10/26/2011

Kingdon Staffers Fret Over Steep Drawdown

Employees of Kingdon Capital are worried that the firmís dismal third-quarter performance could trigger an avalanche of redemptions ó followed by a wave of layoffs.

The firmís main fund, M. Kingdon Offshore, was down about 19% through the end of September, then regained a little ground as the stock market rallied during the first few weeks of this month. By the second week of October, the fund had trimmed its year-to-date loss to 16.9%.

Nonetheless, Kingdonís third-quarter return amounts to one of the worst drawdowns in its nearly 30 years as an equity manager. The steepest decline coincided with the stock-market crash of October 1987, when Kingdonís fund fell 30.2%. The fund lost about 20% in 2008.

At the firmís annual investor meeting, scheduled for Nov. 16, Kingdon executives

are expected to concede they were too bullish on U.S. stocks headed into the third quarter, and that the fundís net-long exposure was higher than usual. The fund has since reduced its equity exposure.

In any case, the assumption among Kingdonís staffers is that a number of investors will seek to pull out at yearend. The big question is how many. The outcome wonít become clear until the end of November ó the deadline for submitting yearend redemption requests.

A person familiar with the firm said management has no intention of laying off portfolio managers. But some investment staffers have begun looking for opportunities elsewhere. Two Asia-stock analysts left last month shortly after the New York firm hired a new portfolio manager for the sector. A Latin America specialist left this month.

As of June, Kingdonís year-to-date loss was a manageable 4%. But like many other equity-fund managers, the firm got killed by the market turmoil in August in September. In just four months, assets in the M. Kingdon Offshore vehicle fell to about $2 billion, from $2.8 billion, due to a combination of losses and investor withdrawals.

The firm, founded in 1983 by Mark Kingdon, manages nearly $4 billion overall, down from about $6 billion just before the financial crisis. In 2010, Kingdon launched a credit-focused vehicle to diversify its offerings.

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