D.E.

Shaw gives special access to its biggest investor Blackstone

and it shows the power of large investors
businessinsider.com/de-shaw-blackstone-2019-3

Bradley Saacks 5m

Sources say $50 billion quant D.E. Shaw's preferential treatment of its biggest
investor, private equity giant Blackstone, leads to the fund getting special access to
internal and one-off funds, as well as reduced fees.
The relationship between the two is reflective of a growing industry reality that
hedge funds — even industry titans like D.E. Shaw — are becoming much more
responsive to, and dependent on, their biggest investors.

Every hedge fund — even the biggest firms run by celebrity investors — is most
concerned about one thing: Keeping its biggest investor happy.

For $50 billion quant fund D.E. Shaw, that means giving its biggest investor — private
equity giant Blackstone —preferential treatment, according to several sources inside the
manager.

Blackstone is the largest hedge fund investor in the world, with more than $78 billion
invested in hedge funds as of the end of 2018, so it pulls weight across the hedge fund
world. And it's unclear exactly what percentage of D.E. Shaw's assets are owned by
Blackstone, since the private equity giant has invested across multiple products.

But Blackstone's preferential treatment at D.E. Shaw, ahead of other large consultants
and institutions, has raised eyebrows at the firm, sources day. A source inside D.E. Shaw
said there was a huge difference between even how it treated Blackstone compared to
Goldman Sachs, which several insiders view as the firm's second-most important
investor.

"It's like Blackstone is number one (in importance), Goldman is number five with no one
in between, and everyone else is way, way below that," one source said.

The special treatment includes creating a special fund with reduced fees just for
Blackstone and offering access to several other exclusive funds, such as a product known
as Asymptote that D.E. Shaw insiders have referred to as the firm's version of
Renaissance Technologies' famed Medallion fund.

"They gave Blackstone a look at anything special they do," another source inside D.E.
Shaw said. "They always got the first look."

The window into D.E. Shaw's treatment of its biggest investor shows the leverage the
hedge fund industry's largest investors have — and how they are using it. With
thousands of hedge funds out there and poor performance plaguing the entire industry's
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reputation, large investors have put their size to work to get more customized products
from managers while demanding lower fees.

"You've seen the Billionaire David Shaw's hedge fund's biggest investor is Blackstone.
maturation of the Crain's New York
business push hedge
funds and alternative investment managers to segment their investors," said Jonathan
Doolan, principal at Deloitte's Casey Quirk, speaking about hedge funds in general.

Every investor "always wants a little bit more" from a hedge fund, Doolan said, but "they
understand the pecking order."

Don Steinbrugge, CEO of hedge fund consultancy AgeCroft Partners, said hedge funds
will often tier their investors by the amount of assets invested, and service them
accordingly.

"The largest clients might be serviced by the head of the firm, and the smallest will meet
with IR," he said. While many investors have to travel to the hedge fund to meet, for the
biggest investors, portfolio managers will go to them, he said.

A representative for Blackstone declined to comment. A representative for D.E. Shaw

declined to comment about specific investors or fees.

See more: Hedge funds went from a niche market to a $3 trillion titan, but became a
victim of their own success thanks to their biggest investors

Asymptote, which filings say is made up of roughly 70% internal assets and launched in
2012, has a minimum outside investment of $1 million, and sources say Blackstone is
consistently the only outside investor in it. Marketing and investor relations staff, sources
say, were once told not to bring up the fund with other investors.

A source familiar with the firm's thinking said that when the firm launched the fund, all
investors were notified in a conference call and by writing, and that various external
investors have been in the fund. The source said the fund is currently at capacity and
closed to new investors.

The exclusivity of the fund is obvious in its size, strategy and investor base — it's the
smallest product the firm has by assets, the source said, and it's quant strategy is
different than the quant strategies offered in the firm's larger funds. A majority of
investments by D.E. Shaw employees are made in funds other than Asymptote, and the
majority of its quant strategies are conducted outside of that fund, the source added.

The performance of Asymptote is unknown, but several sources say the fund is "some of
the best stuff at D.E. Shaw." Current and former employees at D.E. Shaw say even most
employees at the hedge fund are not able to invest in the fund.

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In funds with other investors, Blackstone pays the same fees as everyone else, sources
say. However, D.E. Shaw created one fund specifically for the private equity giant in 2010,
known as Composite Graphic, which is a version of the firm's popular Composite strategy
without the most illiquid investments in the fund's portfolio.

It gave its largest investor a discount — not a massive one — but other investors say they
weren't aware that D.E. Shaw was willing to lower the 2.5% management fee and 25%
performance fee that it charges for the overall fund for Blackstone. It was also internally
significant, sources say, because "dozens" of other investors have asked for fee
discounts or specialty funds — and been rebuked by D.E. Shaw.

All investors are aware of the Composite Graphite fund and were told about it when it
was created, one of the sources said.

However, a June 2011 public due diligence report by consultant Cliffwater for the Rhode
Island Employees' Retirement System plan lists out all the different funds offered by D.E.
Shaw — including another fund that had been started in 2010 — except for Composite
Graphite. Sources say the firm had never made a fund for a single investor like
Composite Graphite before it did for Blackstone.

See more: Investors are asking hedge funds to move to a '0-and-30' fee model, and it's
putting pressure on a big chunk of the industry

The Rhode Island pension plan declined to comment. Cliffwater did not return requests
for comment.

Blackstone was one of the few investors given access to a special opportunity fund in
2013 that focused on energy and oil stocks. Sources inside the firm say that every
investor was told about the fund, but a majority of investors were not able to actual
invest in it. The fund ended up generating annualized returns, net-of-fees, of roughly 12%
from 2013 to 2016, when it was liquidated, sources say.

It was also reportedly the first investor in Arcesium, the back-office company D.E. Shaw
spun off in 2015.

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