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Diamondback to close after clients pull out

Reuters

BOSTON -- Hedge fund Diamondback Capital Management , one of a handful of firms embroiled in a government insider trading investigation, told investors it would close down after nervous clients demanded the return of more than a quarter of its assets.

Richard Schimel and Larry Sapanski, the firm's co-heads, broke the news to clients in a letter Thursday just three weeks after investors asked Diamondback to return $520-million (U.S.), five times the amount top executives had expected.

As assets dwindled to $1.45-billion from about $5-billion two years ago, the firm's business model was in jeopardy and executives had to decide between closing the firm down or trying to engineer a second big restructuring within 18 months.

"Rather than continue to manage investor capital while undertaking to restructure the firm to manage this reduced level of assets, we have decided that the most prudent course is to wind down and terminate the funds and return investor capital," the two men wrote in the letter, a copy of which was obtained by Reuters.

Diamondback expects to lay off nearly all 133 employees. Founded by Mr. Schimel, Mr. Sapanski and a third partner, Chad Loweth, in 2005, Diamondback had been an industry darling.

Its three founders had all worked at Steven A. Cohen's successful SAC Capital Advisors, giving them the kind of pedigree that attracted some $6-billion of assets from marquee clients such as New Mexico's pension fund and Blackstone Group's powerful fund-of-funds unit.

The fund's returns were strong with an average annual return of 9 per cent since 2005, boasting gains even during the financial crisis when many hedge funds were in the red. But two years ago, the firm's fortunes plunged when federal agents raided its Stamford, Conn.-based headquarters, shepherding employees into a conference room, and spending hours boxing up documents.

With Diamondback swept up in the government's fast-moving insider trading probe into how managers might be using illegally obtained tips to make million-dollar trades, many investors got cold feet and ran for the exits.

© 2007 The Globe and Mail. All rights reserved.

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