07/08/2009

Zwirn Is Back With New Hedge Fund Shop

Daniel B. Zwirn, whose once-high-flying hedge fund firm was brought down by an accounting scandal, is about to raise the curtain on his second act.

Even as he continues to unwind D.B. Zwirn, a New York shop that managed more than $5.5 billion at its peak, Zwirn has established a new firm called Zwirn Family Interests and has quietly begun raising capital from friends and family and other backers familiar with his high-risk investment style. Zwirn is not targeting institutional investors at this stage, but has already raised a significant amount of capital for the new venture.

Zwirn, 38, is planning to launch several funds in the coming months. He is currently working in New York with a small staff of key lieutenants who followed him from D.B. Zwirn, but soon will be scouting for fresh talent. One market player familiar with his plans said Zwirn is determined to regain his perch high up in the hedge fund industry.

Zwirn's early success established him as a hedge fund wunderkind, alongside such industry luminaries as Ken Griffin of Citadel Investment and Dan Och of Och-Ziff. After stints at J.P. Morgan's Highbridge Capital and Michael Dell's MSD Capital, Zwirn founded D.B. Zwirn in 2001 and quickly gained a reputation for high-stakes investing in risky and illiquid assets. The firm's flagship vehicle, D.B. Zwirn Special Opportunities Fund, targeted real estate, debt, private equity and other exotic investments.

At its peak, the Special Opportunities Fund - both the U.S. and offshore versions - accounted for about $4 billion of the firm's assets under management. Zwirn managed a staff of several hundred that operated out of offices in New York, Houston and Greenwich, Conn.

His troubles began when he fired his chief financial officer in 2006 and disclosed accounting irregularities in the flagship fund. Investors initially gave Zwirn the benefit of the doubt because he took the initiative to disclose problems to regulators. He also paid out of his own pocket for an outside auditor to clean up the books.

But investors were subsequently spooked by audit delays, an SEC probe and disclosures of improper expenses being charged to investors. In February 2008, the firm publicly acknowledged that one of the improper expenses was the purchase of a personal jet by Zwirn. The airplane, a 1991 Gulfstream 4, was bought in September 2005 via an operation called Z1 Holdings in which Zwirn acted as principal. Zwirn sold the jet, valued at an estimated $17.5 million to $19 million, in March 2007.

By early 2008, investors had deluged the Credit Opportunities Fund with some $2 billion of redemption requests, prompting Zwirn to shutter the vehicle. Because of the illiquid nature of the holdings, the firm expects it will take 2-4 years to sell all of the assets.

In April, Zwirn struck a deal with Fortress Investment, a publicly traded hedge fund firm in New York, to sell $2.5 billion of assets. Last month, Zwirn began shopping $150 million of loans his firm either originated or acquired.

At this point, little remains of Zwirn's original firm. Most of the staff have left - some of them joining Fortress to help manage the Zwirn assets.

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