Yale Pulls Out of Fund It Helped Put on Map

LONDON -- Yale University helped Christopher Hohn build one of Europe's most successful and activist hedge funds. Now, Yale's $500 million investment and Hohn's firm are parting company, according to people familiar with the matter.

It is a split between a premier institutional investor in the burgeoning hedge-fund industry and a hedge-fund manager who has made returns most investors can only dream of. Since he started the Children's Investment Fund Management LLP, known as TCI, in January 2004, Hohn has more than doubled his clients' money.

Officials at Yale, in New Haven, Conn., were concerned that the $15.2 billion endowment's position in Hohn's fund had grown too large, these people said. Yale was instrumental in helping found Hohn's firm with a $200 million investment after Hohn struck out on his own from New York-based Perry Capital LLC, another hedge-fund firm.

Starting with a big commitment from Yale, one of the earliest and biggest proponents of investing in private partnerships such as hedge funds and private equity funds, the fund got a big boost.

An investment by Yale is seen as a seal of approval for a hedge-fund manager, and other big institutions often follow. Yale's initial outlay became $500 million in just over two years, thanks to Hohn's investments.

Yale spokesman Thomas Conroy declined to comment.

For Yale, which has the second-largest U.S. university endowment, trailing only Harvard, the split with TCI means it will be handed a big slug of money that needs to be reinvested. For Hohn, Yale's removal, while significant, isn't expected to have a huge impact on his $7.5 billion fund. The money probably will be easily replaced given Hohn's track record and the high appetite among institutional investors for hedge-fund investing.

Hohn irked at least some investors when he recently proposed an increase in fees for investors who had tied up their money with him for five years, these people said.

He informed his investors in late January that he planned to increase the fees he charges on the profit the fund earns. The increase would be retroactive to the beginning of the year. After some investor complaints citing the retroactive fee increase, the proposal was withdrawn, people familiar with the matter said.

Hohn's proposal would have raised the firm's take of profit earned to 16.5 percent from 13.5 percent for the investors who committed money for five years, these sources said. The bulk of TCI's money is in a pool that is locked up for three years and already has a 16.5 percent fee that wasn't part of the proposal.

Yale's departure from TCI was previously reported by Hedge Fund Alert, an industry newsletter.

The standard rate for hedge funds is a management fee of 1 percent to 2 percent of money invested, plus 20 percent of profit earned, and most funds allow investors to redeem their investments at least annually. Hohn's rates are lower, reflecting that hedge funds typically accept a lower rate for money that is committed for a longer period of time.

TCI's longer lockups allow the fund to take big positions in companies and hold them for a long time, weathering swings in share prices. TCI donates a portion of its fees to a related charity.

Yale's endowment is managed by David Swensen, who was a pioneer of investing in hedge funds and private equity firms. Yale credited its reliance on "nontraditional asset classes," which include hedge funds, for a 22.3 percent return on the endowment's investments in 2005.

The investment office has a target of putting a quarter of its assets into hedge funds and 17 percent into private equity funds, which are partnerships that use money raised from institutional investors and the wealthy to buy whole companies, improve their operations and later sell them for a profit.

The percentage of Yale's endowment given to hedge funds is higher than a 17.6 percent average among all educational institutions, according to Yale.