New rule offers peek at Boston’s 10 largest hedge fund managers

Seth Klarman’s Baupost Group is Boston’s biggest hedge fund, and ranks number five in the country.

The largest hedge funds in Boston control more than $130 billion in assets, with some of the top firms run by executives who used to manage Harvard University’s endowment, according to a Globe analysis of federal filings that provide the first glimpse into an industry that has largely been able to keep its financial records private.

The new data, a requirement of the Dodd-Frank financial overhaul law, tells the public and federal regulators - in many cases for the first time - how much money these firms oversee, what investment strategies they use, and what rates they charge their clients.

For instance, Jack Meyer, the former chief of Harvard’s endowment, has in just six years built his Convexity Capital Management to $14 billion in assets, the third-biggest hedge fund in Boston. Convexity looks to beat various benchmarks using complex fixed-income instruments, including options linked to interest rates, according to a long explanation filed with the Securities and Exchange Commission.


Until now, only investors in these elite funds and industry insiders have known much about them. Regulators were in the dark, lacking even basic information like where hedge funds do business, and how risky they might be.

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“We will for the first time have access to a census of who’s doing what in the hedge fund business in this country,’’ said Robert E. Plaze, deputy director of the Division of Investment Management at the SEC.

Seth Klarman’s Baupost Group is Boston’s biggest hedge fund, and ranks number five in the country, with $25 billion in assets in 2011. Baupost grew by $2 billion last year, and produced a profit, according to Klarman’s January letter to investors, despite a flat stock market in which the average hedge fund lost 5 percent of its value.

Klarman, a philanthropist who also owns a minority stake in the Boston Red Sox, is known for his bargain-hunting in unusual places. Two of his current bets are on the debt of bankrupt Lehman Brothers, which is still being traded in anticipation of a bankruptcy settlement and on a Canadian company that’s trying to start a rock quarry, according to a recent Fortune magazine report.

The new SEC filings do not disclose specific investment holdings, or performance, although Klarman has reportedly earned an average 19 percent a year since 1983 on his oldest fund, more than three times the return of the stock market for the same period.


After Klarman, the three biggest players in town are run by former managers of the Harvard endowment. Long before Meyer left, Robert Atchinson and Phill Gross launched Adage Capital Management, which now holds $15.9 billion in assets. And Jon Jacobson cofounded Highfields Capital Management (known for sussing out Enron’s shaky numbers and betting big against the energy company); it oversees $11 billion, according to filings.

Ronnie Sadka, a professor of finance at Boston College’s Carroll School of Management, said it’s no surprise the former Harvard managers are at the top of the list. “These guys are very smart,’’ he said. They left Harvard in part to escape the annual spotlight over their multimillion-dollar paychecks. “That’s what happened with Meyer and Convexity.’’

Today, those managers continue to invest money for Harvard from the outside, and they are likely paid much more. Most hedge funds take an upfront fee of 1.25 percent to 2 percent of assets, and then they keep 20 percent of the profits they generate for their clients.

Endowments, pension funds, and wealthy investors have been increasingly willing to pay those big fees, in order to get access to funds that are supposed to beat the market and, most importantly, not lose money.

Globally, hedge funds control $2 trillion in investment pools that, broadly defined, do more exotic things than simple stock picking. They can pile heavy into a handful of securities, or bet that some stocks or bonds will fall; some trade heavily or use derivatives and other risky instruments. They often also borrow money to make even greater profits, a strategy that can also inflate losses.


New York remains the center of the hedge fund universe, with $760 billion, or 57 percent of the $1.34 trillion managed in the Americas, according to Absolute Return magazine, an industry publication. Massachusetts ranks fourth, after New York, Connecticut, and California. Bridgewater Associates of Westport, Conn., is the largest hedge fund firm, with $77 billion in assets ($120 billion total).

Up until recently the SEC did not require hedge funds to register unless they had more than 14 clients. A multibillion-dollar fund, with hundreds of investors, could be counted as a single client. The result: more than 60 percent of US hedge funds did not file paperwork with the SEC.

Under new rules imposed after the 2008 financial crisis, any hedge fund with more than $150 million in assets must register and file basic disclosure documents, providing information such as address, names of funds, any potential conflicts of interest, and how much foreign money they manage. It’s also possible to get a sense of how much leverage, or borrowing, they are using.

Some of Boston’s top 10 hedge fund managers have filed with the SEC for years, because they have other customers and businesses, like Wellington Management Co. and Bain Capital. The new disclosures offer more information about them, but still their precise hedge fund holdings require further digging.

Wellington, the silent giant that handles about $200 billion in Vanguard mutual funds for ordinary investors, reported that “up to 25 percent’’ of its $652 billion in total assets are possibly hedge funds. Of that, $11 billion is in hedge funds, according to Absolute Return magazine and undisputed by Wellington. The firm has 18 hedge funds with names like Bay Pond and Wolf Creek that often in the past have not been identified as Wellington entities.

Bain Capital, best known for its leveraged buyout deals and its founder, Republican presidential candidate Mitt Romney, also has become a huge player in hedge funds. The firm’s Brookside Capital oversees $7.5 billion in equity strategies, and Bain’s Sankaty Advisors runs $9 billion of its total $15.5 billion in assets in debt-related hedge funds. Romney has millions of his family’s wealth invested in both Brookside and Sankaty.

Beth Healy can be reached at