For anyone who traded in the 2003-2007 interval (second liens what else - did anything else even trade in that period), the name DB Zwirn was synonymous with hedge fund perfection. In fact, the only name that stood above it was that of Phil Falcone's hedge fund Harbinger. Gradually, both of these high fliers were replaced in the awestruck trader lexicon with another "legendary" hedge fund, that of Paulson & Co. But for a brief period the Zwirn offce at 745 Fifth is where every fixed income trader wanted to reside. Yet as always happens, anything that is too good to be true, isn't. Below is William Cohan, who in a way that only he can, spins the tale of the the rapid rise and even more rapid fall of the hedge fund manager who had it all by his thirties, only to lose it (mostly) all shortly thereafter.
Dan Zwirn’s Hedge-Fund Fall Is a Horror Story of Doing Right, by William Cohan
On the lengthy list of things Dan Zwirn has lost, a few items jump out. There's the $17 million condo on Central Park South, the summer place in Quogue, N.Y., and the $18 million Gulfstream IV jet. Then there's D.B. Zwirn & Co., the hedge fund that once managed $12 billion in assets, employed 275 people in 14 global offices, and created the roughly $700 million in personal wealth that made so many of Zwirn's spectacular purchases possible. Zwirn, 40, misses his money and the things it afforded him. But what he misses most, he said, is his "beautiful machine."
That's Zwirn's term of endearment for his now-defunct hedge fund. The beautiful thing about it was its discipline. D.B. Zwirn abstained from the directional or leveraged bets that other hedge funds make. Instead the firm provided capital to about a thousand companies with few other financing options -- companies such as a small New York-based Spanish-language radio group and a company that leased slot machines to casinos on Indian reservations. The one and only strategy was to learn everything about the prospective borrowers, figure their odds of repayment, crank up the interest rate to the proper pain point, and grind out 1 percent a month in profits.
For 49 straight months, Zwirn, who aspired to be the hedge fund world's scrappy singles hitter, got paid like a home run champ. The D.B. Zwirn Special Opportunities Fund had gross returns of 21.8 percent in 2003, 21.6 percent in 2004, 18.9 percent in 2005, 24 percent in 2006, and 16 percent in 2007. As machines go, Zwirn's was a Ferrari.
Kafkaesque Fight
Seated behind the desk in his personal office in midtown Manhattan, Zwirn, who's built with the compact force of a small linebacker, reaches for what have become the most prized possessions of his new life: two Lucite tombstones. They could be from any number of deals he did in his early career as an investment banker and private equity investor. Instead, each contains a replica of a letter from the Securities and Exchange Commission. The first, dated Feb. 23, 2011, absolves Zwirn -- after a four-year investigation -- of any personal blame for the implosion of his firm. The second, dated April 7, 2011, clears D.B. Zwirn of any wrongdoing. This past summer, Zwirn settled most of the outstanding civil litigation against him. "For the first time in five years, I have not been thinking of catastrophic personal downside," he says, managing a faint smile.
After a Kafkaesque fight with his firm's auditors, PricewaterhouseCoopers, and the SEC, Zwirn said the tombstones give him hard-won proof of his innocence. What the letters can't restore are his firm or the roughly 98.6 percent of his fortune that vanished over the past five years. They also don't say that he's without his share of responsibility.
Gulfstream Loan
In April 2005, Zwirn decided he needed a Gulfstream IV. He was 33 and the boss of a rapidly growing global financial behemoth. He didn't ask anyone's permission. He just gave the order, and it fell to Harold Kahn, the fund's chief operating officer, to arrange the financing.
Merrill Lynch agreed to provide 90 percent of the $18 million purchase price on a non-recourse basis and required only a $1.9 million letter of credit from Zwirn's management company to close the deal. Citibank initially agreed to provide the letter of credit; after a series of delays in obtaining the Citi loan, Zwirn still needed $3.8 million in September 2005 (including cash collateral) to meet what Merrill required to get the jet. For a firm the size of D.B. Zwirn, it was a tiny sum. Zwirn could have just written a check, but that's not particularly creative or cost-effective for a specialist in the art of using other people's money. In any event, Zwirn says he was not aware that difficulties had emerged in getting the final piece of financing.
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