Hedge fund in­dus­try seeks sta­bil­ity

Connecticut Post (Sunday) - - Sundaybusiness - By Paul Schott

The or­ga­niz­ers of the in­au­gu­ral Green­wich Eco­nomic Fo­rum in­vest­ment con­fer­ence wanted to cre­ate an event that would ri­val Davos, Switzer­land’s World Eco­nomic Fo­rum. They have al­ready made ma­jor progress to­ward that goal.

Run­ning from Nov. 15- 16 at the De­la­mar Green­wich Har­bor ho­tel, the sum­mit at­tracted sev­eral hun­dred pro­fes­sion­als from around the world and lead­ers of some of the top Con­necti­cut hedge funds, in­clud­ing Bridge­wa­ter As­so­ciates founder Ray Dalio and Tu­dor In­vest­ment founder Paul Tu­dor Jones II.

The con­fer­ence’s strong de­but re­in­forced lower Fair­field County’s stand­ing as one of the world’s most prominent hedge fund en­claves. But un­cer­tainty clouds the in­dus­try’s fu­ture in the area. Hedge fund growth has stalled in re­cent years, and other states want to re­cruit Con­necti­cut firms. And even af­ter al- lot­ting tens of mil­lions of dol­lars in sub­si­dies in re­cent years, the state might need to do even more to bol­ster the sec­tor’s longterm prospects.

“For the most part, the hedge fund in­dus­try is fac­ing the same chal­lenges ev­ery­where,” Con­necti­cut Hedge Fund As­so­ci­a­tion Pres­i­dent Bruce McGuire, one of the con­fer­ence or­ga­niz­ers, said in an in­ter­view last week. “Con­necti­cut is a mi­cro­cosm of what’s go­ing on through­out the in­dus­try.”

Large but stag­nant pres­ence

Con­necti­cut has amassed the third largest num­ber of ac­tive hedge fund man­agers, 211, ac­cord­ing to fi­nan­cial- ser­vices data firm Pre­qin. Only New York and

Cal­i­for­nia have more hedge funds, which in­vest in a broad range of as­sets in­clud­ing stocks, bonds, cur­ren­cies, de­riv­a­tives and real es­tate.

Af­ter New York, the state ranks No. 2 in as­sets un­der man­age­ment, with a to­tal of about $ 384 bil­lion. West­port- based Bridge­wa­ter As­so­ciates is the world’s largest hedge fund, with hold­ings of ap­prox­i­mately $ 162 bil­lion. Green­wich- based AQR Cap­i­tal Man­age­ment follows as the sec­ond big­gest in the state, with as­sets to­tal­ing about $ 118 bil­lion.

Com­bined, Bridge­wa­ter and AQR em­ploy about 2,400 in the state, ac­cord­ing to the state Depart­ment of Eco­nomic and Com­mu­nity De­vel­op­ment.

Those em­ploy­ees are highly paid. Av­er­age wages for fi­nan­cialser­vices po­si­tions in lower Fair­field County last year ran at about $ 266,000, com­pared with an over­all re­gional av­er­age of around $ 85,000, ac­cord­ing to the state Depart­ment of La­bor.

Other ma­jor hedge funds in the state in­clude Green­wich- based Vik­ing Global In­vestors and Stam­ford- based Point72 As­set Man­age­ment.

“The state may be a lit­tle more ex­pen­sive than some parts of the coun­try, but rel­a­tive to big fi­nan­cial mar­kets in New York — and, to a lesser ex­tent, in Bos­ton and San Fran­cisco — we look like a bar­gain,” Cather­ine Smith, the state’s eco­nomic de­vel­op­ment com­mis­sioner, said in an in­ter­view ear­lier this year. “And th­ese firms are stay­ing be­cause they like the lo­ca­tion, the tal­ent we have and be­cause their em­ploy­ees like liv­ing in the state.”

But the num­ber of ac­tive hedge funds in the state has shrunk by 9 per­cent in the past three years, to about 700, ac­cord­ing to Pre­qin. In five of the past six years, fund liq­ui­da­tions have ex­ceeded fund launches in Con­necti­cut.

Ris­ing skep­ti­cism of hedge fund man­agers’ ef­fec­tive­ness, and a growing pref­er­ence among those who still in­vest with those firms to do so with heavy­weights like Bridge­wa­ter rather than new­com­ers, have con­trib­uted to the di­min­ish­ing num­ber of funds.

“That skep­ti­cism is en­ter­ing into the ar­eas of pub­lic pension funds and univer­sity en­dow­ments, which are ma­jor in­vestors with hedge funds,” said Lawrence J. White, a pro­fes­sor of eco­nom­ics in New York Univer­sity’s busi­ness school. “The rise of in­dex funds is an­other man­i­fes­ta­tion of that skep­ti­cism. The ques­tion is asked, ‘ Can I ex­pect an ac­tive fund man­ager to do bet­ter than the over­all market?’”

On the move?

At the same time, Con­necti­cut faces in­creas­ing com­pe­ti­tion from other states such as Florida that have pitched their lower tax rates to Nut­meg State com­pa­nies.

“My pitch is you should go ahead and give up ... ca­pit­u­late and come to Florida and make it eas­ier on your­selves,” Florida Gov. Rick Scott, a Repub­li­can who is now a U. S. se­na­tor- elect, said dur­ing a visit last year to Nor­walk.

In re­cent years, some mar­quee fund man­agers, in­clud­ing Jones, have fol­lowed that ad­vice, mov­ing to a state that has no in­come tax. Jones’ firm, Tu­dor In­vest­ment, now has an of­fice in Palm Beach, Fla. In Con­necti­cut, the com­pany has down­sized. It an­nounced ear­lier this year it would re­lo­cate its main of­fices from back­coun­try Green­wich to down­town Stam­ford.

