Steyer-ing power

22 October 2012 By Richard Beales

It’s not just the view of Alcatraz that makes Farallon Capital Management different from most other big hedge funds. Tom Steyer, the founder of the $20 billion firm based in San Francisco, has also navigated the succession trail with more forethought than most.

After starting Farallon 27 years ago, Steyer is handing the top job to Andrew Spokes, a Brit with whom he has shared leadership for five years. Steyer’s ambitions are several and include Democratic politics at a high level, in California and perhaps beyond. But investors in his hedge funds will be more focused on what he is leaving behind.

Retiring hedge fund moguls are not good at smooth transitions. Big names like Stanley Druckenmiller and George Soros have closed their doors to outside investors, preferring to run “only” their own billions. A few titans have failed to hang on to would-be successors. Moore Capital Management’s Louis Bacon could be viewed as one of those, especially after Greg Coffey’s departure last week. Still others have botched their exit and seen investors flee.

Other founders hoping their firms will endure include the likes of Ray Dalio at Bridgewater Associates and Daniel Och at Och-Ziff Capital Management. But they have not yet reached the point of stepping away. Bruce Kovner’s handover at Caxton Associates to Andrew Law last year is one of few that seem to have worked reasonably well – with the caveat that it’s early days.

The first box Steyer checked was to start early. He hired and promoted Spokes long ago. He also diversified the firm’s activities and parceled them out. Second, he hung on to talent so that Spokes’ 19 partners have an average tenure of more than 11 years apiece. Third, he telegraphed his plans so that investors won’t have been surprised except by the precise timing. And fourth, Steyer is showing confidence in Farallon by leaving most of his capital for the firm to manage.

It helps at the margin that Farallon’s better than 9 percent return so far this year is twice that of the average fund, according to Hedge Fund Research. Even so, investors will probably be more than usually alert for any hint that Steyer is missed. But the founder’s groundwork is designed to give them reasons to stick around rather than excuses to take their cash and run. If it works for him, others will take note.

 

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