Hedge Fund Attrition Rate Dips For 2nd Year

Hedge Fund Attrition Rate Dips For 2nd Year
February 2007
Hedge Fund Daily

For the second year in a row, hedge fund attrition rates have fallen, according to Hennessee Group, which may sound like good news also suggests the industry is in for change that doesn’t bode well for some players. Basing its findings on its Hennessee Hedge Fund Index, the New York firm reports that 5.1% of funds called it quits last year, down from 5.4% in 2005 and a recent high point of 6.2% in 2004 (The highest attrition rate, says Hennessee, was 6.4% back in 2000). The 2006 year figure is also slightly below the eight-year average rate of 5.2%. Charles Gradante, managing principal at Hennessee, expects the trend to continue. "We are seeing evidence of rising barriers to entry within the industry, including the need for more expensive infrastructure to attract institutional money, which favors larger funds and creates difficult for start-up and moderately sized funds to sustain growth and attract top talent," he says. Gradante adds that in the longer term, "the attrition rate will decline as the evolutionary process continues. Gradante expects that will leave an industry consisting "mostly of funds with larger infrastructure and size, commensurate with institutional needs." He notes that the hedge fund attrition rates "do not imply that failures in hedge funds are substantially higher than other industries."

The Collapse of Amaranth (Commodity Hedge Fund)

Amid Amaranth's Crisis, Other Players Profited
Goldman Offered Deal; J.P. Morgan Balked, Then Did One Itself
By ANN DAVIS, GREGORY ZUCKERMAN and HENNY SENDER
Wall Street Journal, January 30, 2007

When Amaranth LLC collapsed in the fall, after swiftly losing more than $6 billion, it was the biggest hedge-fund failure ever. Now as investors slowly get back what's left of their money, it's becoming clear the debacle also had some big winners: other players in the high-stakes energy market who profited from a crippled rival's travails.

The final agonies of Amaranth, described by dozens of people close to the roller-coaster negotiations about its fate, began on Friday, Sept. 15. Bleeding cash and facing a Monday demand for money it didn't have, Amaranth scrambled through an intense weekend to find someone who would take over losing energy investments for a price.

It did negotiate a rescue plan, requiring it to pay nearly $2 billion to Goldman Sachs Group to take toxic trades off its hands. Strapped for cash, Amaranth aimed to get the money to do the deal by using cash collateral on deposit with its middleman for natural-gas trades, J.P. Morgan Chase & Co.

But on Monday morning, just after Amaranth had told its investors a rescue was close, J.P. Morgan said it wouldn't release the collateral. The firm was effectively responsible for making sure parties to Amaranth's trades got paid, and it said the rescue plan didn't free it of this risk, according to people familiar with its stance. J.P. Morgan's refusal killed the plan. Amaranth's situation went from dire to desperate.

Two days later, J.P. Morgan itself agreed to take over most Amaranth energy positions. With a partner, it cut a deal that turned out to be lucrative for J.P. Morgan -- earning it an estimated $725 million -- but more painful for its longtime client, Amaranth.

Hedge funds are among Wall Street's biggest customers, and the Street gives them red-carpet treatment as the fees roll in. But the Amaranth case shows how Wall Street dealt with a fund after it had traded its way into a deep hole. Information the fund revealed about its holdings as it grasped for a lifeline let other commodity-market players, Wall Street firms included, exploit its positions. As they drove prices relentlessly against Amaranth, its losses swelled, and instead of facing a big but possibly survivable setback, it collapsed.

Amaranth's case also reflects an incentive structure in the world of hedge funds that can tempt some to assume heavy risk. Typical of hedge funds -- private investment pools for the wealthy and institutions -- Amaranth took 1.5% of investors' assets as a management fee each year, plus 20% of investment gains. This 20% fee is calculated on gains recorded at year end, including gains not nailed down by closed trades. From this take, traders at many firms, such as Amaranth, are given bonuses that are largely theirs to keep, even if the paper gains later shrink or vanish.

"This results in a huge incentive for taking risk," says Luis Garicano, a University of Chicago business school professor. "When the bet goes well, the hedge-fund manager collects a lot, while when it goes badly the worst that can happen to the loser is he gets zero."

At Amaranth, star energy trader Brian Hunter won an estimated $75 million bonus after his team produced a $1.26 billion profit in 2005. Like many others at the fund, he had to keep about 30% of his pay in the fund. The fund's chief risk officer, Robert Jones, got a bonus of at least $5 million for 2005, say people familiar with the bonuses. Nicholas Maounis -- founder, majority owner and chief executive of the Amaranth management firm -- got an estimated $70 million cut of 2005 management fees, plus some of Amaranth's $200 million-plus in performance fees. He kept much of his compensation in the fund.

Asked to comment, a fund spokesman said, "It would be inadvisable for Amaranth to speak on the public record ... at this time. While no litigation has been threatened or commenced against Amaranth, regulatory inquiries continue and litigation remains possible." He said, "Mr. Maounis's No. 1 priority is the continued disposition of the Amaranth portfolio and distribution of capital to investors."

Volatile Market

The 32-year-old Mr. Hunter's specialty was natural-gas futures -- contracts for delivery on a future date -- and options. This is a highly volatile market, where the price can move swiftly on changes in gas available in storage and on shifts in the weather -- or a weather forecast.

If Mr. Hunter thought prices in, say, March would be higher than what other traders expected, he could buy contracts for March delivery cheaply. If his view of April prices was lower than the market's, he could go the other way. Or he could bet on the spread between a pair of months. For example, if there's a cold winter, gas can suddenly get scarce in March, sending prices skyrocketing. Things shift in April, as the heating season winds down. The March-April spread is one many gas traders bet on, but can be such a perilous bet that some call it "the widowmaker."

Mr. Hunter bet big. He sometimes held 30% of contracts for gas delivery in certain months, say people who saw the trading data. His team, operating largely out of Calgary, Alberta, made a stunning $1.5 billion in six weeks last spring, mostly on energy trades. But gains that big in a single market can portend swings just as fast the other way, and in May that's what happened. His bets on gas prices years into the future backfired and dealt the fund a sudden loss of about 10%.

That triggered demands for more collateral from J.P. Morgan. It was Amaranth's natural-gas clearing broker, a firm that executes a client's trades on an exchange and stands behind the client's obligations in case it can't pay. Clearing brokers give futures traders confidence they'll be paid if they are owed money when a contract expires.

For taking this risk, the firms demand collateral, known as "margin," in an amount of cash reflecting a portfolio's possible one-day price move. The margin demand fluctuates daily with how well or badly the positions did that day.

Amaranth told its investors the May loss was "a humbling experience that has led us to recalibrate how we assess risk." To reduce its exposure, it paid investment bank Morgan Stanley to take over part of its energy portfolio. Yet officials at the New York Mercantile Exchange, where many energy contracts trade, were concerned enough that they discussed what a failure by a player as big as Amaranth might do to the market.

The regulators took comfort in the stability of J.P. Morgan. The bank at times advised Amaranth to reduce its natural-gas exposure, says someone familiar with the bank's operations. But the clearing operation focused chiefly on whether the fund met margin requirements, as Amaranth always did.

According to a person involved in the discussions, Amaranth's Mr. Maounis told his energy team to reduce its exposure, but warned them not to do so precipitously, lest the firm suffer another major loss. Amaranth's positions were so big they couldn't be unwound fast without moving the market.

But Amaranth allowed the portion of the fund invested in energy to grow, as the energy bets started to pay off again. By July, Amaranth was 56% in energy, up from 34% in April. In the last week of August, the value of the fund's assets reached $9.2 billion, up about 27% since Jan. 1.

One of Mr. Hunter's bets anticipated relatively cheap gas in September. But in the last half hour of trading Aug. 29, the price of the expiring contract for September delivery jumped. The surge wiped out hundreds of millions of dollars in Amaranth's gains. The fund told Nymex it suspected someone had manipulated prices. Regulators are looking at it.

Then in early September, widely watched weather-forecasting centers made two predictions: that the hurricane season would pass without major storms, and that the winter would be mild. The forecasts, too, slammed Mr. Hunter. He was betting on a gas shortage and price spike at some point after October. Worse, contracts for winter delivery fell by more than those for early-fall delivery, hitting him where his bets were concentrated. By the end of Friday, Sept. 15, Amaranth was down more than $2 billion from its August value.

Margin Calls

The losses automatically raised J.P. Morgan's margin demands. One of the ways Amaranth had met past demands was selling nonenergy investments to raise cash. But now it turned out some couldn't be liquidated instantly, say people involved. Amaranth suddenly faced a risk of not having enough cash for Monday's margin demand. If it didn't, creditors could foreclose on its assets and it might lose them.

Amaranth called Wall Street banks in search of solutions. It asked Goldman Sachs if the bank, a major player in both energy markets and hedge funds, would take over much of Amaranth's energy portfolio. The fund tried a different tack with others, trying to raise money by selling a piece of the fund-management firm, Amaranth Advisors LLC.

Firms prefer to do negotiations like these secretly and one at a time, to avoid revealing too much to too many rivals or signaling vulnerability. But Amaranth's Greenwich, Conn., office that weekend was a revolving door. Morgan Stanley representatives spotted someone from Merrill Lynch & Co. in the parking lot. Rumors flew.

On Saturday, Goldman offered to do a deal designed to eliminate most of Amaranth's energy risk -- in return for a $1.7 billion cash payment from the fund -- say people familiar with the negotiations. Amaranth managers were insulted. Mr. Hunter had figured the fund could get out of these problematic trades for about $800 million.

Amaranth kept shopping. It called John Arnold of Centaurus Energy, a Houston hedge fund that was Mr. Hunter's biggest rival. No deal.

With others they talked to, some Amaranth traders claimed Mr. Arnold was driving gas prices against Amaranth, according to someone who was approached. Their pitch was: We've got one guy in the market trading against us. If you take over our positions and hold onto them, you can make a billion dollars.

A Deal With Merrill

Later that Saturday, Amaranth managed to make a partial deal. It got Merrill Lynch to assume about a quarter of its natural-gas exposure, in return for a payment of approximately $250 million, say people familiar with the matter. Merrill won't comment.

Amaranth officials figured that Goldman Sachs now would reduce its price, since Merrill was taking some of the exposure. Instead, Goldman executives fumed, say people familiar with their reaction; Goldman had wanted to negotiate exclusively, not have competitors poring over Amaranth's books.

Rather than reduce its price, Goldman upped it, to $1.85 billion. The deal it envisioned would use derivative contracts to assume most of the risk of Amaranth's main remaining energy investments. Goldman would do trades that partially offset energy trades on Amaranth's books, with the aim of neutralizing them. The deal would leave a lot of positions on Amaranth's accounts at J.P. Morgan, which remained responsible for their execution.

Some at J.P. Morgan, including Chief Executive James Dimon, had grown concerned about Amaranth. Late Sunday, J.P. Morgan called in its top energy trader, George "Beau" Taylor, to review Amaranth's positions. Informed that an Amaranth-Goldman deal was imminent, J.P. Morgan said it might make an offer itself, but then said it needed more time.

In Greenwich, Mr. Maounis was in turmoil, sometimes losing composure and in tears, according to people familiar with the matter. Late that night, he accepted the deal with Goldman.

