Chesapeake Partners Shuts Down Citing Government Regulation

Chesapeake Partners, a $1.4 billion hedge fund that bet on special situations including mergers, bankruptcies and spin-offs, is shutting down after an 18-month stretch of losses, as it blamed government regulation for making investing tougher.

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Founders Traci Shanbrun Lerner and Mark Lerner, in a June 27 letter to investors, which was seen by Reuters, criticized the U.S. government for helping undo Pfizer Inc's bid for Allergan Plc through new rules to oppose tax inversion deals where companies move abroad to cut taxes.

Chesapeake has suffered losses this year on Allergan and other companies whose planned mergers were delayed or abandoned, including Office Depot Inc and Teva Pharmaceutical Industries Ltd.

"From that moment, it has not been possible to invest in pending mergers in the same way," the husband-and-wife pair wrote.

"We find ourselves in an investing environment that has become progressively more hostile and undiscernible," they added.

Chesapeake is the latest hedge fund to close down, following in the footsteps of George Soros, Carl Icahn and Stanley Druckenmiller, who turned their firms into family offices as regulatory burdens grew. In the past 12 months more funds shut down than started up, according to data from Chicago-based Hedge Fund Research.

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The Lerners said they are returning clients' money to manage only their own.

The Lerners, in the letter, also criticized restrictions on banks for making it tougher and more expensive to run a hedge fund and said political gridlock will make investing even more difficult.

For decades, the pair, who work in Baltimore and keep a low profile in Wall Street circles, boasted some of the hedge fund industry's best returns. Their fund gained an average 14 percent a year since its launch in 1991. The Standard & Poor's 500 index climbed an average 9 percent during the same period. The fund returned 47 percent in both 2013 and 2009.

But the past 18 months have been tougher for Chesapeake, with the fund losing 13 percent in 2015 and dropping 8.2 percent in the first five months of 2016.

At the same time, the Lerners worried that capital requirements at banks, for example, hurt smaller firms because banks will no longer loan money or clear trades for anyone but the biggest hedge funds.

"Managers without scale cease to be worthwhile customers, increasingly denied access to the services of the major Wall Street firms," they wrote.

Bloomberg first reported Chesapeake's plans to shut down.

(Reporting by Svea Herbst-Bayliss; Editing by Leslie Adler)