Analysis: Titan's taste for small funds seen behind its SAC exit

Money manager Titan Advisors has decided that bigger isn't always better.

The firm, which manages about $3 billion on behalf of pension funds and wealthy individuals, has been shifting some of the money it invests with roughly two dozen hedge funds away from some larger funds into smaller ones, according to letters it has sent to investors.

One of the most noteworthy moves was its decision to pull its money from Steven A. Cohen's SAC Capital Advisors at a time when the $14 billion hedge fund is in the spotlight in an ongoing insider trading investigation.

The decision by Titan, a so-called hedge fund of funds, turned some heads on Wall Street because the firm's founder, George Fox, is a friend of Cohen's and his Port Chester, New York-based investment firm is one of SAC Capital's oldest outside investors.

But over a year ago, Titan began shifting some of the money it invests away from larger funds into smaller ones.

Titan is in the process of redeeming money from Bill Ackman's $11 billion hedge fund firm Pershing Square Capital Management, and in 2011 pulled all of its money out of $34 billion Brevan Howard Asset Management, one of the world's largest funds, according to the investor letters. Reuters reviewed 11 letters sent in the past two years.

Titan recently allocated money to GS Gamma, a New York-based fund with less than $1 billion under management, and BHR Capital, also in New York, with roughly $1.5 billion in assets.

Titan, according to a person familiar with the firm, had between $75 million and $100 million invested with SAC Capital.

Officials with Titan, who declined to comment, have not yet sent investors a letter explaining their decision to redeem from SAC Capital. The decision to exit, which investors were notified of in late December, came a few weeks after Mathew Martoma was charged with insider trading while working for Cohen's firm. He has pleaded not guilty.

Altogether, seven current and former SAC employees have been charged or implicated in the insider trading probe into hedge funds and their sources of trading tips, and the firm itself - along with the 56-year-old Cohen - has been drawing renewed scrutiny. Cohen has not been charged with any wrongdoing.

Over the past year, Titan has told investors it is concerned about the ability of large hedge funds, even ones it has invested with for a long time, to continue outperforming the markets.

In a March letter reviewed by Reuters, Fox said the firm is "maintaining a preference for smaller managers" because over time "bigger size threatens performance." He added: "A central part of ongoing due diligence is asking ourselves, 'Are the best days ahead for this manager?'"

Last year, SAC Capital's flagship fund was up 12 percent, compared with a meager 3.17 percent gain for the average hedge fund. But SAC Capital, which charges some of the highest fees in the $2 trillion hedge fund industry, lagged behind the 13.4 percent gain posted by the S&P 500 index.

Pershing Square also was up 12 percent in 2012.

Officials with SAC Capital, Pershing Square and Brevan Howard declined to comment on Titan's move.

The redemption from SAC Capital comes as Titan's own performance has been modest at best. Last year, the firm's flagship fund of funds was up 6.97 percent through the end of November, said a person familiar with Titan. In 2011, the fund was largely unchanged.

Titan would not be the first money manager to lose an appetite for large multi-billion dollar hedge funds. The $242.7 billion California Public Employees Retirement System, one of the biggest pension funds in the world, has long had a taste for smaller, less well-known hedge funds.

Some industry analysts have noted that as hedge funds get bigger it becomes more difficult to generate the same kind of returns they delivered when the funds first launched and were smaller.

Some experts said they thought the insider trading scrutiny may still have played a role in Titan's SAC decision.

"On the face of it, it sounds like they were being very proactive in pulling out of SAC, but there may have been other reasons at work too," said a person who advises hedge fund investors and is familiar with Titan Advisors.

Federal authorities left little doubt they were moving significantly closer to Cohen when they arrested Martoma in November and charged him with using inside information to generate profits and avoid losses totaling $276 million in shares of two drug stocks, Elan Corp PLC and Wyeth, now owned by Pfizer.

Federal authorities said Cohen, as owner of SAC Capital, signed off on the trades, even though the billionaire manager wasn't charged with any wrongdoing.

Ever since SAC's name first arose in the insider trading probe several years ago, Fox has been loyal to Cohen.

At the end of 2010, Titan quit Loch Capital Management, one of four firms raided by federal authorities in November of that year, but it stuck with SAC Capital even after the hedge fund acknowledged getting a subpoena for information.

For now, Titan's redemption from SAC Capital does not appear to be setting off a run for the exits by outside investors, who account for $6.3 billion of SAC's money (the rest is owned by Cohen and other insiders, such as employees).

(Reporting By Svea Herbst-Bayliss; editing by Matthew Goldstein, Martin Howell and Leslie Adler)