On Monday morning, the sleep-deprived fund chief issued a letter to investors, telling them that half of the money the fund had at its peak 2½ weeks earlier was gone. Instead of being up 27% for the year, it might be down more than 35%. But his letter gave an assurance. It said a deal to get the fund out of natural gas was "near completion."

The letter didn't mention that a key player still needed to sign off: J.P. Morgan. The clearing broker held an estimated $1 billion to $2 billion of Amaranth's money in a margin account, cash that Amaranth intended to use to pay Goldman.

Amaranth held a conference call intended to close the Goldman deal. But as officials from Goldman and Nymex listened, J.P. Morgan refused to release Amaranth's collateral -- scotching the deal.

The bank said it believed the complex transaction wouldn't eliminate its risk. J.P. Morgan would still be the clearing broker for Amaranth's energy positions. And although Goldman and Amaranth claimed that the risk in those positions would be drastically reduced by Goldman's offsetting trades, J.P. Morgan would be the clearing broker for those new trades, too. The firm said it needed to analyze how the deal worked. It also argued that it had a right, and perhaps a duty, to hold onto the margin money until its obligations were resolved.

"We would have been absolutely willing to facilitate a deal that would have removed unwanted Amaranth credit exposure from our risk profile," a J.P. Morgan spokesman said.

In the energy market, it was now open season on Amaranth. All weekend, others had been dumping natural-gas positions on after-hours trading platforms, having either heard rumors about Amaranth or been invited to review its books. On Monday, with word of the fund's distress out in the open, traders sold certain gas investments even faster, in anticipation of a forced liquidation of Amaranth's portfolio.

For instance, Mr. Hunter had bet that the spread between March-delivery gas contracts and April contracts -- the "widowmaker" bet -- would widen. The burst of trading made it shrink, to 75 cents per million-BTU gas contract from $1.15 on Friday, according to NaturalGasAnalytics.net. On Monday alone, Amaranth's losses deepened by several hundred million dollars.

That morning, Amaranth got a call from Kenneth Griffin, founder of Citadel Investment Group. Mr. Griffin had built Citadel into a $13 billion hedge-fund behemoth estimated to be responsible for 3% of daily trading on the New York Stock Exchange. Even so, his group suffered some losses during Mr. Hunter's 2005 winning streak. Mr. Griffin proposed taking over most of Amaranth's energy portfolio.

That portfolio now was in worse shape because of Monday's losses. The more it deteriorated, the more cash an outsider would demand to take it off Amaranth's hands. The Citadel deal would have cost Amaranth more than $2 billion, say people familiar with the bid. And the fund couldn't pay, with its collateral hung up at J.P. Morgan.

Mr. Griffin considered giving the hedge fund time to pay by granting it a bridge loan, taking other Amaranth assets as collateral. He dropped the idea when lawyers warned that Citadel might have a hard time collecting if Amaranth ended up in bankruptcy.

With the Citadel plan shaky, J.P. Morgan got back in the game. In conjunction with Citadel, J.P. Morgan, which itself is a big hedge-fund player, began new talks with its now-very-vulnerable clearing client. The end result was a broader deal than the scuttled Goldman one: J.P. Morgan and Citadel would jointly assume Amaranth's entire remaining energy portfolio.

Amaranth would have to eat losses of about $800 million its portfolio had incurred from Friday night through Tuesday as others exploited its weakness. J.P. Morgan and Citadel wanted $1.6 billion to take over most remaining gas trading positions and some $300 million to assume options to buy or sell gas. As a topper, they asked for $250 million for taking over miscellaneous commodity investments. Mr. Hunter thought the price for taking over the miscellaneous positions should be no more than $50 million, says someone involved in the talks.

Amaranth capitulated. After an all-night session, the deal was signed at 5:30 a.m. Wednesday. Amaranth's total payments to Merrill Lynch, J.P. Morgan and Citadel, plus the last few days' market losses, came to about $3.2 billion.

Now that J.P. Morgan was in on the deal, getting access to the Amaranth cash that J.P. Morgan held as collateral was no longer a problem.

His business in tatters, Amaranth's Mr. Maounis, 43, discussed selling what was left of his fund-management firm to Citigroup Inc. Dean Barr, an official of Citigroup's Alternative Investments group, was interested but wouldn't buy unless Mr. Maounis stepped down as the firm's chief, says someone familiar with the talks. Ultimately, negotiations foundered over other issues.

So Amaranth began liquidating its remaining holdings. Mr. Hunter flew back to Calgary and settled into a new house he had been building. He is now talking about launching a hedge fund of his own. Mr. Maounis also is exploring starting a new hedge-fund business.

'Very Nice Increment'

The three firms that were paid hundreds of millions of dollars to take over Amaranth trades -- Merrill Lynch, Citadel and J.P. Morgan -- soon reported significant profits on energy trading. J.P. Morgan made at least $725 million, partly by quickly selling many of its new positions to Citadel.

The Amaranth deal produced a "very nice increment to fixed-income trading," Mr. Dimon, J.P. Morgan's CEO, said in a speech in November. "But we did take a lot of risk."

Bill Winters, co-head of J.P. Morgan's investment bank, said at a November conference that through its hedge-fund relationships, such as trade clearing, "we have the insight into what's going on in these funds" and can "respond quickly to opportunities when they come up. Amaranth was one obvious example of that."

He added, "I imagine there will be others...where our ability to be both on the inside, but not compromised, is extremely powerful [as a way] to generate profits."

The huge, complex deal with Amaranth helped build J.P. Morgan's profile as a commodities player. This month, a magazine called Risk named the firm "Energy Derivatives House of the Year."

How much the investors in Amaranth will lose depends on when they got in. They've gotten back about $1.6 billion to date. For one investor that came in in mid-2005, money returned so far comes to 27% of what it put in and about 18% of what its stake was worth at the peak. Investors will receive somewhat more when Amaranth finishes liquidating.

Some investors have a keepsake. Amaranth once sent chess sets as year-end gifts, inscribed with a quotation from the late grandmaster Alexander Kotov: "It often happens that a player carries out a deep and complicated calculation, but fails to spot something elementary right at the first move."

Hedge-Fund Milestones

Hedge-Fund Milestones
WSJ, January 29, 2007

Hedge funds, investment vehicles for the wealthy and institutional investors, have proliferated in recent years. When Long Term Capital Management collapsed in 1998, the industry had about $240 billion under management. In contrast, by the end of 2006, the industry had about $1.4 trillion under management, according to Hedge Fund Research, Inc., a private firm in Chicago. Though they control just 5% of all U.S. assets under management, they account for about 30% of all U.S. stock-trading volume. But the industry's rise hasn't always been smooth. Here are some key milestones for hedge funds since 1995.

June 1995-- Highlighting the difficulties faced by many hedge funds in the mid-1990s, Bruce Kovner, a legendary currency and commodities speculator, disbands his U.S. fund and returns about two-thirds of the $1.8 billion he managed at Caxton Corp., founded in 1983. Caxton had averaged annual returns of at least 30% for most of its existence, but lost money in 1994 and was struggling again in 1995. Caxton's troubles weren't unique: Hedge funds' total assets under management shrank for the only time in industry history in 1994. Analysts blame rising interest rates and the industry's unwieldy size after a 1991-93 growth spurt.

October 1995-- An even more shocking closure follows a few months later, when Michael Steinhardt shuts down his $2.6 billion investment partnerships. Mr. Steinhardt's decision came despite the fact that he had enjoyed good returns in 1995 after a disastrous 1994. Mr. Steinhardt, known for his aggressive, short-term trading and big, risky market bets, started his fund in 1967 and was a pioneer of the industry. His average annual returns of 30% or more helped his assets under management balloon to $4.4 billion at their peak.

January 1997-- Odyssey Partners, one of Wall Street's most successful private investment partnerships, dissolves because the $3 billion hedge fund has grown too bulky to easily invest.

June 1997 -- Another legendary manager, Julian Robertson Jr., hoping to profit from the rising prices of mutual-fund and asset-management companies, puts a chunk of his Tiger Management Co. on the block.

September 1997 -- George Soros, founder of Soros Fund Management LLC, one of the world's largest hedge funds, is accused by Malaysian Prime Minister Mahathir bin Mohamad of bringing down the Malaysian currency, the ringgit, during the Asian financial crisis.

September 1998 -- After spectacular early success, Long Term Capital Management, a fund founded in 1994 by John Meriwether, the former head of bond trading at Salomon Brothers, faces a cash and credit crunch after a series of bad investments. The fund nearly collapses, but a consortium of Wall Street firms, including Goldman Sachs & Co., puts up $3.6 billion for a bailout.

October 1998 -- Hedge-fund operator Everest Capital Ltd., headed by Marko Dimitrijevic, loses nearly half of its $2.7 billion under management. Financier Nelson Peltz and several college endowments, including those of Yale and Brown universities, are hurt.

December 1998 -- A disastrous year for the industry comes to a close. In addition to the LTCM and Everest debacles, Mr. Robertson's gains for the year were wiped out in the last quarter, and one of Mr. Soros's funds lost 18%. The average hedge fund focused on U.S. stocks returned 12.7%, less than half the 28.6% gain of the S&P 500. Many other hedge-fund categories produced gains in the low single digits, while several categories racked up losses for investors.

March 2000 -- Tiger Management LLC, a $6 billion hedge-fund, announces it will close down most of its operations and liquidate its investments. Mr. Robertson, Tiger's chief, blames the stock market's rush to Internet stocks. Meanwhile, throughout the year, Soros Fund Management struggles with losses as its attempt to venture into tech stocks fails and several people quit, including chief investment officer Stanley Druckenmiller. Mr. Soros vows to stick to more conservative investments.

October 2001-- Charles Schwab Corp., the top U.S. online and discount broker, announces plans to start offering hedge funds to its clients in the next year.

December 2001 -- Though hedge funds now control more than $500 billion in assets, most saw mediocre results for the year, with average returns of 3.2%. The Sept. 11 attacks, a vacillating stock market and a lack of deal-making are key reasons for the weak returns.

January 2003 -- A new breed of hedge funds, which have a reduced minimum investment requirement, are gaining popularity. Most traditional hedge funds require investments of $250,000; but new funds such as Oppenheimer Tremont allow affluent individuals to invest as little as $25,000.

May 2003 -- The research firm Strategic Financial Solutions LLC estimates that there are about 4,100 hedge funds in existence, with about $450 billion in assets.

September 2003 -- The SEC recommends regulations for the hedge-fund industry, including a requirement that managers register as investment advisers and be subject to occasional audits.

July 2004 -- Hedge funds, looking for other places to put their money, are increasingly competing with private-equity funds to provide capital to ailing companies. Perry Capital, an $8 billion hedge fund, gave $100 million revolving line of credit to the energy company, Xcel Energy Inc. Hedge funds are also becoming prominent in acquisitions. A group of a dozen hedge funds makes it into the final round of bidding for the Texas Genco Holdings Inc. unit of CenterPoint Energy Inc., but loses out to two big-name private equity funds: Blackstone Group and Kohlberg Kravis Roberts.

November 2004 -- Assets under management by hedge funds reach a record $1 trillion. They have grown 20% a year, on average, since 1990.

May 2005 -- Citigroup Inc. announces it is forming a joint venture with Pacific Alternative Asset Management Co. to offer hedge-fund portfolio-management services to its wealthiest clients.

