Sandell Downsizes Amid Dwindling Assets

Sandell Asset Management has shrunk to about $1 billion under management - a precipitous fall for a firm that was running $7 billion just two years ago.

The operations of the multi-strategy fund shop also continue to shrink: Last month, the New York firm closed its Hong Kong office, leaving it with a lone outpost in London and fewer than 40 staffers. Among the latest departures: Rebecca Pacholder, a partner in the firm who worked closely with credit-trading chief Serge Adam, left Dec. 31 for a new job at an undisclosed firm.

Founded by Tom Sandell in 1998, the firm is best known for its flagship Castlerigg fund, whose offshore version lost 32.6% in 2008. Castlerigg reportedly gained 8.5% last year through November, but that didn't include "special situation shares" that were down 11.4% during the same period. As much as 50% of Sandell's overall investor capital apparently is tied up in investments the firm has labeled as illiquid.

The Castlerigg portfolio traditionally was split among three strategies: credit, special-situations equity and merger arbitrage. Before starting the firm, Tom Sandell was a senior managing director in Bear Stearns' risk-arbitrage unit.

Castlerigg's special-situations portfolio had dwindled to only 2% of the fund's net equity as of November - three months after the departure of Nick Graziano, head of special situations trading. He left to join Leon Cooperman's Omega Advisors.

Just before Christmas, Sandell announced it was sharpening its focus on the remaining strategies by setting up two new vehicles in addition to the flagship fund. Castlerigg Merger Arbitrage Fund launched this week, while Castlerigg Credit Opportunities Fund is expected to begin trading in February. Sandell and Patrick Burke oversee the merger-arb strategy, leaving the credit vehicle to Adam.

Since 2008, Sandell's staff has been steadily eroded by a combination of layoffs and resignations. The main problem: Castlerigg is still a far cry from returning to its high-water mark before the financial crisis, leaving the firm with little or no revenue from performance fees.

One dilemma facing senior investment staffers who consider leaving: Whether their deferred compensation is worth sticking around for. One Sandell staffer apparently passed up $2 million in deferred comp to take a new job at another firm. The staffer could have banked his deferred comp within a year or two, but apparently was concerned that Castlerigg wouldn't return to its high-water mark within that timeframe. Under that scenario, the firm might not be in a position to pay out bonuses.

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