008.
Dallas-based Highland Capital Management made a lot of money in The Nineties and 'Early Aughts' by rolling out a number of funds under the Highland Capital banner, allowing them to trade on everything from commodities to distressed assets.
But the fiscal crisis of 2008 forced Dondero and Okada to shut down their flagship Crusader Fund in 'an orderly fashion' after 'unprecedented market volatility and disruption.'
Assets in the Crusader Fund were valued at approximately $360 million when the fund when the shuttering (which caused a lawsuit) occurred.
The Beginning: Founded by Ron Beller and Geoff Grant in 2005
The Height: Managed $3 billion in assets in 2006, the year it returned 87% to investors.
The End: Liquidated in 2008.
Beller, a former Head of the Fixed-Income Currency and Commodity Sales Group at Goldman Sachs returned roughly $2 billion of Peloton's AUM to clients when he and former partner Geoff Grant Liquidated the fund in 2008.
Even though he had some unwanted excitement during his time with Goldman, Beller had a pretty great gig there when he left in 2005 to found Peloton with Geoff Grant. The subprime mortgage crisis caused the fall of Peloton and cut deeply into Beller's net worth.
The Beginning: Founded by Julian Robertson in 1980.
The Height: Tiger had almost $7 billion in assets by 1993, the year the fund returned 80%.
The End: Fund shuttered in 2000.
After being one of the earliest titans of the hedge fund boom, Robertson watched his multi-billion dollar investment business deteriorate rapidly before his eyes as a long bet on doomed US Airways and a run on the yen took a huge chunk out of his assets.
Tiger's legacy are the numerous 'Tiger Cub' hedge fund managers who are Tiger alums running funds all over the globe.
The Beginning: Founded by Lief Rosenblatt, Gabe Nechamkin and Mark Sonnino in 1999
The Height: After returning roughly 25% in 2004, the fund managed $7 billion by the end of 2007 but lost 35% in 2008.
The End: Shut down in 2008 with less than $3 billion in assets.
Satellite is a perfect example of just how bad 2008 was for hedge funds in particular and the global economy in general.
Rosenblatt, Nechamkin and Sonnino were proteges of George Soros and spent almost 10 years building Satellite as a public equity and fixed income-driven fund. And fro seven years they did a great job of it.
But 2008 hit the three managers like a proverbial freight train as equity seemed to disappear around the globe and growing demands for redemptions caused the men to shutter the fund and pay investors back at a rate of 21% in November.
The Beginning: Founded by Nicholas Maounis in 2000.
The Height: Managed $9 billion of assets in 2005 and had annualized returns of 86%.
The End: Folded in 2006 after losing billions in assets over a matter of weeks.
Amaranth had a meteoric five-year rise to reach a huge AUM number by utilising a convertible arbitrage strategy to generate capital gains.
But the fund whose name translated to 'unfading' in Greek did just the opposite when it made an unfortunate delta hedge transaction on natural gas future derivatives and lost roughly $6.5 billion on the gamble.
Maounis later sued JP Morgan for interfering with his attempt to resuscitate Amaranth by refusing to execute trades on the fund's behalf and Amaranth's failure is a major talking point in the debate over the efficacy of derivatives.
The Beginning: Founded by John Meriwether in 1994
The Height: Posted annualized returns of over 40% over the first four years of trading and once held $120 billion in trading liabilities.
The End: Closed in 2000 after borrowing to stave off bankruptcy.
Long-Term Capital Management was a seeming 'can't miss' when Meriwether, a former director of bond trading at Solomon Brothers founded it in 1994 and appointed Nobel Prize winning economists to its board.
And for a while LTCM lived up to its hype, making enormously healthy returns and growing its asset base very quickly until 1996 when it lost $4.6 billion in AUM and took a bailout payment form the government that is hearkened back to in this day of more extravagant bailouts and was dissected in brilliant detail throughout Roger Lowenstein's book When Genius Failed.
LTCM shut down in 2000 after realising its inability to pay off its growing debt.
The Beginning: Founded by Timothy Barakett and Nathan Rotschild in 1995.
The Height: Managed $13 billion in September of 2008 and had annualized average returns of 19.3%.
The End: Failed in August of 2009.
Barakett's 2009 letter to Atticus' investors was met more with anticipation and acceptance rather than surprise after the fund had weathered terrible returns including a year-to-year for September 2008 that saw the European arm of the fund drop by 42.5%.
But Amaranth had a great run, with strong returns over the fund's first 10 years and a nearly constant presence in Institutional Investor's Top 100 Hedge Funds list and frequent adoration from Jim Cramer,
Source: Tracking Hedge Funds
The Beginning: Founded by Arthur J. Samberg in 1998
The Height: Managed $15 billion in 2001 and had annualized average returns of 16.8%.
The End: Shuttered in 2010 after being fined by the SEC for insider trading.
Pequot returned healthy profits every year and built an enormous AUM of $15 billion by 2001 when Samberg's #2 man, Daniel Benton, rolled out his portions (nearly half) of Pequot's assets into his own fund.
After John Mack made a one-month pit stop to work with Samberg at Pequot between a senior post at Credit Suisse and taking over as CEO at Morgan Stanley, the SEC launched a probe of Pequot's trading practices and the commission found enough to levy a fine of $28 million against Samberg in 2010. He closed the fund moths later.
The Beginning: Founded by Bernard Madoff in 1960.
The Height: Madoff claimed at one point that his fund managed around $50 billion with annualized average returns of 20%.
The End: Madoff admitted to perpetrating a Ponzi scheme in 2008.
Bernie Madoff is now the face of everything evil about the culture of greed that many attach to the hedge fund world after cheating his clients out of billions of dollars of their personal assets.
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