August 2005 -- Greenwich, Conn. becomes the unofficial hedge-fund capital with more than 100 funds. Greenwich-based hedge funds collectively manage more than $100 billion, about a 10th of the total invested in hedge funds world-wide.

August 2005 -- Bayou Management LLC, a $440 million hedge fund based in Stamford, Conn., closes down without returning investor money. The founder, Sam Israel III, is accused of overstating gains and understating losses.

February 1, 2006 -- The SEC's registration requirement takes effect.

June 2006 -- Amid a tumultuous stock market, several hedge funds shut down, and others suffer. KBC Alternative Investment Management, for example, drops from $5.3 billion in assets to less than a $1 billion in 18 months. But the problems appear well-contained.

June 2006 -- The Court of Appeals for the District of Columbia Circuit vacates the SEC rule requiring hedge-find advisers to register with the agency, calling it "arbitrary." The decision is a major victory for the $1.2 trillion hedge-fund industry and forces the SEC to find another way to monitor it. By early December, some 275 hedge-fund advisers withdraw from SEC registration.

August 2006 -- One of the biggest New York hedge funds trading natural-gas futures, MotherRock, shuts down after suffering big losses in the natural-gas market in June and July.

September 2006 -- Connecticut hedge fund Amaranth Advisors, despite boasting of world-class risk-management systems, loses $5 billion in one week on a natural-gas bet gone wrong, cutting its assets under management in half. Days later, after losing another $1 billion, Amaranth agrees to sell its energy portfolio to J.P. Morgan Chase and Citadel Investment Group. By the end of the month -- after talks with Citigroup about a possible purchase of assets break down -- Amaranth says it will liquidate all its positions, marking the end of one of the most spectacular collapses in industry history.

November 9, 2006 -- Fortress Investment Group files plans with the SEC for what would be the first initial public offering of shares by a hedge-fund firm in the U.S. In January 2007, underwriters set terms at 34.29 million shares with an estimated price range of $16.50 to $18.50 a share.

November 28, 2006 -- Citadel Investment Group says it plans to sell $500 million in bonds, the first stage in what could be up to $2 billion in debt issuance and one of the largest offerings from a hedge fund in the investment-grade corporate-bond market.

December 2006 -- The SEC proposes raising the net worth investors must have to invest in a hedge fund to a minimum of $2.5 million in investments from $1 million in net worth, a step aimed at protecting individual investors.

January 26, 2007 -- Hedge funds are increasingly borrowing shares to influence the outcome of company votes, The Wall Street Journal reports.

Average P.E. Pros' Pay Pushes Past $815K

Average P.E. Pros' Pay Pushes Past $815K
09/15/06
DailyII.com


All those high-flying private equity deals are paying off handsomely for the professionals that perfect them. According to the latest annual Dow Jones Private Equity Analyst-Holt Compensation Study, the average compensation for a p.e. professional last year was $816,000, a whopping 45% increase from the year before and the biggest increase since the survey began four years ago, with top executives doing even better. Most of that increase comes from salary add-ons; the base pay grew a more modest 13% to $305,000; bonuses bring the figure up to an average of $505,000; but carried interest, namely share of profits from deals, boosted the final figure by more than 60%. "In terms of compensation, it's a great time to be a private equity professional, particularly when carried interest is added into the equation," Jennifer Rossa of Private Equity Analyst, a Dow Jones publication, said in a statement. Rossa noted that based on the survey, "firm size is playing a bigger role" in determining compensation, and this, she says, "creates a personal incentive for firms to raise increasingly larger funds and to raise as many as they can." Top p.e. executives saw their base salary level increase 13.6% to $551,000, with 11.6% rise in bonuses to $919,000. But their carried interest skyrocketed about 50% to give them $1.63 million average paycheck for the years.

The Hedge-Fund King Is Getting Nervous

The Hedge-Fund King Is Getting Nervous
By SUSAN PULLIAM
WSJ, September 16, 2006

It was the kind of day that can give a hedge-fund tycoon nightmares. As stocks fell on the afternoon of June 12, the largest holdings of Steven Cohen's more than $10 billion hedge fund were falling even harder.

Mr. Cohen, whose trading acumen, monumental compensation and sprawling art-laden home had made him a trailblazing star of the hedge-fund boom, watched the carnage unfold on eight computer screens arrayed around his desk. From time to time, he leaned back and rubbed his face. "Oh, boy," he said to himself.

Steven Cohen at his trading desk in Stamford, Conn.


The 20,000-square-foot trading room at SAC Capital Advisors, chilled to 70 degrees to keep traders alert, was hushed. Mr. Cohen, who sits at its center, likes it that way. Phones blink rather than ring. Computer hard drives had been moved off the trading floor to eliminate hum. Rows of traders wearing SAC fleece jackets watched Mr. Cohen nervously, waiting for an order to sell shares.

But Mr. Cohen wasn't budging. Less than an hour before the stock markets closed, Mr. Cohen, biting his nails, compared his sinking stocks to a plunging department-store elevator. "There goes ladies lingerie," he said, to no one in particular. By day's end, his firm had lost $150 million, or 1.5% of its assets -- one of its worst one-day showings ever.

In years past, Mr. Cohen might have sold frantically as the market fell. He had achieved celebrity status in the hedge-fund world, overshadowing such influential managers as George Soros and Julian Robertson Jr., with a hair-trigger approach to trading that was extraordinarily profitable. When stocks appeared to be mispriced, Mr. Cohen would pounce, then he would bail out as soon as they ticked in the right direction. His success had inspired a generation of scrappy Wall Streeters -- some of them with no experience whatsoever handling other people's money -- to open their own hedge funds.

That quick-trading game is now over, says Mr. Cohen. With about 7,000 hedge funds competing for investment ideas, good stock investments are getting more scarce. "It's hard to find ideas that aren't picked over, and harder to get real returns and differentiate yourself," he says. "We're entering a new environment. The days of big returns are gone."

To make matters worse, the stock market, he says, is no longer as forgiving for investors. The tailwind of low interest rates, low inflation and strong corporate profits, he says, has been lost. There are no more easy pickings, he says.

SAC is among the most widely watched investment firms in the world. Mr. Cohen, who is 50 years old, has always guarded his privacy fiercely, keeping mum as attention was heaped upon his trading tactics, his voracious art collecting, and his expanding Greenwich, Conn., estate. Recently, in a series of interviews at his Stamford office, Mr. Cohen discussed the rise of SAC Capital, the suspicions of improper trading that have dogged his firm, and the big shift in his view of investing.

Mr. Cohen says he is now making bigger bets and holding the stocks longer. The throng of rival hedge funds could create a dangerous logjam, he says. Mr. Cohen worries that some of his largest holdings are also favored by other hedge funds. A rush for the exit could spell trouble. He says he expects that eventually there will be a sudden and sharp reversal in the stock market -- but he's not worried about that happening this year. "There will be a real decline that may devastate hedge funds that have crowded into the same stocks," he predicts.

"Hedge funds are bigger than they used to be. Their positions are bigger," he says. "I worry that if everyone were to sell, could we get out?"

Hedge funds, private investment pools for institutions and well-heeled individuals, now hold about $1.2 trillion in assets, more than twice what they had five years ago. Fat returns are becoming more elusive. In 2005, the average hedge fund returned 9.3%, below the 11.4% average for the past decade, according to Hedge Fund Research Inc., a Chicago consultant. By comparison, the S&P 500 index returned 7.7% last year. A record 848 hedge funds closed up shop in 2005, many of them hobbled by poor performance, according to Hedge Fund Research.

Mr. Cohen's reputation rests on an investing style altogether different from the buy-and-hold strategy espoused by influential investors such as Warren Buffett. Mr. Cohen believes that by scrutinizing trading patterns of a stock -- by "watching the tape" -- it is often possible to predict how the stock will move in the coming hours or even days. For years, he jumped in and out of stocks -- sometimes without any knowledge of a company's fundamentals, or even what it did. It was akin to picking out rocks in a river by watching the currents swirl around them.

Classic "value" investors such as Mr. Buffett insist that what other traders are thinking and doing is of no consequence to sound investing. Mr. Cohen is his polar opposite. He spends long days at the office in black jeans and worn sweaters, glued to his computer screens as he personally trades upwards of 300 stocks. SAC's trading floor bombards him with information about what's going on in the market. He soaks it all up. His eyes are often rimmed with fatigue.

On a typical day, SAC's trading accounts for 2% of overall stock-market activity. SAC pays securities firms an average of one cent for each share it trades, which adds up to more than $400 million in trading commissions each year, making SAC one of Wall Street's best clients.

For years, the relentless trading was highly effective. SAC Capital Management LP, Mr. Cohen's largest and oldest fund, launched in 1992, has generated an average annual return to investors of 43.5%, after he takes a sizable cut of profits. He and his partners keep 50% of that fund's gains, along with a 3% annual fee, far more than the 20% and 2% charged by most managers.

Mr. Cohen's colossal compensation inspired cocky traders who figured they could do the same, and dismayed others who disdained the frenetic momentum-style investing that underpinned the bull market of the 1990s. His net worth is estimated at about $3 billion, which SAC does not dispute.

In 1998, Mr. Cohen and his second wife, Alex, 42, bought his gated 1920s fieldstone estate for $14.8 million. They added a 12,000-square-foot annex with a basketball court and an indoor pool, and an outdoor skating rink. They constructed a 20-seat movie theater and decorated the ceiling of its lobby with the pattern of stars on their wedding night 16 years ago. Outside, they laid out a two-hole golf course, formal gardens and an organic vegetable plot.

They bought $700 million of art and adorned the estate with some of the pieces. A Keith Haring sculpture of three painted aluminum dancing figures stands out front. A $52 million Jackson Pollock hangs in the library. A Van Gogh and a Gauguin, both bought recently for a total of $100 million, grace the living room. An Andy Warhol and a Roy Lichtenstein hang in the foyer.

The spending spree fueled carping that new hedge-fund wealth was altering the fabric of Greenwich, long a home for the very rich. Mr. Cohen's inclination to keep to himself caused people to brand him a recluse.

Mr. Cohen, a self-described cynic, is given to self-deprecating humor. He describes himself as a regular guy who just wants to be left alone. He says he likes to eat grilled-chicken sandwiches at Top Dog, a local hot-dog stand, and to kick back at night in front of reality television shows. "I'm not reclusive," he says. "I'm out and about. I have seven kids. That takes time...I'm not an introvert. I'm media shy. They turn what should be an admirable trait into something bad."

His wife Alex, who says she and her husband worry constantly about the safety of their children, shrugs off criticism of the house. "I don't need a house this big," she admits. "But you know what? Why not? I'd rather my kids have a playground here."

On the recent afternoon, their home was a whirl of activity. Mrs. Cohen's parents and a nephew were there, as were the four Cohen daughters, including twins, all of them school-aged. (Mr. and Mrs. Cohen have three older children by previous marriages.) There was a cook, a housekeeper, the couple's personal assistant, a caregiver for the children, Mr. Cohen's personal trainer and his driver, who doubles as a bodyguard. The driver minds the family's four dogs, one of them an imposing German Shepherd named Johnny that once worked as a police dog.

