Philip Falcone grew up in the mining town of Chisholm, Minnesota, population 4976. The youngest of nine children who lived in a three-bedroom house, Falcone excelled at ice hockey and played for Harvard.
After college, a burgeoning career as a professional hockey player was cut short by injury and he then cut his teeth in the markets as a trader at Barclays Capital.
Now, Falcone is best-known as a “billionaire New York hedge fund manager”. Geared to the gills like most hedge funds, his Harbinger Capital Partners made a poultice in the bull market; in Australia, too. Falcone’s most notable play being a 16 per cent stake in Andrew Forrest’s Fortescue Metals which reaped him hundreds of millions in profit when he sold down two years ago.
It was a big bet for Australia, but not for New York. Falcone added fame to fortune with a massive bet against the subprime mortgage market. When credit markets iced over in mid-2007, Harbinger’s prescient “short” positions raked in $US11 billion. It was an exceptional punt. His flagship Harbinger Capital Partners Fund returned 116 per cent that year.
Unlike normal investment funds, hedge fund returns are magnified by their leverage. Their profits may be turbocharged, but so are their losses. And, unlike other funds, they don’t hug the index but rather bet big on anything they choose.
The very next year, Falcone came unstuck. His flagship fund jettisoned half its value. At its zenith in 2008, Harbinger had $US26 billion under management. By last year, after a rash of redemptions, there was $US9 billion left.
And that was despite a bounce in 2009, when Harbinger returned 42 per cent, far better than most funds. Yet 2010 was another shocker. He dusted 12 per cent.
Meanwhile, no less than three separate Securities and Exchange Commission probes were getting under way.
As US regulators investigated Harbinger Capital for allegedly flouting short-selling rules, among other things, Falcone valiantly tried to bounce back by taking a huge position in a US wireless broadband play called LightSquared.
And when 66 members of Congress objected that LightSquared’s proposed network might cause “severe interference” with aircraft GPS devices and military gear, Falcone responded, ”They’re interfering with us, we’re not interfering with them.”
Now he’s neck-deep in political donations allegations as a bunch of Republicans pursue him for donating to Barack Obama’s Democrats while seeking licence favours for his broadband play. It’s messy.
Then again, so was the imbroglio which arose after he allegedly borrowed $US113 million from a Harbinger fund to pay his own 2008 taxes. (This was repaid last year.)
Hedge funds don’t have to report publicly but, in light of recent ructions, Falcone is probably down to his last $US6 billion. The extreme volatility of this fund performance is something of a parable for his peers. Hedge fund returns have been all over the shop. Some are making a killing, others getting killed.
In the US, funds indices are almost all showing declines of more than 5 per cent in the third quarter. In fact, although some are coining it, the last quarter was the fourth worst of any in hedge fund history.
And, enshrining that immutable investment market tenet that today’s rooster is tomorrow’s feather duster, the famous John Paulson, who had notched up returns of 600 per cent as the market tanked in 2008, is conceding losses of 30 per cent. Like Falcone, Paulson had cleaned up too by shorting the mortgage market.
If these types, with their dedicated teams of Ivy League analysts and high-faluting risk managers, blow up so spectacularly, what can be said of the prospects for day traders and the sharemarket spruikers who prey on them with their “unique” programs for trading wealth?
Fortescue is by no means Harbinger’s only connection with Australia. Falcone’s funds have often dabbled in the Antipodes – in Poseidon Nickel and Murchison Metals to name two.
Harbinger even seems to be among creditors owed $2 billion by Indian fertiliser tycoon Pankaj Oswal.
Yet there is a more interesting connection, more blueblood and still undisclosed. And that is the AMP. No, Falcone has not invested in AMP; AMP has invested in Falcone. And quite lamentably.
It is no doubt embarrassed about this – though all investors blunder – but thanks to a super fund regime which doesn’t require money managers even to divulge what they are doing with people’s savings, these little secrets are rife all over the superannuation landscape.
Ad absurdum, this is a situation where Australian super is being gambled in a high-risk New York hedge-fund manager who dips into his funds to pay his own tax and punts, among other things, on speculative Aussie minerals explorers.
Fair enough, super merry-go-rounds happen. And both retail funds and the industry funds own large licks of these “alternative investments”. It’s all part of diversification. But has the public got no business knowing what it owns? Even though the super fund still rips out a fee when it outsources the job to another manager?
According to documents obtained by BusinessDay, AMP was grossly overweight in Harbinger – about 16 per cent of its Total Return Fund was tied up in Falcone in 2008.
That’s down to 6 per cent weighting. The fund was shut to investors in 2009 and the only external mention worthy of note was this: “The research and advisory function (for the Total Return Fund) has been consolidated to improve efficiency and reduce the operational challenge of multiple independent supplier relationships,” AMP was quoted as saying.
Phew! That explains everything.
Are these remaining, darkly toasted investors in the TRF now the proud owners of non-tradeable shares in Falcone’s “high conviction” LightSquared mobile-phone venture in the US? As LightSquared was not only high-risk, but also illiquid, Falcone is hard-pressed selling his stake to meet redemptions.
Clients of a hedge fund back their manager, they take their risk eyes open. Clients of the super system, however, are there under compulsion. This is a big gravy train. The cost of a snapshot of investments would be marginal. And it would impose accountability on the managers.