The Hedge Fund Cage Match

If you follow him solely on social media, particularly the platform formerly known as Twitter, you'd think hedge fund billionaire Bill Ackman is spending his off hours meeting GOP candidates from Doug Burgum to Vivek Ramaswamy, stepping up to support the presidential hopefuls even if their rivals and the internet go to smash against them. But there's something else he’s been doing outside of running his firm.

Call it a cage match, but for Wall Street types. Boaz Weinstein of Saba Capital, Ackman and billionaire Marc Lasry, the fund manager who owned a stake in the Milwaukee Bucks before selling that interest this year, are among the finance titans in a takeover bid for Sculptor Capital Management, the hedge fund previously known as Och-Ziff that controls nearly $35 billion. To top off the list of heavyweights, as Bloomberg's Hema Parmar reports, they're also joined by billionaire Jeff Yass, the co-founder of trading firm Susquehanna International.

Sculptor in late 2022 formed a special committee to find a buyer as part of an agreement during a legal dispute with its founder. Weeks ago, Sculptor agreed to sell to Rithm Capital, in what seemed like the end of a saga. But the special committee is recommending its existing deal over the dueling bid from the Weinstein group, and chaos has ensued.

Sculptor is led by Jimmy Levin, once the protégé of hedge fund titan Daniel Och, the founder of the firm. The two have had an ugly, bitter separation. Och dredged up scathing and personal allegations in the middle of a lawsuit last year as he contested what he called an "absurd award" of pay (more than $140 million) for Levin in 2021, Bloomberg's Katherine Burton reported at the time. The legal matter was subsequently closed—at least for the time being.

In the latest twist, Och and a group of former executives demanded that Sculptor release books and records to investigate how the publicly traded hedge fund picked Rithm to be its ultimate acquirer. It's a shot across the bow—a first step to reopening the long, messy legal dispute that coincided with a yearslong drop in Sculptor's assets.

Rithm agreed to buy Sculptor for $11.15 a share. The rival group is reportedly offering more than $12, though Sculptor disputes that, saying the group only committed financing for less than half of the amount required to complete the deal. Och and his crew, who collectively own 14% of the firm's stock, wrote a letter to the board's chair, citing "serious concerns" that the directors have breached duties to shareholders with the Rithm deal talks.

This is where Levin's pay becomes part of the dispute again, or as Och's team calls it, an "exorbitant and unwarranted compensation package." According to the letter, "The special committee turned down multiple bids with a higher potential stock price because they did not provide sufficient assurances that management would be both retained and compensated at stratospheric levels." Sculptor did not respond to the Tuesday filing. Weinstein's group does not plan to keep current management (Levin) on board.

There's a ton of money at play. Levin himself has almost 14% of the firm's stock as its largest single shareholder, so beyond his compensation, he has a reason to work toward an orderly sale of the firm. For its own part, Weinstein's Saba Capital has amassed enough shares of Sculptor to become a top-10 shareholder, Bloomberg data show. Given the size of Levin's compensation package, the real payday for him would come with keeping his job.

The interest in Sculptor has been pretty far and wide. Sculptor reached out to 70 potential suitors as it sought to sell, according to a proxy filing, but many bids were withdrawn or denied—even at higher prices—for a multitude of reasons including financing or unfavorable deal conditions.

So the story is getting complicated. But one way to understand it is to consider some of the reasons why the relationship between Och and Levin, who was a water skiing instructor at the summer camp for his ex-boss's son, has gotten so sour. As Bloomberg's Amanda Cantrell explains for the Bloomberg Deals newsletter:

On the surface, this may look like a fight about shareholder rights. Och has protested Levin’s pay package and accused him of putting his personal interests ahead of stockholders, while Levin has argued that Och mishandled a bribery scandal that cost the firm hundreds of millions in fines and $30 billion in client redemptions.

What's more is that this is a strangely public dispute in an industry that's otherwise incredibly private. Part of the reason this is possible is because Sculptor is one of the very few publicly traded hedge funds on the planet. Bloomberg Opinion's Matt Levine wrote about the strangeness of the situation this week:

There are not a lot of hostile takeovers of hedge funds. If you run a hedge fund, generally speaking, nobody is going to replace you as the manager of that hedge fund without your permission. Your clients might leave, if you underperform or otherwise upset them, but they are not going to come to you as a group and say “we got to talking and 51% of us agree that we would rather have Boaz Weinstein run this fund.” Your lieutenants might become dissatisfied with working for you, but generally you control the company and they don’t, so they can’t mount a coup; their only recourse is to leave and start their own funds.

In a separate column, Levine spends a lot of time discussing the potential motives of the rival bidders, too:

The schematic math is that anyone can buy Sculptor for about $650 million, and Sculptor is a business that pays its chief investment officer something like $100 million per year. If you could buy the company, fire him and make yourself the boss of Sculptor, then you could take that $100 million a year for yourself. That’s like a 15% annual return on your investment right there, even assuming that you can’t grow assets or improve performance or save money by firing anyone else. That’s pretty good. It is not quite the schematic math that I began with — “buy all the shares for $0, then make yourself CEO and collect all the fees” — but it is related.

As Robin Wigglesworth at the Financial Times has said, the Och-Levin saga is becoming "one of the longest-running and nastiest feuds in the hedge fund industry," as well as a "delightfully public and petty drama." And that was written before this week's latest twists. In part of its letter to the Sculptor board chair, the Och group even asked to work with potential bidders on improving their offers. All week, Sculptor has been trading above the Rithm offer price—a signal that investors are now, regardless of how the drama plays out, expecting more.

Slow Moving Trainwrecks

Ralph Schlosstein calls it a head fake. He's referring to the relative calm in the economy that's being propped up by years of government stimulus, which is "masking, a little bit, the bite of the tightened monetary policy," the Evercore chairman emeritus told Bloomberg Television this week. "When that runs out, and I think we're within months of running out, I think you're going to see the bite of monetary policy."

He's not the only one. As Fed Chair Jerome Powell addresses the country from Jackson Hole, Wyoming, this Friday, investors won’t only be watching for the potential for future interest-rate hikes. They’re attuned to how long interest rates might stay high and whether the Fed will have to adjust its expectations around "r*," which is the neutral rate of interest. Wall Street will look for clues, but they're not likely to get more of them for many months until the Fed can claim victory over inflation.

To read this newsletter online in its entirety, you can find it here, and you can sign up here for Bw Daily for which I write every Friday and is by far the favorite part of my week. More to come. Tips and opinions are welcome at [email protected].