Mr. Cohen says his work week typically begins after dinner on Sunday night, when he talks to his portfolio managers to set his trading strategy for the coming week. On weekday mornings, he climbs into a black Chevrolet Suburban and is driven to SAC's headquarters -- a modern steel-and-concrete structure with a facade of terra cotta and glass that overlooks the Long Island Sound.

The art collection there contains edgy contemporary work. "Self," a sculpture of a human head carved from the frozen blood of the artist, Mark Quinn, is housed in a refrigerated plastic cube. A sculpture of an alien wearing a Japanese school uniform and carrying a book bag, by Takashi Murakami, stands next to a table in his office. A 11¾-inch working elevator by artist Maurizio Cattelan is built into a wall just outside. "I like things that make me laugh," says Mr. Cohen of the offbeat work. "I like seeing people's reactions. Art is a great diversion from looking at numbers."

Although SAC now employs more than 600, Mr. Cohen still spends much of his time at the office trading. By 8 a.m., he is usually planted at his trading station, where he stays glued for most of the day. He monitors stock, bond, commodity and currency markets on his screens and taps out email and instant messages to some of SAC's 225 portfolio managers and analysts, as well as to traders outside SAC. Mr. Cohen's own trading still accounts for 15% of the firm's profits. Portfolio managers feed him investment ideas and fill him in on chatter about what other hedge funds are doing. "He is in the center and cherry-picks the best ideas," says a former SAC manager.

A video camera and microphone stay trained on Mr. Cohen so traders and managers who don't sit nearby can pick up what he is saying and doing, including his frequent sarcastic comments, known as "Steve-isms." Often the traders mimic his trades in their own portfolios. "On bad days, I leave it on all day so that when things get crazy, I can make sure we are doing everything we need to support Steve," says Thomas Conheeney, SAC's chief operating officer.

Mr. Cohen grew up middle-class in affluent Great Neck, N.Y. His father was a dress manufacturer in New York's garment district, and his mother was a piano teacher. There were eight Cohen children. He traces his ability to cull meaning from stock-market dissonance to the commotion in his crowded house. "I learned how to listen and concentrate," he says.

His relationship with his parents was sometimes difficult, he says. He began playing poker frequently as a high school student, he recalls, and would sometimes arrive home at 6 a.m. after an all-night game, hand the car keys to his father, then head to bed without saying a word. Mr. Cohen says his mother never acknowledged his success. She "thought I was smart but lazy," he says, and up until her death last year, considered his younger brother Donald to be the family's financial expert.

Mr. Cohen excelled in school and at the card table. "I'd look at his desk in the morning and see wads of $100 bills," says Donald, 47, now an accountant in Florida. The summer before his junior year, he quit his job cutting fruit at a local grocer for $1.85 an hour to concentrate on cards. Mr. Cohen says poker "taught me how to take risks."

At the University of Pennsylvania, he studied economics, played poker and took an intense interest in the stock market. An acquaintance helped him open a brokerage account at Gruntal & Co., he says, and he began trading with $7,000 he was supposed to use to pay tuition. He began watching the "tape" of stock-market action at a brokerage office near campus. Eventually, he sold enough of his positions to pay his overdue bills.

In 1978, he landed a job trading options at Gruntal, where he eventually managed a $75 million portfolio and six traders. His approach to investing stood out. "He was trading 50,000 shares at a time, which was unique [because it was so large], and he did it by watching the tape," says Gregg Frankel, who was Mr. Cohen's broker at Jeffries Group Inc. in the early 1980s.

On Oct. 20, 1987, one day after stocks plunged more than 22%, Mr. Cohen bet $50 million of the firm's money on stocks he thought were priced too low by New York Stock Exchange auctioneers, known as specialists. "He saw what was going on and said, 'I'm going to make my money back,' " recalls Jon Merriman, a trader who worked for him then. Stocks rallied that day, and Mr. Cohen's positions helped Gruntal recover losses.

In 1992, Mr. Cohen left Gruntal to launch a hedge fund with $20 million of his own money. During the 1970s, hedge funds had gained traction among wealthy investors, who jumped at the chance to have brainy commodities and currency traders manage a slice of their fortunes. By the early 1990s, managers such as Mr. Robertson, Mr. Soros and Michael Steinhardt had become financial-world stars by posting huge returns from risky, leveraged bets.

Mr. Cohen's timing was perfect. The hedge-fund industry was still relatively small in 1992. The big bull market of the 1990s, which eventually minted a new generation of star managers, was just beginning to gather steam.

Mr. Cohen was unknown outside Wall Street trading circles, and some investors balked at the fees he planned to charge. He initially attracted just $13 million from outside investors. He started with about a dozen traders and portfolio managers jammed back-to-back in a small office on Wall Street. During the first year, his assets doubled, and his investors earned a return of 17.5%.

By 1995, SAC's assets had more than quadrupled. Mr. Cohen moved its headquarters to Stamford and began to branch out. He hired two "quantitative" traders to work with computer models that scoured the markets for stocks that appeared underpriced or overpriced based on certain market data. SAC would bet that these price discrepancies wouldn't last.

When Long-Term Capital Management, a big hedge fund, collapsed in 1998 and the price of many securities sank, Mr. Cohen pounced. From late August until mid-October, he stayed up late making bullish bets via the Globex 24-hour trading system, routinely arriving at the office with exhaustion etched on his face. For the year, SAC had returns of 49.2%, compared to an average of 2.6% among hedge funds, according to Hedge Fund Research. "At the end of that year, people began to realize he had something special going on," says George Fox, who has allocated money to SAC for 10 years through a fund-of-funds, which invests in hedge funds.

SAC's assets ballooned to nearly $1 billion in 1999. Mr. Cohen hired dozens of new traders and analysts to introduce new trading strategies and investment themes: health care, bond trading and "macro," which involves betting on global economic factors such as shifting currency rates.

He installed a psychiatrist, Ari Kiev, part-time in an office off the trading floor, and told traders Dr. Kiev could help them overcome such weaknesses as fear of taking trading risks. "Most people trade with a notion of avoiding failure," says Dr. Kiev, who says he teaches traders "skills for mastering their own discomfort."

Some portfolio managers who didn't cut it were fired. SAC traders began betting on who would survive.

In 1999 and 2000, during the technology boom, SAC generated returns to investors of 68.1% and 73.4%, respectively, and copycat funds began to spring up.

Mr. Cohen and the growing hordes of rapid in-and-out speculators sparked debate. Shareholders who bailed at the first sign of trouble forced companies to focus on short-term performance. When hedge funds bought and sold huge blocks, small investors sometimes got whipsawed -- leaving some with the impression that a mysterious game was being played outside of their view.

Muttering began that fast-trading managers like Mr. Cohen enjoyed an unfair advantage over Main Street investors -- that they were, in essence, playing cards with a rigged deck. The substantial business they brought to Wall Street trading desks, critics speculated, gave them access to morsels of information unavailable to small-time investors -- confidential information about what companies and other investors were planning to do.

As Mr. Cohen's star was rising, some established hedge funds, including Mr. Robertson's Tiger Management and Mr. Soros's Quantum Fund, were losing their luster. They had prospered by making large bets on stocks, bonds and currencies based on deep research. Now they were eclipsed by a new breed of speculators. In 2000, Mr. Robertson returned money to investors, and Mr. Soros scaled back his involvement with his fund.

"The old guard wasn't crazy about me," says Mr. Cohen. "I used to hear it all the time." Some old-school managers disdained any investing that wasn't based on corporate fundamentals. "We were trading more than investing, and people frowned on it," Mr. Cohen says. "They looked at it and didn't want to partake. Finally, they said, 'Shoot. He's making money.' And they started copying me."

Some critics raised more serious questions. Two years ago, Mr. Robertson spoke to a group of interns at UBS AG, the Swiss banking giant. In response to a question, Mr. Robertson told them he had the impression that some of Mr. Cohen's trading practices were improper, although he didn't provide specifics.

SAC was dogged by chatter that it pays hefty trading commissions in exchange for preferential access to market-moving information, an accusation SAC officials contest. Others suspected it of "front-running" -- finding out from outside brokers about other investors' planned trades, then buying or selling before those trades caused stock prices to move.

"People took shots at me," says Mr. Cohen. "SAC has a lot of people. We're active in the marketplace and people assume we know something....People thought I front-ran everything." SAC denies it has ever engaged in front-running.

Mr. Cohen regularly invited Wall Street officials to his offices to show them his operation. At one such meeting, a senior UBS stock-sales executive said: "We know the type of guys you are," Mr. Cohen recalls. "The inference was we were not trustworthy guys." Mr. Cohen says he asked the executive to leave, and didn't trade much with UBS for months afterward.

In 2001, the SEC began probing whether an SAC trader, Michael Zimmerman, had attempted to profit from advance knowledge of stock-research reports published by Lehman Brothers Holdings Inc., where his then-fiancé, Holly Becker, worked, according to a regulator familiar with the matter. The SEC also informally looked into whether SAC profited by front-running, this person says. The commission ultimately closed the Zimmerman probe without taking action, and it dropped the latter issue, this person says.

In February of this year, Biovail Corp., a Canadian pharmaceutical company, sued SAC and other hedge funds, alleging they conspired to drive its stock down by influencing analysts to put out negative research reports. The suit, filed in New Jersey state court, claims SAC "ghost wrote" the negative reports put out by a research firm, helping SAC to make money on a bet it had made that Biovail's stock would decline. The suit alleges a pattern of such behavior. An SAC spokesman calls the allegations "outrageous and defamatory."

SAC has never been accused by regulators or other authorities of any wrongdoing.

In the bear market that followed the technology-stock bust, the air of invincibility that had hovered over Mr. Cohen began to disperse. The stock market was tumbling. It was getting harder and harder to make a quick profit by darting in and out of stocks. Eventually, he found himself at a turning point.

The catalyst was an enormous loss. In October 2002, SAC lost $100 million on Tenet Healthcare after it bet that the company's regulatory problems concerning its Medicare pricing weren't as severe as perceived by the market. When Tenet disclosed it had overcharged the government for Medicare services, its stock tumbled to $15 from $50 within days. SAC's flagship fund notched a return of 11.5% in 2002, its lowest annual return ever.

The number of hedge funds was mushrooming, and many were pursuing short-term trading strategies similar to SAC's. To make matters worse, in 2001, the New York Stock Exchange began trading all stocks in one-cent increments, abandoning the fractional system in which stock prices moved in larger increments of 1/8 and 1/16 of a dollar. Mr. Cohen says the change made it more difficult to make money with rapid-fire trading because it got rid of some of the inefficiencies that traders had exploited.

One morning, Mr. Cohen woke up with numbness in his arm. A doctor told him he needed surgery on his neck, and in September 2003, he had a disk removed. After the operation, he says, he briefly stopped breathing. He was saved, he says, after a private nurse he had hired to be in his room noticed the problem.

"I think there was a change after his surgery," recalls Mrs. Cohen, who says her husband "came out and looked at everything differently." Mr. Cohen says he has since grown closer to his siblings, and for his 50th birthday, he and his wife took their first lengthy vacation without their kids.

Over the years, many styles of investing have proven to have finite shelf lives. When too many investors start doing the same thing, that tactic often stops working well.

