12/10/2008

SAC, Diamondback Segregate Some Assets

Fund operators SAC Capital and Diamondback Capital have created "side pockets" to wall off a portion of their assets, but for different reasons.

SAC, whose main hedge fund is down about 20% this year, wants to protect illiquid, hard-to-value assets from investor redemptions. The $16 billion Stamford, Conn., firm, which is run by Steve Cohen, notified investors within the past two weeks that it had set up a side pocket for about 13% of the fund's assets. The segregated investments include both fixed-income and private-equity assets. By walling off those holdings, SAC can exclude them from performance calculations until the positions can be sold or properly valued.

Diamondback established a side pocket for about 14% of its assets to account for its exposure to Lehman Brothers, which filed for bankruptcy in September. The Stamford fund operator, headed by SAC alumni Larry Sapanski, Richard Schimel and Chad Loweth, initially estimated that it had $772.5 million tied up in Lehman's prime-brokerage unit. On Nov. 10, the firm wrote down the value of its Lehman assets to $518 million "due to increased concerns about the extent and timing of recovery."

Diamondback has told investors its Lehman holdings will likely have to be discounted further.

The side-pocket provisions apply to investors in Diamondback funds before Nov. 1. No management fee will be charged on the covered assets.

Including the Lehman securities, Diamondback has about $5.3 billion under management. Through November, Diamondback's main hedge fund is flat for the year, but up 5.3% excluding the Lehman assets.

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