The Bear Stearns portfolio manager who kicked off the deepening bond market crisis is trying to move on with his life and launch a hedge fund, but a worried Bear isn’t likely to let him depart so quickly.
Ralph Cioffi, the portfolio manager of the two Bear Stearns Asset Management hedge funds that collapsed in June, has been quietly attempting to put together another fixed-income hedge fund, according to people familiar with the matter.
Despite the bond market’s continuing woes, he has told people that several of his fund’s former clients have expressed an interest in investing with him.
While details about the fund’s strategy are sketchy, much of it would likely center on investing in distressed mortgage debt, where even the most creditworthy bonds are considered historically cheap.
The capital for Cioffi’s fund was slated to start out in the $150 million to $250 million range.
Bear, however, is not willing to let Cioffi just walk away.
According to people close to Cioffi, Bear is using his considerable amount of restricted stock to try and persuade him to stay.
A 23-year veteran of Bear Stearns, and one of its most highly compensated employees over the past three years thanks to his hedge funds’ double-digit returns, Cioffi has millions of dollars worth of restricted stock.
Cioffi is currently working for Bear as a consultant as it sifts through the funds’ numerous legal challenges and mounts a defense against a raft of shareholder suits.
Both the Securities and Exchange Commission and federal prosecutors are looking into how Bear valued a series of illiquid and arcane collateralized debt obligations prior to the funds’ collapse.
Also being examined are Cioffi’s communications and representations to investors.
Both Cioffi and a Bear spokesman declined to comment.
Despite the damage done to Bear’s income statement and reputation when Cioffi’s funds blew up, there is recent precedence for a portfolio manager dusting himself off from the ashes of one razed fund and launching another.
John Meriwether, leader of Long-Term Capital Management, the fund that collapsed in 1998, triggering an earlier bond crisis, has turned in repeated solid performances managing JMW Partners, which has grown to about $2.6 billion from $250 million in 1999.