SAC's difficulties, particularly its ill-fated Tenet investment, led Mr. Cohen to rethink his approach. As he recuperated at home, he says, he decided to move more decisively away from short-term trading. He set up an SAC unit called "Intrinsic" and staffed it with 30 analysts to hunt for longer-term investment ideas. Mr. Cohen began investing in small- and mid-cap companies in the health care, energy and technology sectors.

SAC took a big position in Google Inc., betting that its profits would grow faster than Wall Street expected. The investment, begun in late 2004, netted SAC a $100 million profit. SAC now owns just $11 million of the stock, according to a recent regulatory filing. In January, SAC bet that Arcelor SA, a Luxembourg steel company that trades in the U.S. as American depositary receipts, would be acquired. The wager made SAC $75 million when Arcelor announced on July 7 that it had agreed to be acquired by Mittal Steel Co. NV.

SAC now hangs onto stocks for an average of six to twelve months. That might not qualify as long-term investing to Mr. Buffett, but it far exceeds the norm of several years ago -- often just a few weeks.

The payoff, thus far, has been solid, although not as dazzling as in the boom years. In 2003, SAC's flagship fund yielded 18.1% for investors, less than the 19.6% average hedge-fund return reported by Hedge Fund Research. In 2004, the fund returned 22.9%, far exceeding the 9% industry average, and in 2005, it returned 18%, compared to 9.3% for the industry. Through August of this year, despite the market turmoil that cost the firm $150 million on June 12, the SAC fund notched an 18% return. The average hedge fund was up 7% over that period, while the S&P 500 rose 2.7%.

Because Mr. Cohen is still outpacing the market and his hedge-fund peers, his reputation with investors remains intact. Late last year, he launched a $2 billion fund. SAC only accepted a fraction of the money that investors wished to put in, according to people familiar with the situation.

Mr. Cohen concedes that holding investments longer and betting bigger could lead to lower returns. A year ago, SAC told investors the fund was aiming to return between 10% and 15% a year, people familiar with the matter say.

That isn't the only risk. These days, many of Mr. Cohen's big bets are popular with other hedge-funds. SAC's top holding in August, Time Warner Inc., is held by 79 other hedge funds, according to Goldman Sachs Group Inc. Atlanta-based energy company Mirant Corp., another big holding, is held by 97 hedge funds. If the funds tried to bail out of these stocks en masse, share prices would likely tumble.

Mr. Cohen says he worries about whether SAC's investments are beginning to look like those of any other hedge fund. What's worked for SAC in recent years, he says, may not work going forward.

On June 9, around midday, Mr. Cohen walked off SAC's trading floor and slumped into a chair. The markets had been choppy all week. He was growing more certain that stocks were in for a significant decline, but ventured that it was more than a year away.

"The hedge-fund run is not over," he said. "I think the game is changing, and if it is, I have to react. We won't go off the ledge with everyone else."

Steven Cohen and his wife, Alex, at the Top Dog restaurant in Cos Cob, Conn.

NFL Stars, Charmed by Kirk Wright, Lose Millions in Hedge Fund

NFL Stars, Charmed by Kirk Wright, Lose Millions in Hedge Fund
By Monee Fields-White
Bloomberg, 2006-08-23

When the FBI finally caught up with hedge fund manager Kirk Wright, he was lounging by the pool with his wife, Kilssis, at the Ritz-Carlton hotel in Miami's South Beach neighborhood.

In his room, the Federal Bureau of Investigation agents discovered debit cards and an ID card with a different name -- one of three aliases Wright used while in Florida. They also found $28,000 in cash, a vestige of investors' funds estimated at $185 million, according to a sworn affidavit from FBI Special Agent William Cromer Jr.

Wright, 36, now faces 24 federal charges of mail and securities fraud, each carrying a maximum sentence of 20 years behind bars. He's pleaded not guilty.

He and the hedge fund company he founded, Marietta, Georgia- based International Management Associates LLC, also face a fraud lawsuit by the U.S. Securities and Exchange Commission and at least three separate lawsuits from investors and former business partners.

These include former pro football player Steve Atwater, who was so impressed with Wright and the returns he claimed to make on investments that he asked to join the firm as a client liaison.

Atwater, 39, brought in six other former football players, who invested a total of almost $20 million.

All the money is now gone, Atwater says, shaking his head. ``In my wildest dreams, I never thought he was stealing the money,'' says the former defensive back for the Denver Broncos and New York Jets.

Wright's Mother Invested

The tale is all too familiar to the roughly 500 people who invested with Wright, from a Los Angeles real estate developer to a 74-year-old retired car salesman in Las Vegas, to Wright's own mother, who's not a plaintiff in the suits.

Standing just less than 6 feet (1.8 meters) tall and sporting a trimmed goatee, Harvard-educated Wright told his clients he could bring them annual returns in the region of 27 percent by short selling stocks. He wooed them in seminars in Las Vegas, at the hospitality suite at Atlanta Falcons football games and at parties at his suburban home, which had a pool and three fountains.

``Kirk was a polished, young black man who was trying to do something,'' says Horace Noble, 74, who was the first black station commander of the Cook County, Illinois, sheriff's office in 1963. ``So, I put some money in there to help him, and to get a boost myself.


$1 Million Lost

``In the end, Kirk only cared about one color -- green,'' adds Noble, who lost almost $1 million when Wright's firm collapsed. In fact, most of Wright's clients were not black, Atwater says.

The SEC, in its Feb. 27 fraud lawsuit, alleges that since at least 2003, Wright falsified statements about the amount of the firm's assets and inflated the rates of return for the seven hedge funds under his management.

Nearly all of the money invested with Wright may be lost, according to the SEC suit. William Perkins, the state and federal court-appointed receiver, has recovered $6.3 million so far -- including about $1 million from the sale of Wright's home.

``There was a large amount of money that traveled through these accounts over the years,'' says Perkins, a partner at William G. Hays & Associates LLC, an Atlanta-based consulting firm that specializes in bankruptcy administration and fraud investigation. ``But after all of the expenses, losses and consumption throughout that period, there was never a significant balance.''


Doctors Sue

Wright is also being sued by his two former partners, Nelson Keith Bond and Fitz Harper Jr., both Atlanta-area anesthesiologists. The two doctors met Wright in 1998 when they were running a clinical practice, Axis Anesthesia Associates, and they helped him tap into a network of wealthy physicians in Atlanta.

In their March 31 lawsuit, the pair say they were duped and lost $1.5 million. Bond and Harper decline to comment, says Stephen LaBriola, their attorney. The two doctors haven't been charged with any wrongdoing.

The roster of investors expanded as word about the fund's success spread to include business executives, rich retirees and professional athletes.

``People grow lax in their due diligence,'' says Ivan Thornton, managing partner at New York-based Fiduciary Management Group LLC, which manages money for athletes and entertainers. ``Everything they read about hedge funds talks about them making high returns, and people feel like they are missing out.''

Wright gained some legitimacy by having the two doctors on board, says James Ellner, an Atlanta-based anesthesiologist and IMA investor, who has known Harper since 1992.


`Brilliant Guy'

``Everyone looked up to Wright as this brilliant guy,'' Ellner says. ``He was showy.'' Federal court records show Ellner lost about $100,000. Ellner declined to confirm that figure.

Wright and Bond were also registered as acceptable financial advisers by the National Football League Players Association, the players' union, Atwater says. Atwater and the other players sued the NFL and the players' union on June 23 for recommending unfit financial advisers.

``They fumbled,'' Blaine Bishop, a former Philadelphia Eagles and Tennessee Titans safety who also worked for IMA, said of the NFL and the union at a news conference when the suit was filed.

The players want to be reimbursed for their $20 million in losses and to see the union improve its screening of fund managers.


NFL Comment

NFL spokesman Brian McCarthy says the claims are unfounded and declined to comment further. Dana Hammond, director of the NFLPA's financial advisers program, didn't return phone calls seeking comment.

Wright told his investors that he was achieving phenomenal returns on their investments by short selling a particular stock. That exposed them to extreme risks, according to an order in February by Superior Court Judge Jackson Bedford freezing the assets of IMA and Wright.

A short sale is the sale of borrowed shares that the investor is committed to repurchase eventually. Investors use short sales to capitalize on an expected decline in the security's price.

Wright had $30.5 million in trading losses, Perkins says. The rest he likely used for personal purchases, including more than $6 million in real estate, jewelry and art, all of which is being sold.

``We are going to try and retrace all of the money and recoup those assets as much as possible,'' says Mark Kaufman, partner at McKenna Long & Aldridge LLP in Atlanta, the firm representing the investors' committee in IMA's bankruptcy.


Not Guilty Plea

Wright, who pleaded not guilty at his arraignment on July 13, is in an Atlanta jail awaiting trial. His court-appointed lawyer, Virginia Natasha Perdew-Silas, didn't return repeated calls for comment.

Jacob Frenkel, the attorney for Wright and IMA in the SEC case, says ``the charges are of such seriousness that resolution would be in the interests of all parties.''

It's a long way from the Bronx, New York, where Kirk Wright grew up and was a bright and polite young man, according to a person who knew him then. He earned a bachelor's degree in political science from Binghamton University, which is part of the State University of New York system, in 1993. Two years later, he received a master's degree in public policy from Harvard University's Kennedy School of Government.


Founds IMA

Fresh out of Harvard, Wright joined Kaiser Associates, a Washington-based corporate consulting firm, as a vice president. A year later, while still in his mid-20s, he founded International Management Associates in the basement of his home in Manassas, Virginia, 32 miles southwest of Washington.

Wright shared the home with his first wife, Kasandra Pantoja, with whom he had four sons.

By the time he met Harper and Bond in 1998, Wright had a small group of investors in his three hedge funds -- the Taurus Fund, Growth & Income Fund and Sunset Fund -- totaling less than $15 million, according to the doctors' suit.

Harper and Bond invested and began referring friends and family members to Wright, their lawsuit says. They set up seminars for their doctor friends at which Wright would court potential clients.

Noble, a retired owner of a Lincoln-Mercury dealership, went with a friend to one such seminar in Las Vegas on a September evening in 1999. More than 25 people, mostly physicians, gathered in a hotel conference room, Noble says. Wright praised the success of his company's funds, using charts and graphs on a video screen.


`Silver-Tongued Devil'

``He's a silver-tongued devil,'' Noble says.

In November 1999, Noble made his first investment of $140,000. He deposited an additional $336,000 during the first half of 2000 after receiving statements showing a 3 percent jump each month.

Wright eventually rolled all of Noble's money into the Platinum fund. According to the fund's marketing materials, ``It seeks to capitalize volumetrically on a few select opportunities characterized by moderate to high valuations, compelling business fundamentals and strong management teams.''

That language should have been a red flag for investors, Thornton says. ``If you have jargon-laced speech like this, that usually means you're covering something up,'' he says.

By 2000, Wright had moved to Atlanta, where Harper and Bond were based. The city at the time was a boomtown. From 1990 to 2000, its population grew by 1.15 million to 4.1 million, according to the Metro Atlanta Chamber of Commerce. Almost two- thirds of that growth was due to newcomers.


Atlanta Hawks, Falcons

Wright, who worked from the ground floor of a glass office tower in suburban Marietta, 13 miles north of Atlanta, adopted a high-profile lifestyle. He rented corporate suites at Atlanta Hawks basketball and Falcon football games, bringing along potential clients.

