Moore Spin-Off Closes After Sponsor Exits

Fund-of-funds operator Alstra Capital is shutting down after its biggest client, Max Capital, decided to take direct control of its hedge fund investments after they suffered double-digit losses last year.

Since its inception in 2005, Alstra's main business has been managing the alternative-investment assets for Max, a Bermuda reinsurance company that shares a common ancestry with Alstra. Both firms trace their roots to Louis Bacon's Moore Capital: Max was launched by a Moore-led consortium in 1999 in part as a way to boost the hedge fund's assets under management, while Alstra is run by Bacon's brother, Zack Bacon. At the beginning of 2008, Max accounted for about $1.2 billion of Alstra's $1.4 billion under management.

Alstra runs a fund of funds for Max called Max Diversified Strategies, which according to a recent regulatory filing contains "materially all" of Max's alternative investments. In its annual report, issued last week, Max reported losing $233 million, or 19.3%, on its alternative investments. Alstra said Max Diversified Strategies' assets under management fell to $749 million at yearend, suggesting that in addition to losses, Max redeemed some of its assets last year.

Max said in its annual report that it was seeking to reduce its hedge fund exposure. The portfolio's decline in value last year took a significant bite out of the reinsurer's capital base. Those losses led to a reevaluation of the investments.

Max decided to sever its "trading agreement" with Alstra in the last few weeks, according to a regulatory filing. Since then, Zack Bacon decided to shutter the fund shop and return to Moore Capital, which spun off Alstra in 2005. On its Web site, which shut down two weeks ago, Alstra said it was registered with the SEC as an investment advisor. It is no longer registered.

Alstra invested in about 35 underlying vehicles with 10 trading strategies. It placed money with some of the biggest names in the business, including funds run by Brevan Howard Asset Management, Chilton Investment, Diamondback Capital, Harbinger Capital, Marathon Asset Management, Spinnaker Capital and Tudor Investment. The fund had a long-standing swap agreement that added about $140 million of leveraged exposure as of Feb. 28, 2007.

Going forward, Max intends to manage its alternative investments in-house. However, the Bacons continue to have close ties with the company. Zack Bacon is Max's deputy chairman. He owns 210,000 shares of the company. Louis Bacon formerly sat on the board. Moore is Max's single-largest shareholder, with 6,666,667 shares. Max went public in 2001.

Early on, Moore served as an investment advisor to Max via Max Re Diversified, a fund of funds that invested Max's money in Moore's own hedge funds and roughly 40 other funds. Alstra, initially a fund-of-funds subsidiary of Moore, became the advisor for Max Re Diversified in April 2004 and was spun off from Moore in 2005. In 2007, Max Re changed its name to Max Capital.

Over the years, Alstra and Moore have each earned millions of dollars in fees from Max. Max paid Alstra $6.2 million in management and performance fees during the first nine months of 2008, which was a down year for Alstra. Of that amount, $2 million went to Moore for managing some of the underlying investments. In October, Max and Alstra agreed to switch to a fixed annual fee of $8 million.

Moore helped launch Max in part because it served as an effective fund-raising tool. U.S. investors can reap substantial tax benefits by investing in offshore reinsurance entities. Specifically, investors' capital gains are taxed under long-term rates, which are lower than the short-term rates paid by most hedge fund investors.

In its most recent earnings statement, Max reported a 2008 net loss of $175 million on revenue of $1.25 billion.

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