Playing Shakespeare’s King Lear is the crowning ambition for some actors, but in 2023 we’re seeing superstar hedge fund managers Daniel Och and Ray Dalio trying out for the role in real life.
In the original version of the story, mixing myth with perhaps some nuggets of historical truth, a pre-Roman Leir of Britain retires and turns his kingdom over to his two daughters and sons-in-law, who betray and neglect him. He goes to France to enlist the help of his third daughter, who provides him with an army to retake his kingdom, where he rules for three more years before dying peacefully.
In Shakespeare’s version (spoiler alert), the French invasion fails and everybody dies. We’ll have to wait and see whether Och and Dalio relive the traditional or Shakespearean versions of the tale.
When Och stepped down in 2018 from the Och-Ziff hedge fund (now Sculptor Capital Management Inc.) he co-founded and ran, he did not turn it over to two of his three children, but to Robert Shafir. He has been unhappy with its performance since and incensed at a plan to sell the operation. Instead of a French army, he is backing other superstar hedge fund managers including Boaz Weinstein in their bid to take over the firm.
Ray Dalio has sons, not daughters. When he gave up control of Bridgewater in 2022, like Och he left management of the hedge fund to senior executives rather than relatives. He too has been unhappy with its performance and wants back in.
The struggle of aging patriarchs to reclaim power ceded to younger rivals is older than recorded history. It doesn’t play out much in modern business because most large entities are run by boards and executive committees where power is ceded gradually and usually among like-minded executives. That doesn’t eliminate struggles, but it makes them more discrete, if not less nasty.
Hedge funds — and also some technology start-ups — are throwbacks to a time when charismatic individuals dominated management. Will we see more Lear-like tales unfold when the generation of managers that includes Citadel’s Ken Griffin and AQR Capital Management LLC’s Cliff Asness approach retirement age?
A successful hedge fund needs three things — investment performance, investors and good operations. The traditional asset management industry prospered for decades while delivering returns worse than random selections, but hedge funds must deliver returns above a hurdle rate or die. Management fees rarely cover costs, performance fees are necessary for profit. In any event, without performance, you can’t get investors.
While performance is necessary to attract and retain investors, it is not sufficient. Lots of funds have great track records, you must find ways to stand out from the crowd. Finally, you must run an efficient operation. You must attract and retain top people, and keep them from taking your secrets elsewhere. You must navigate the rocky shoals of financial regulation. You must minimize trading costs, keep tight controls on risk, avoid dicey counterparties and maintain liquidity.
Och and Dalio are typical of 20th century hedge fund founders in that they took on all three tasks personally. They managed the trading, pitched investors and structured operations. Of course, senior people were hired and given equity stakes over time to take over these functions, but from the outside the founders were the identity of the fund — the guarantee that performance would be good, that investors would get what they paid for, and that operations would be smooth.
For most businesses with retiring founders who personify the firm, the solution is simple. When Colonel Harland Sanders sold Kentucky Fried Chicken in 1964 at the age of 73, the company hired actors to pretend the Colonel was still in charge. No hedge fund, as far as I know, has tried that. Many hedge fund managers close their funds or convert them to family offices, which certainly works, but can mean walking away from billions of dollars worth of going-concern business value.
For the biggest hedge fund management companies that are closely identified with a charismatic founder but have evolved into highly structured corporate entities with diffused authority and responsibility, the hope seems to be that the founder will fade gracefully away, creating opportunities for ambitious subordinates and letting investors, counterparties and regulators get comfortable with successors.
Unfortunately for that scheme, the sort of person who spends a career battling the market without the protection of a big financial institution does not seem to be the sort of person who fades gracefully away.
Och and Dalio founded their funds before the rapid growth of hedge funds starting in the late 1990s. Most of the best-known hedge fund managers today are in their 50s, or healthy 60-is-the-new-40 60s. But as baby boomer managers get to their 70s and 80s, or develop health problems or other interests, expect more bloody succession (and post-succession) battles in the years ahead.
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