He also bought a vintage 1967 BMW 2000CS, a 2000 Jaguar Coupe XK8 and a gray 2003 Aston Martin two-door coupe.

Wright moved into a four-bedroom, three-bath, stucco and brick home at the end of a cul-de-sac in Marietta. Then he doubled the size of the house, adding a vaulted marble-floor family and entertainment room, with a curved-glass staircase and cathedral- like window that overlooked the pool and backyard fountains.

``He often said it was his dream home,'' says former neighbor Evelyn Kernachan, who has lived in the quiet Turtle Lake Court neighborhood for 27 years. ``He was engaging and personable, but at times he could be inconsiderate of his neighbors.''

She says the vehicles of construction workers blocked her mailbox and driveway.

Harper and Bond officially joined IMA in November 2000, while still practicing medicine on a part-time basis. Harper -- who had no background in finance -- became chief financial officer, while Bond became the chief operating officer.


Las Vegas Office

During the next four years, the doctors helped Wright open offices in Las Vegas, New York and Los Angeles, where they hired Thomas Birk, who previously worked in the marketing department of Lehman Brothers Holdings Inc., as managing director.

Wright began investing in other business ventures outside of IMA, including a Southern-style restaurant in Cleveland, that later failed.

In partnership with GTO Development LLC, a Santa Monica, California-based real estate developer, he entered into a deal to develop condominiums in Los Angeles and Lake Arrowhead, California.

GTO's principal, Roger O'Neal, also invested in IMA. He says he wanted to withdraw money from his IMA accounts to fund the projects. Wright discouraged him from doing so and told O'Neal that IMA would put up $6 million toward the condominiums. ``Kirk said he wanted to diversify some of his high-net-worth clients,'' O'Neal says.


`Just a Scam'

The properties have been seized by Perkins, the liquidator. ``It was just a scam,'' says O'Neal, who lost $13.5 million. ``He wanted to invest my own money in my own company. Not only did I get victimized personally, now I'm becoming a victim in my business.''

During this time, Harper and Bond repeatedly asked Wright to let them see the brokerage statements showing how IMA was investing its money, according to their lawsuit, filed on March 31, in Superior Court in Fulton County, Georgia.

At the start of 2004, Harper and Bond began pushing Wright to start a new company that would offer more transparency, according to their lawsuit.

The new firm, called IMA Advisory Group, hired Lehman Brothers as its prime broker and a certified public accountant, Kenneth Turchin, to manage the company's books. Wright was the principal trader.


A Round of Golf

It was in May 2004 that Atwater, who holds a bachelor's degree in finance and banking from the University of Arkansas, heard about IMA from one of its clients at a conference for entrepreneurs in San Antonio, he says. The investor gave the football player Bond's number.

Atwater invited Bond to his Duluth, Georgia, home, which is located in the Sugarloaf Country Club community, and they played a round of golf and talked about money. ``I didn't hit the ball that good but we did hit it off pretty good,'' Atwater says.

Atwater trolled through information about the funds. He noted that Wright was registered with the players' union. ``We felt comfortable,'' Atwater says.

At the start of August, Atwater invested $1.5 million. His statement for the first month showed a 9.39 percent gain, or $140,000. The jump seemed so unreal to him that he called Bond to make sure the numbers were correct.

Atwater's balance continued to grow, by 4.6 percent in September, 4.4 percent in October, 7.3 percent in November and 2.5 percent in December.


NFL Players Join

Atwater began telling his football buddies about IMA, including Bishop, 36, with whom Atwater competed in the 1995 and 1996 Pro Bowls, the NFL's all-star games. Atwater also spoke to Ray Crockett, 39, who'd played with Atwater in the Denver Broncos backfield for four years, winning the Super Bowl in 1998.

Bishop, who invested in late 2004, and Crockett, who invested in January 2005, declined to comment.

In December 2004, Atwater met Kirk Wright for the first time, when Wright invited Atwater's family to his hospitality suite during a Falcons game.

Atwater recalls Wright making his way around the room, shaking hands and chatting with each guest. Wright talked to Atwater about IMA's future and said that he was thinking about buying an NBA basketball team.

``The first impression I got from him was that he was a really sharp guy,'' Atwater says. ``He really put on a good show that day.''

In early 2005, Atwater approached Bond about working at the firm. Atwater, who owned some commercial properties in Southern California, told Bond he wanted to help other players with their post-career investments.


Studying for License

Bond liked the idea, and in March, Atwater joined as a client liaison at IMA Advisory Group. Bishop followed in May 2005.

In a shared office, the two former football players spent several months studying to become registered investment advisers. Over the summer, the pair recruited more former NFL players as investors.

They added Terrell Davis, 33, a former Denver Broncos all- star running back; Al Smith, 42, a former Houston Oilers all-pro linebacker; and Clyde Simmons, 42, a former defensive end for five teams, including the Philadelphia Eagles. The only active NFL player to invest was Rod Smith, 36, a Broncos wide receiver.


Accountants' Questions

Later that summer, Turchin began asking questions about IMA's books. In an Aug. 23 e-mail message to Harper, a copy of which is included in the SEC court case, the accountant said there were inconsistencies in the brokerage statements produced by Lehman Brothers and Bisys Group Inc., a Roseland, New Jersey-based company that executed and administered trades for Wright, and those sent to investors.

For example, Turchin wrote, Lehman and Bisys reported a 24 percent loss for two funds during the period ended on March 31, 2005. IMA told investors the same two funds gained more than 6 percent in the period.

``There is no validation of fund performance for IMA and IMAAG funds,'' Turchin wrote. ``The portfolio manager is the only person authorized to trade the funds and is the only person receiving broker statements.''

The portfolio manager was Kirk Wright.

Turchin's lawyer, Jason Brown, declined to make his client available for comment.

Shortly after that, the football players called a personal foul. Atwater says Wright, Bond and Harper stopped coming to the office. Rod Smith also spotted errors in the balances on his account statements.


Proprietary Information

Atwater and Bishop wanted more information about the funds and asked to see the broker statements. Wright refused, claiming they were proprietary information.

``I assumed that once I got my license that it wouldn't be an issue, but I was wrong,'' says Atwater, who became a licensed investment adviser in July 2005.

Regulators also began asking questions. In September, the SEC and the New York State attorney general's office requested the company submit account statements for review, the doctors say in their lawsuit.

Wright seemed concerned by the requests, and stood before the staff and warned that they all must cooperate with the SEC, Atwater recalls. ``This just seemed strange because I kept thinking, 'I don't have any part in the documentation,''' Atwater says. ``This was all Kirk.''

William Hicks, SEC Atlanta district trial counsel, wouldn't comment on how long the agency has been investigating the hedge fund. Brad Maione, a spokesman for the New York attorney general's office, declined to comment.


SEC Review

In October, Atwater and Bishop met with Wright, Bond, Harper and Birk, who had come from the Los Angeles office. They talked about the status of the SEC review, and Wright came with a copy of statements for four TD Ameritrade Holding Corp. accounts, showing a total balance of about $155 million. Atwater says seeing the statements alleviated his doubts.

And on Oct. 22, Atwater and Bishop attended Wright's wedding to Kilssis Delos Collado, whom Wright had met in 2002 when she was a part-time hostess at Georgia Brown's restaurant in Washington.

Wright's four sons from his first marriage were at the wedding, held at St. Luke's Episcopal Church in Atlanta. The bride flashed an engagement ring worth more than $50,000, according to Perkins, the liquidator.

The reception was held in the backyard of Wright's home, where the newlyweds shared the traditional first dance on a platform that stretched across the pool, says Calvin Paris, an IMA investor who attended.


'Ostentatious'

Guests feasted on a seafood buffet that included shrimp and lobster and on a dessert buffet. Bartenders served champagne from three bars sculpted from ice.

``It was ostentatious to a fault,'' Paris says. ``I can't understand how anybody can do that, knowing full well they are not only deceiving themselves but their investors and family.''

``Kirk is worse than greed,'' Paris adds. ``He took people's money that didn't belong to him.''

Atwater, who says he didn't know about the Turchin e-mail, began to get uneasy again. He says Bond began avoiding meeting with him.

On Dec. 5, Atwater, Bishop and the other NFL players requested their money back. Wright, Harper and Bond tried to convince them to do otherwise, telling them of future goals of growing into a $300 million company, Atwater says.

On Dec. 27, Atwater says, the players received letters stating they would get their funds in less than 21 days. By Jan. 23, they hadn't received any money.

Wright had long before stopped showing up at the office, and now he didn't return phone calls. Atwater and Bishop drove to Turtle Lake Court and stopped at Wright's house. They spoke with Kilssis, who said she didn't know where he was.


$3.2 Million Transfer

On the morning of Jan. 26, Atwater, who'd been checking the balance of his bank account compulsively, saw something new: a deposit in the amount of $3.2 million. The bank said the funds wouldn't be available for 14 days, so he went there to ask about the long wait and retrieve a copy of the check.

To his surprise, the check had been drawn not from IMA accounts but from one held by a business partnership Wright had with Willie Clay, a former safety for several teams, including the New England Patriots.

Clay's signature was forged on the front of the check and Atwater's signature was forged on the back, the players' lawsuit says. ``When I saw the check, I was sick,'' Atwater says. The check bounced, he says. Clay didn't return phone calls.

Atwater began calling the other football players. Now, he says, he has little hope they'll find any large sum. The SEC lawsuit says IMA's Ameritrade accounts, which Wright told Atwater had held $155 million, in reality held less than $150,000.

``None of us were thinking it would happen this way,'' Atwater says.

At Wright's home in Marietta shortly after his arrest, little was left of the grand life he once led. Clothes were strewn across the bedroom floor, furniture was slashed and a coffee table's glass top had been shattered, scattering diamond-shaped shards across the marble floor.

The Quintessential Quant

The Quintessential Quant
Meet the most wanted man in high finance
Businessweek, August 21, 2006
By Roben Farzad

James H. Simons, the former math professor who founded the $12 billion quantitative shop Renaissance Technologies Corp., pocketed an estimated $1.5 billion last year. That was thanks to the 5% in fees and nearly 44% of profits that Renaissance docks its investors (vs. traditional hedge funds' typical "2 and 20"). Clients don't complain; Renaissance's leading fund has returned 35%, after fees, since 1989. And D.E. Shaw & Corp., the brainchild of ex-Columbia University computer science professor David E. Shaw, with $23 billion in capital, has netted investors 21% a year for 17 years, without a single losing 12-month stretch.

Landing a job at either of these shops can be insanely lucrative -- and even more insanely competitive. "Using a self-consciously obnoxious term, we're looking for superstars, the kinds of people who would be extraordinarily good at nearly anything," says Nicholas P. Gianakouros, head of global recruiting for New York-based D.E. Shaw.

He is being euphemistic. The handful of quant and programming geniuses who get into the toughest mathematics, physics, and computer science PhD programs on the planet are already best in class. So screening for the 5 or ten very best of that best means establishing a whole new set of prerequisites. "The quant shops are a different animal," says Alison Seanor, vice-president at Glocap Search, a Manhattan hedge-fund recruiter. What is the "it" factor that distinguishes the crème de la crème? All Seanor will say is, "I know it when I see it."

