Last January, in Davos, Switzerland, at the World Economic Forum's annual gathering of heads of state, corporate titans, and other veterans of the global conference circuit, some of the most influential money managers on the planet met for a private dinner at the Sunstar Parkhotel. The event focused on a growing phenomenon in the high-stakes world of corporate finance: public companies "going private" to avoid the regulatory scrutiny and relentless short-term pressures of the stock market. In attendance was everyone from venture capitalists to CEOs, but many hailed from private equity firms—which specialize in buyouts of public companies—including David Rubenstein, a managing director of The Carlyle Group, an investment firm with $44 billion under management, and Stephen Pagliuca, a managing director of $40 billion Bain Capital.
Like most intimate confabs at the conference, the dinner wasn't expected to generate much controversy, or to compete for press coverage with just about anything uttered by Angelina Jolie, who was on hand in Davos as a United Nations goodwill ambassador. Toward the end of the evening, however, the collegial vibe took a turn: During an informal question-and-answer session, hedge fund manager Daniel Loeb—seated in the audience—began to criticize private equity firms for hoarding profits that rightly belong to public shareholders. While some attendees may have agreed privately with Loeb, those dinner guests well accustomed to the sanguine navel-gazing of business conferences were taken aback. In the pantheon of audacious acts, Loeb's behavior was akin to wearing an NRA T-shirt to a peace rally.
Of course, nobody who has followed Loeb's career was too surprised. As the founder and chief executive of the $3.6 billion New York-based hedge fund Third Point LLC, Loeb has developed a reputation as one of America's most outspoken and controversial investors. A self-styled successor to activists such as Carl Icahn and T. Boone Pickens, the 44-year-old California native takes large stakes in companies and then agitates for change through public, often hostile negotiations with management. He is known as Wall Street's poison pen—an epistolary assassin who employs words as ammunition against the top brass of corporations in which his fund invests. Witty in comparison with the mind-numbing style of most securities filings, Loeb's bons mots have attracted a cult following among analysts and money managers, who forward them like off-color jokes and post them on investing blogs.
Loeb's activist MO has been lucrative for Third Point, raking in an average annual return of nearly 23 percent since 2002, according to a former employee, well above the 7.7 percent average of HedgeFund Intelligence's Absolute Return Composite index, a leading benchmark. As one of the 100 largest hedge funds in the country, Third Point earned Loeb $150 million in 2005—landing him twentieth on the list of America's highest-paid managers in Alpha magazine, the bible of the kill-or-be-killed industry.
Increasingly, however, Loeb's brash style has put him at odds with some Alpha associates—and the saber-rattling that fueled his fortune now threatens to undermine him. The hedge fund community is under siege after operating in relative obscurity for decades. High-profile funds have been accused of crossing the legal line; the federal government is pushing for more oversight; and the media, once content with an occasional peek behind the curtain, is clamoring to tear it down. The glare has motivated some of Loeb's peers to adopt a level of secrecy not seen since the early days of the Cosa Nostra, and it's not necessarily paranoia: In 2003, hedge fund billionaire Edward Lampert was kidnapped at gunpoint while leaving his Greenwich office and held for nearly two days.
