Last Updated Mar 9, 2011 1:29 PM EST
True, you wouldn't expect an old pro like Icahn to abruptly close down his hedge fund and return $1.7 billion to investors in the middle of a bull market. And in his letter announcing the decision, he expresses concern that the big post-crisis rally in stocks is coming to an end:
Given the rapid market run-up over the past two years and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis.If oil prices keep climbing or the economy slows after the Federal Reserve pulls the plug on quantitative easing this summer, Icahn would be hard-pressed to sustain his fund's strong returns. Since launching in 2004, it has earned a gross return of nearly 107 percent.
Yet Icahn, who made his reputation in the 1980s as a corporate raider (or "shareholder rights activist," as they like to be called), tempers his fears about the health of the economy by saying he doesn't expect "renewed market dislocation." He's also levering up to place an even bigger bet on the stock market. That doesn't exactly sound like a man hoarding canned goods before the big one strikes.
Icahn's move is causing jitters not only because of the fragile economy, but also because other prominent hedge fund traders have bailed in recent months. Perhaps most notably, Stanley Druckenmiller, formerly George Soros's right-hand man, pleaded battle fatigue in shutting down his highly successful fund last year.
Hedge funds still rolling
The NYT interprets Icahn's exit as a sign that "the luster and mystique of hedge funds have faded since the financial crisis." Then how to explain why money keeps rolling into these investments? Deutsche Bank expects a net in-flow of $210 billion into the sector in 2011, nearly four times last year's total. Hedge fund assets are approaching their levels before the financial crisis. Institutional investors are also expanding their hedge fund teams in expectation of further growth.
The most likely theory for why Icahn is folding up shop? Running a hedge fund is a grind. It requires constant hand-holding for anxious investors. The pressure to boost returns quarter after quarter is unending, while a bad spell, let alone a comet hitting the market, can send investors scattering. Federal regulation is also tightening.
Meanwhile, Icahn has spent virtually his entire career answering to one person -- himself. Says Bryon Wien, vice chairman of investment firm Blackstone Advisory Partners:
If you're Carl, who has several billion dollars, you say to yourself, "What do I need this for? I'm over 70 years old; I've made a fortune and am basically managing my own money. I don't need to spend my time talking to clients."It's also not like Icahn is going to start stuffing his money into a mattress. He'll simply return to focusing on what he does best -- investing in and hounding companies.
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