One obvious filter is that liberal arts students -- or even bankers and stock jockeys -- need not apply. What you will need is a nosebleed grade-point average in applied mathematics, physics, or computer science at an elite school like the Massachusetts Institute of Technology, California Institute of Technology, or Indian Institutes of Technology. Many of these students are published and have won high math honors such as the Putnam Fellowship. Often, their names are already so well known in the field that the quant funds make the first approach.

Another must-have: an 800 math SAT score (even if you sat for that exam in your awkward adolescence). Although the funds diplomatically claim the number is "just another data point," it's pretty well understood to be a critical credential.

The quant shops want malleable intellect untainted by Wall Street dogma -- i.e., not "buy, sell, or hold" types. "They're not really looking to make money on corporate events like takeovers," says Emanuel Derman, director of the financial engineering program at Columbia University and head of risk for quant house Prisma Capital Markets. "They're looking to make money on mathematical models." Top funds often advertise in esoteric scientific journals. "You'll not likely find our ads in a dentist's waiting room," says D.E. Shaw's Gianakouros.

If yours is one of the lucky 1% to 3% of résumés to survive an exhaustive initial culling, you can look forward to an hour-long phone interview peppered with thought problems and brain teasers. Pass that test and you will then be summoned as many as three times to undergo up to a dozen grueling interviews. "Every interviewer uses a different approach," says Gianakouros, citing programming problems and math proofs. Expect to be asked to build an intricate Excel model on the spot. Whatever the case, advises Derman, "don't say anything unless you're ready to be quizzed on it."

The firm will then solicit references for areas in which a candidate may appear weak. Ultimately, it takes a consensus among everyone who has met the candidate to extend a coveted offer. D.E. Shaw says that out of every 500 candidates who got the initial callback, only one makes the final cut. Many agree it's even harder to get into secretive Renaissance, which would not comment for this story.

A typical offer, say sources, starts with a base salary of around $250,000, plus a guaranteed annual bonus that could double that. The best can command a cut of a fund's upside -- beaucoup bucks when you consider the multibillion-dollar asset pots. All this, yet, says Seanor, "most of these guys have never even had a real job."

Hedge Fund Managers Earned Billions in 2005

Simons, Pickens Top $1 Billion for Managing Hedge Funds in 2005
By David Clarke and Katherine Burton

May 26 (Bloomberg) -- James Simons earned an estimated $1.5 billion last year, the most of any hedge-fund manager, followed by Boone Pickens at $1.4 billion, according to Institutional Investor's Alpha magazine.

The average pay of the top 26 earners rose 45 percent in 2005 to $363 million, the magazine said. Hedge funds returned 9.2 percent last year, double the Standard & Poor's 500 Index and about the same as in 2004, according to Chicago-based Hedge Fund Research.

``The founders and owners are taking the lion's share of the profit,'' said Henry Higdon, chairman of Higdon Barrett LLC, a New York-based executive search firm. ``These guys created firms and risked capital, you can't say they don't earn it.''

Hedge funds, private partnerships that typically require an initial investment of at least $1 million, try to make money whether financial markets rise or fall. While the average fund beat the S&P 500's 4.9 percent return in 2005, the industry continues to lag behind the 16 percent average gains in the 1990s.

Alpha arrives at the managers' earnings based on estimates of assets under management, fees, returns, personal investments in the funds and ownership stakes in their firms.

Top hedge-fund managers often earn far more than the best-paid chief executive officers, sports stars and celebrities.

Henry Paulson, 60, head of Goldman Sachs Group Inc., was the highest paid Wall Street executive last year, earning $38.3 million in salary, stock and options, up 28 percent from a year earlier. Film director George Lucas brought home $290 million last year, and golfer Tiger Woods earned $87 million, according to Forbes magazine.

The highest paid chief executive in 2005 was Richard Fairbank of Capital One Financial Corp., who earned $249.4 million, according to Forbes.

Simons, Pickens

Simons, 68, of Renaissance Technologies Corp., more than doubled the $670 million he earned in 2004, when he ranked second among hedge-fund managers. His $5.3 billion Medallion fund's return after taking 5 percent of the fund's assets and a 44 percent performance fee was 29.5 percent in 2005.

Pickens, 78, profited from energy investments that boosted his BP Capital Commodity Fund to a sevenfold return and returned 89 percent net for his BP Capital Energy Equity Fund.

George Soros, 75, was third on Institutional Investor's list with $840 million of income.

He ranked sixth in the 2004 survey, after taking home $305 million. The Hungarian-born billionaire rose to prominence by betting against the British pound in 1992. Soros's Quantum Endowment Fund climbed 12.3 percent last year, according to data compiled by Bloomberg.

Below is a table of the 10 hedge fund managers with the highest pay, according to Institutional Investor.

Steven Cohen, 49, retained fourth spot in the magazine's rankings. Cohen, who runs the $8 billion hedge fund SAC Capital Advisors LLC, increased his compensation to $550 million from $450 million in 2004.

Edward Lampert, a Yale economics graduate, fell to sixth place from first on the magazine's previous list, which put his earnings at $1 billion in 2004. His fund returned 9 percent last
year.

Lampert, 43 orchestrated the merger of Kmart and Sears, ESL's two biggest holdings.

In January 2003, Lampert was kidnapped outside his office by two armed men and held for 30 hours. He persuaded the kidnappers to let him go with a promise -- never fulfilled -- to pay ransom.

Bruce Kovner, 61, chairman of Caxton Associates LLC, ranked seventh. His Caxton Global Offshore fund had an 8 percent return. Kovner held the third place spot in 2004 by earning $550 million, according to Institutional Investor.

1. James Simons $1.5 billion Renaissance Technologies
2. Boone Pickens $1.4 billion BP Capital Management
3. George Soros $840 million Soros Fund Management
4. Steven Cohen $550 million SAC Capital Advisors
5. Paul Tudor Jones $500 million Tudor Investment
6. Edward Lampert $425 million ESL Investments
7. Bruce Kovner $400 million Caxton Associates
7. David Tepper $400 million Appaloosa Management
9. David Shaw $340 million D.E. Shaw
10. Stephen Mandel $275 million Lone Pine Capital

In Today's Buyouts, Payday For Firms Is Never Far Away

In Today's Buyouts, Payday For Firms Is Never Far Away
By GREG IP and HENNY SENDER
He Wall Street Journal, July 25, 2006

New Owners Extract Stream Of Charges and Dividends, Running Up Company Debt Burger King's Menu of Fees

When a trio of private investment firms acquired Burger King Corp. in late 2002, the chain was unprofitable. But immediately, it started paying off for the investors.

At the time of the acquisition, Burger King paid its new owners -- Texas Pacific Group, the private-equity arm of Goldman Sachs Group Inc. and Bain Capital -- $22.4 million of unspecified "professional fees." Burger King also started paying the group quarterly management fees for monitoring its business, serving on its board and other services. The total reached $29 million by this year.

In February, after three years of restructuring efforts under the new owners, Burger King announced plans to sell shares in an initial public offering. Three months before the sale, Burger King paid the owners a $367 million dividend. The company justified it in part by saying it had produced cash "in excess" of its needs -- and then borrowed to make the rich payment. Burger King also paid the owners a $30 million fee to terminate their management agreement.

According to company filings, the three firms collected a total of $448 million in dividends and fees from Burger King -- approximately what they initially invested. All that took place before the May stock sale, which valued their remaining stakes at $1.8 billion -- more than triple their original investment.

These are the new rules of the private-equity game, part of a growing wave of private money reshaping global financial markets. Just yesterday, hospital operator HCA Inc. announced it would be taken private by Bain Capital, Kohlberg, Kravis Roberts & Co., Merrill Lynch & Co. and HCA managers and founders for $21.3 billion plus assumed debt. Excluding debt, it would be the second largest buyout on record, after KKR's $25 billion buyout of RJR Nabisco Inc. in 1989, and the second time HCA has been taken private. (See related article.8)

In many of their deals, the private-equity firms have turned the buyout game on its head. In the late 1980s, it was a high-risk, high-reward business that sometimes took years to pay off. Nowadays, buyouts can often generate income for the firms almost immediately, long before a significant turnaround in the company has occurred. And since acquired companies frequently borrow money to pay off the new owners, many are left saddled with debt.

A slew of companies -- Burger King, Warner Music Group, mattress maker Simmons Bedding Co. and Remington Arms Co. -- have paid their private-equity owners large dividends mostly financed with debt. In late June, the parent of Hertz Corp. borrowed to pay a $1 billion dividend to Clayton, Dubilier & Rice Inc., Carlyle Group and Merrill Lynch, which acquired the company last December. They reaped that bonanza even though the rental-car company swung to a loss in the first quarter, primarily due to higher interest payments on debt incurred to complete the deal. Hertz has since announced plans for an initial public stock offering, whose proceeds will go to pay down that debt. A spokesman for Hertz declined to comment on the dividend.

Since 2003, companies have borrowed $69 billion primarily to pay dividends to private-equity owners, according to Standard & Poor's Corp. That compares with $10 billion in the previous six years.

The resurgence of the buyout investors, and their new skill at quickly extracting money long before any turnaround bears fruit, are signs of the ascendance of private money and its broad impact on the world of finance. The new power players are private financiers -- hedge funds, buyout firms and venture capital firms -- that often operate with limited scrutiny from the public and regulators.

Collectively, hedge funds, which invest in all types of assets; venture-capital firms, which invest in early-stage companies; and buyout firms, which generally buy mature businesses, managed some $1.5 trillion world-wide in 2005. That compares with $54 trillion managed by pension, insurance and mutual funds, according to International Financial Services, London, an industry group.

But the comparison understates the large and growing influence of private money. Hedge funds have become the biggest source of trading volume and commissions for the brokerage industry, sometimes accounting for half the daily volume at the New York and London stock exchanges, according to traders.

Growing Role

Private money is also playing a growing role in mergers and acquisitions, an area long dominated by companies. So far this year, buyout funds have been involved in 24% of mergers and acquisitions by value, according to Thomson, up from the 14% in 1988, the peak of the previous buyout boom. Venture-capital firms now manage $259 billion, more than six times as much as a decade ago, according to Thomson and the National Venture Capital Association.

Proponents say hedge funds give markets flexibility and encourage risk taking, key underpinnings to a dynamic economy. Venture-capital funds have nurtured many smaller companies, and private-equity firms have made the tough choices to turn around a host of troubled companies.

The many ways to generate returns from private equity -- collecting dividends, and fees for advising, stock underwriting and management -- are drawing Wall Street firms. Last week both J.P. Morgan Chase & Co. and Merrill Lynch cited hefty private-equity gains for steep rises in second-quarter profits. Goldman Sachs is now one of the largest private-equity investors in the world. In May, Goldman, along with other investors, teamed up with the management of Kinder Morgan Inc. in an agreement to buy out the pipeline operator for $13.5 billion, plus assumed debt. And Merrill is a lead investor in the blockbuster HCA deal.

The new quick-profit buyout game is fueled by low interest rates and willing credit markets. They let private-equity firms use their investors' capital, and lots of debt, to buy mature companies like Burger King from public shareholders or corporate parents.

Buyout funds averaged annual returns of 24% in 2004 and 2005, according to Thomson Financial, triple the return of Standard & Poor's 500 stock index. The returns have set off a scramble by investors ranging from college endowments to rich individuals to get in on the private-equity world.