Com­pared with Con­necti­cut, Florida’s hedge fund in­dus­try is still small. It counts about 370 ac­tive funds, a to­tal that has not changed much in the past five years.

But its fi­nance pro­file con­tin­ues to grow. The Mi­ami- Palm Beach area has ce­mented it­self as a hub for pri­vate wealth man­age­ment, boosted by in­ter­na­tional busi­ness that com­prises many large Latin Amer­i­can clients.

“When I moved here in 2009, there weren’t many hedge funds in Florida,” said Brian Gen­dreau, a clin­i­cal pro­fes­sor of fi­nance in the Univer­sity of Florida’s busi­ness school. “The big­gest prob­lem they ran into was ‘ in­fra­struc­ture.’ Find­ing the right law firms for them was al­ways a bit of a prob­lem. To­day, the bar­ri­ers to those firms do­ing busi­ness here are lower. I hear a lot about hedge funds and pri­vate eq­uity funds and main­line as­set- man­age­ment funds mov­ing to Florida.”

McGuire is more concerned about re­lo­ca­tions to other North­east­ern states.

“Bos­ton and New York are big­ger threats to us than Mi­ami or Dal­las,” he said. “How hard would it be to go to New York, where it would be eas­ier to at­tract the next group of em­ploy­ees? That could hap­pen if we did not take any ac­tion.”

To help re­duce the risk of high­pro­file ex­its, Con­necti­cut has given eight- fig­ure sub­si­dies to Bridge­wa­ter and AQR through the First Five Plus pro­gram launched by Demo­cratic Gov. Dan­nel P. Mal­loy’s ad­min­is­tra­tion.

Bridge­wa­ter has qual­i­fied for up to $ 52 mil­lion in grants, loans and tax cred­its. AQR could re­ceive up to $ 35 mil­lion in grants and loans. The com­pa­nies’ al­lo­ca­tions are based on tar­gets for re­tain­ing and cre­at­ing po­si­tions.

Those deals have sparked crit­i­cism from some watch­dogs in a state plagued by chronic bud­get deficits and some of the stark­est in­come- in­equal­ity gaps in the coun­try. At the same time, those agree­ments have gar­nered bi­par­ti­san sup­port in the state Leg­is­la­ture.

“Th­ese are very high- value out­fits that em­ploy hun­dreds of highly paid em­ploy­ees,” said out­go­ing state Sen. L. Scott Frantz, R- Green­wich, who served as a co- chair­man of the Leg­is­la­ture’s Com­merce Com­mit­tee. “Re­gard­less of the need for cash, it was smart for DECD to re­tain them.”

Look­ing ahead

In Jan­uary, the in­dus­try will face a new gov­er­nor in Demo­crat Ned La­mont and Demo­cratic ma­jori­ties again in both the state House and state Se­nate.

Frantz, who runs Green­wich-based pri­vate eq­uity and ven­ture cap­i­tal firm Hae­bler Cap­i­tal, sug­gested that La­mont visit ev­ery as­set- man­age­ment group and pri­vate eq­uity firm “of sig­nif­i­cance” in the state. La­mont is con­nected to the fi­nance sec­tor through his wife, An­nie La­mont, who is co- founder of the Green­wich- based ven­ture cap­i­tal firm Oak HC/ FT. An­nie La­mont spoke at the Green­wich Eco­nomic Fo­rum.

“The new gov­er­nor needs to sit down with in­dus­try lead­er­ship im­me­di­ately to demon­strate the ap­pre­ci­a­tion for one of the most valu­able busi­nesses in Con­necti­cut,” Frantz said.

While state law­mak­ers have weighed pro­pos­als in re­cent years to hike tax rates on in­vest­ment firms, McGuire sug­gested they take the op­po­site ap­proach in the 2019 ses­sion. He wants them to con­sider cre­at­ing a fi­nan­cialser­vices en­ter­prise zone, sup­ported by tax in­cen­tives, that would stretch from Green­wich to Bridge­port.

“We should pro­mote hedge funds and other fi­nance firms as much as Cal­i­for­nia loves Sil­i­con Val­ley,” McGuire said. “We should stop treat­ing hedge funds as a dirty word and em­brace bril­liant peo­ple such as Ray Dalio and Paul Tu­dor Jones who have started amaz­ing com­pa­nies and all the smart peo­ple who want to go to work for those types of firms.”

While Jones has moved, long­time Green­wich res­i­dent Dalio ap­pears con­tent to stay. At the Green­wich Eco­nomic Fo­rum, he touted the town’s lo­ca­tion and di­ver­sity.

“There’s a rea­son it’s the cen­ter of hedge funds; there’s a rea­son it’s such a great com­mu­nity,” Dalio said dur­ing a panel dis­cus­sion on Nov. 15. “I have friends here that are neigh­bors and then friends from China, friends from Abu Dhabi, friends from Sin­ga­pore. And that’s the essence of the place. It’s right next to New York City. … It’s just a won­der­ful town.”

Tyler Size­more / Hearst Con­necti­cut Me­dia

Bridge­wa­ter As­so­ciates founder Ray Dalio speaks at the Green­wich Eco­nomic Fo­rum at the De­la­mar Green­wich Har­bor on Nov. 15.

Con­trib­uted photo

Tu­dor In­vest­ment Corp. founder Paul Tu­dor Jones II speaks dur­ing the Green­wich Eco­nomic Fo­rum on Nov. 15.

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