SAC Indictment Marks End of an Era

NEW YORK ( TheStreet) -- I suspect that the indictment of SAC Capital Advisors is a bigger story than we think.

It's not the substance of the charges, or the personalities involved, that have me thinking that.

I just think that the era of the personality-driven hedge fund may be ending. Or this version of it, anyway.

It's been a great ride. Hedge funds have been around since the 1960s. Most of the early successes, such as Julian Robertson's Tiger Fund, were based on a specific strategy. (The Tiger Fund closed in 2000.)

What has changed in this century has been the rise of the personality-driven funds, like SAC. It's not the strategy that matters here, but the man in charge.

Hedge funds turned formerly mild-mannered mutual fund managers into masters of the universe. Steven Cohen himself is a good example. He looks like an accountant, but he has become a billionaire many times over, capable of making Fortune 500 CEOs quake in fear when he moves on them.

Guys like Cohen became billionaires, in part, through a quirk in the tax law. They get a piece of everything their companies earn, but it's all capital gains rather than salary. Carried interest and management fees can reach into the seven digits per year. Their tax rates are also lower than yours. And they have amassed the political power to protect that status.

I know: The government also thinks Cohen got rich through insider trading. Our Antoine Gara thinks losses in re-insurance, made in the search for yield, could come back to bite the company.

There are lots of Cohens around now. They're on TV all the time. They're swashbucklers with lavish lifestyles, big men who make big bets. Smaller investors follow them like schools of fish after a shark. Guys like Bill Ackman of Pershing Square Capital Management and Daniel Loeb of Third Point LLC make news when they place their bets, and are treated like the financial equivalent of TMZ superstars.

But beyond the indictment, there are indications that the days of the big swinging hedge fund manager are fading into the past. Moore Capital Management's Greg Coffey, an Australian known as the "Wizard of Oz," retired last year at age 41. Many investors have found they can get better returns with funds based on software algorithms.

As baby boomers retire -- and we're retiring in car-load lots these days -- our goals shift from capital gains to income, and for these investors there's now a better deal, the Master Limited Partnership.

Many real estate and energy investments are now set up as MLPs. MLPs have tax advantages and can throw off spectacular rates of dividends.

Breitburn Energy Partners ( BBEP), an oil and gas MLP out of Los Angeles, presently yields more than 10%. Annaly Capital Management ( NLY), which invests in mortgages and related instruments, currently yields more than 13%.

Some analysts, like Shane Brett of Global Perspective in the U.K., are calling this the "end of the gilded age." They say that competition from things like MLPs, new rules on compensation, and returns on exchange-traded funds are sunsetting the "big man" fund.

During the age of the gangster picture, in the 1930s, Hollywood required that the main character get it in the end. James Cagney's Public Enemy was trussed up like a mummy and left on his mother's doorstep. Edward G. Robinson's Little Caesar was shot in the street and asked, "Is this the end of Rico?"

What we've learned is that when one movie ends, another one starts. Trends change, but the desire for yield, and for someone to personify yield, abides. There will be more Steven Cohens, regardless of how his firm's current troubles end. We all need to believe there's a hero out there for our money, someone who will make us rich while we watch.

At the time of publication, the author had no investments in securities or companies mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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