But the payouts to private-equity firms that often follow deals come at the cost of mounting debts for the acquired companies. One caution sign: Two-thirds of the loans issued to pay dividends to private-equity firms are rated single-B or lower, a highly speculative rating, according to S&P. Historically, more than a quarter of loans rated single-B have defaulted after five years, S&P says. If interest rates keep rising or the economy stumbles, many of those companies could find themselves in trouble. Some might be forced to cut jobs or capital spending to manage their debt burden. Some could go bankrupt.

Michael Madden, a veteran investment banker who now runs his own private-equity firm, BlackEagle Partners LLC, says fees charged by private-equity firms can be compensation for the time and manpower required to turn around a company. They're less defensible, he says, if the buyout firm is simply attending board meetings "and not living on the scene day to day."

Dividends, he says, allow private-equity firms to reap a quicker return than through an IPO or sale. That in turn attracts more investors, enabling more and bigger deals. "Are they logical?" Mr. Madden asks. "Yes. Do they increase the systemic risk in the buyout business? Absolutely."

Warburg Pincus and Vestar Capital Partners, two major private-equity firms, generally don't extract fees from their portfolio companies, though both sometimes take dividends. Executives at both firms say the practice of charging fees means the new owners' interests are no longer aligned with those of the company: The company can do poorly while the private-equity firms do well.

The case of Dade Behring Inc., a medical diagnosis company, illustrates the risks when buyout firms take big payments. In 1994, Boston-based Bain Capital and the private-equity arm of Goldman Sachs bought Dade International, Deerfield, Ill., for about $450 million. Of that, only $85 million was the firms' own money.

Among private-equity firms, Bain is one of the largest recipients of dividends from its own companies, according to S&P. The firm, co-founded by Massachusetts Governor Mitt Romney, is also one of the most aggressive funds in the field. Last year, it bid for the entire National Hockey League.

In late 1996 Dade acquired a division from DuPont Co., boosting sales and debt. In 1997 it merged with Behring Diagnostics, a unit of Germany's Hoechst AG, which is now part of Sanofi-Aventis SA.

In 1999, Dade Behring borrowed again, in part to buy back a chunk of the equity stake belonging to Bain and Goldman. The $365 million paid to the firms was more than four times their original equity investment. The payment helped boost Dade's long-term debt to $902 million by the end of 1999, compared with $373 million a year earlier.

Over the next few years, the euro weakened against the dollar. Since half of Dade Behring's sales were in Europe, the company had fewer dollars coming in. At the same time, rising interest rates meant higher payments on its increased debt load. To deal with the one-two hit, Dade-Behring laid off 1,000 of its 7,000 employees and shuttered factories. In 2001, Dade Behring considered filing for bankruptcy protection to restructure its debts.

Some creditors formed a committee that examined the conduct of Dade's owners, directors and advisers, including Bain and Goldman. According to a company securities filing, they considered bringing claims relating to "illegal dividends, illegal stock redemption and impairment of capital," among a long list of items.

Though they said there was no merit to the matter, Goldman and Bain agreed to forgive some Dade debt they had purchased from other lenders after their own initial equity investment. The creditors decided not to sue. In August 2002, with the consent of most creditors, the company filed for Chapter 11 bankruptcy protection.

A Bain spokesman says the company was struggling when it was acquired by the private-equity firms. "We grew it and improved the products through several mergers," he says. The purpose of the 1999 payment was to boost Hoechst's ownership stake, he says, adding that the company's debt was "quite modest" by today's standards. Goldman and Dade declined to comment.

Dade emerged from bankruptcy and went public in 2002. Shorn of much of its debt, and aided by a stronger euro, it recovered. Ultimately, the investment proved to be among the best performing companies in the Bain fund that held it, according to people familiar with the matter.

Intelsat Ratings Lose Altitude

At Intelsat Ltd., an operator of communications satellites, debt taken on to pay new owners has stirred controversy. The storied organization traces its roots to the international consortium that captured the first images of man walking on the moon and operated the hotline between Washington and Moscow. Jobs at the company were secure and well paid and came with generous benefits.

In 2001, Intelsat became a privately owned corporation. After originally seeking an IPO, it agreed in 2004 to be bought by private-equity firms Apollo Management, Apax Partners, Madison Dearborn Partners and Permira. When the deal closed in early 2005, it looked like a risky proposition: Just weeks earlier, one of the company's satellites failed, the second malfunction in a few months. The financiers discussed renegotiating the deal at a lower price but decided against it.

The group put up $515 million of its own money to finance the acquisition for $3 billion, plus assumed debt.

Despite the shaky start, the new owners quickly issued more debt to pay themselves a $306 million dividend. Intelsat also paid the buyout firms a $50 million "transaction and advisory fee," and over the course of 2005, $21.5 million in other fees. In November, it paid them another dividend, of $198.8 million, according to Securities and Exchange Commission filings. In total, the buyout firms pocketed $576 million in dividends and fees.

Intelsat's debt load has led to multiple cuts in its credit rating. To maximize cash flow, the company says it will "aggressively manage" employee costs. It cut 43 of its 808 employees last year. It has also rebuffed retirees who say the company has wrongly cut their medical benefits.

Just before Intelsat was transformed into a private company in 2001, its governing board promised retirees their medical benefits would not change under the new structure. The board also said that if Intelsat's net worth ever fell below $300 million, it would finance a trust fund to ensure the continued payment of medical benefits. But shortly after privatization, the company concluded it was not bound by those promises and since then has stopped providing medical coverage to surviving spouses as retirees die. As a result of the leveraged buyout, its net worth fell from $2.3 billion to negative $290 million in March.

A group of retirees in 2004 sued Intelsat in U.S. District Court for the District of Columbia to make it abide by the old entity's promises. In a filing, Intelsat says those promises do "not create obligations that are enforceable" against the present company. Retirees say Intelsat has also told them it is not obligated to pay living retirees' benefits, either, though it continues to do so.

The tough new attitude has shocked retirees and their families. In September 2004, shortly after the leveraged buyout was announced, Patricia Magarinos de Acosta's husband, an Intelsat retiree, died after a long illness. A few weeks later, Intelsat told her it was ending her medical benefits. She was forced to purchase individual coverage, which now costs over $3,400 a year with a $2,000 annual deductible. Her annual income is only about $24,000, composed of her husband's pension and her own modest income as a freelance writer. Medical expenses forced her to sell her condominium a year ago and move to a cheaper neighborhood. Mrs. Acosta says her husband would be "horrified" by the behavior of the "solid institution" where he worked for about 15 years.

Some retirees contrast Intelsat's tight-fistedness toward retirees with its generosity to its managers and owners. John Tierney, who retired in 1995, says, "They're $11 billion in debt. Why not give us $75 million," the maximum needed, he says, to pay all the retirees' future medical benefits. He fears if the retirees lose in court, Intelsat will cut off all medical benefits. Like many former Intelsat employees, Mr. Tierney is not American and does not qualify for Medicare. So he is exploring returning to either Ireland or Canada, where he does qualify for health coverage, if his benefits are cut.

In an interview, David McGlade, Intelsat's new chief executive, says that in return for the management fees, Intelsat has received valuable advice on strategic deals, in particular the acquisition of PanAmSat Corp. The ownership group "collectively has some of the best merger and acquisition expertise in the market," he says.

Mr. McGlade adds that the new owners have attracted high-quality management and have brought greater financial discipline to the company. "If they did not feel we could support this level of debt, we wouldn't have this level of debt," Mr. McGlade says.

Intelsat referred questions about the dividend to its private-equity owners, all of whom either declined to comment or didn't respond to requests for comment.

Last year, Intelsat said it would borrow more than $3 billion to acquire PanAmSat, creating the world's largest satellite operator. PanAmSat was also controlled by private-equity funds -- KKR, Carlyle and Providence Equity Partners Inc. -- which bought the company for $4.3 billion in 2004. Two months after the firms initially bought PanAmSat, the company borrowed to pay its new owners a $245 million dividend. Five months after that, it paid them an additional $200 million dividend with proceeds from a March 2005 IPO.

Rating agencies fretted that the owners could continue paying themselves steep dividends instead of reducing the company's debt.

The merged company is expected to have less need for backup satellite capacity, reducing the need to launch more satellites in the future, boosting cash flow with which to service its debt. It also has a sizable business backlog, made up primarily of long-term contracts that are difficult to cancel. Still, to assuage the rating agencies' concerns, Intelsat promised to pay no dividends for 12 months after the deal's close, which took place July 3.

Nevertheless, "We and the market are rightly concerned about what is going to happen after 12 months," says Gerald Granovsky, an analyst at Moody's. "We are concerned that taking dividends will be really mortgaging the future of the company because you'll be taking out the [financial] capacity you may need in the future."

Burger King Is Gobbled Up

The Burger King deal took place in 2002, when British liquor giant Diageo PLC initially agreed to sell Burger King for $2.3 billion. The chain had gone through multiple CEOs, it was unprofitable and many of its franchisees were in dire financial straits.

The price was negotiated down to $1.4 billion by the trio of private-equity firms, led by Texas Pacific Group and its hard-charging founder, David Bonderman, who once made a splash by booking the Rolling Stones to play at his 60th-birthday party in Las Vegas. The private firms put up their own equity for a third of the purchase. The remainder was debt later taken on by the company, including a loan from the new owners.

Burger King's May IPO valued the three firms' holdings at $1.8 billion. A few days later, they sold 4% of those holdings for $64 million as part of their agreement with the underwriters. But their investment had already delivered handsome returns. In addition to the $448 million in dividend and fees, Burger King reimbursed its owners $500,000 for legal fees and $650,000 for unspecified expenses, and also paid them $55 million in interest on their loan, which the company repaid early with new borrowings. Separately, Goldman earned $6.35 million in fees for its part underwriting the IPO, according to Thomson Financial.

In all, the firms received $511 million in dividend, fees, expense reimbursements and interest from Burger King without having to relinquish control. Today they have a 76% stake, valued at about $1.5 billion.

Company security filings say the quarterly management fees were for "monitoring our business through board of director participation, executive team recruitment, [and] interim senior management services." The management and acquisition fees, the filing added, were "comparable" to those paid by other companies to their private-equity-firm owners. Spokesmen for Texas Pacific, Bain, and Goldman wouldn't comment on the Burger King fees and dividends.

Under its new owners, Burger King initiated a program to help struggling franchisees restructure their debts, revamped its menu and redesigned its stores. At first, its performance deteriorated further. Many franchises were closed or taken over by the company. Same-store sales fell, and the chief executive hired by the buyout firms quit.

Company performance has improved since 2004. Operating cash flow has risen to about where it was at the time of the buyout. Same-store sales are up. The company has also expanded abroad, opening stores in China, for example, for the first time. Burger King used its IPO proceeds to pay down debt that financed the dividend and has avoided credit-rating downgrades. Still, its market share has continued to fall, and since the IPO, Burger King Holdings' shares have slipped 13% to $14.85 in 4 p.m. New York Stock Exchange composite trading.

In a written statement, John Chidsey, Burger King's CEO, said that the fast-food chain "was a distressed, poorly performing business" before its buyout. Under the new ownership, its "performance has improved dramatically" thanks to the buyout firms' "continuing support of management's vision and direction."