The recent events at Amaranth Advisors (market loss of $6.5 billion in the month of September) and Pirate Capital (lost half of its investment staff last week) have investors (and their fiduciaries) particularly on the look-out for other potential hedge fund crises. According to this story on Dealbook, fiduciaries are now spending their days "fielding tough questions such as 'Do you have any idea what these managers actually do?'" Partly as a result, market participants are atwitter when changes are announced at other uber-buzzed-about hedge funds.

Eton Park Capital Management LP is the latest hedge fund to be the focus of buzz and rumors as a result of the announcement that its chief operating officer, Stuart Handel, is returning to Morgan Stanley in early 2007 to head up that firm's global prime-brokerage business, which is one of the premier businesses on Wall Street catering to hedge funds. Prior to helping start Eton Park in late 2004, Mr. Handel had been the co-head of Morgan Stanley's United States prime-brokerage operations. Clearly, this is a major promotion over the position he held previously at Morgan Stanley. The market is abuzz, though, about why such a senior executive might leave the hedge fund started by former Goldman Sachs whiz kid Eric Mindich.

Is there something wrong at Eton Park people are asking? The short answer is probably not. As this Wall Street Journal article explains, "Eton Park's performance this year hasn't been stellar -- the firm is up around 7% for the year to the end of September, according to people familiar with the matter. Last year, the firm was up 13%, these people say." Assuming that the $5.5 billion Eton Park hedge fund charged all investors the typical industry fees of a 2% management fee plus 20% of the profits in excess of some bench mark (like T-bills return), the fund would be expected to have approximately $120-$150 million in total management company revenues for the year [$5.5 billion times (2% fee plus ((7% return minus ~5% risk free rate)* 20%))].

As the WSJ explains, Eton Park under "operating chief, Mr. Hendel built up a state of the art infrastructure for Eton Park's founder, Eric Mindich, formerly of Goldman Sachs Group Inc., including a large back-office team to make sure trades were processed smoothly." The people and systems for such a state of the art infrastructure are expensive both to create and then as an on-going expense. As a result, a significant portion of Eton Park's gross revenues probably are dedicated to "meeting the yearly nut" and there is not a significant amount of money to spread around among the founders (partners), traders, quants, marketers and various support functions. With Wall Street having one of its best years ever, compensation for those at the top of the pyramid is likely to be near record levels and probably more than even a prominent hedge fund like Eton Park can pay this year.

This explanation may help to explain why there have been several high-profile defections from Eton Park this year. "In recent months, Mr. Mindich has lost four of his staffers, including Scott Prince, his head of trading and derivatives; his chief risk officer, Chris Perez; and his chief European derivatives trader, Nagi Bedwani."

The Dealbook article concludes with information about who will be succeeding Mr. Handel as Eton Park chief operating officer. The article states:

An October 3 letter from Mr. Mindich to Eton Park investors indicated that Marcy Engel, Eton Park’s general counsel and chief complaince officer, would take over Mr. Hendel’s responsibilities, while remaining general counsel.

“Eton Park’s strong commitment to controls and infrastructure has been a key pillar of our firm and I know that Marcy shares this commitment and is exceptionally well qualified to further our initiatives in this area,” Mr. Mindich wrote.

Ms. Engel was formerly the head of planning and operating risk for Citigroup’s fixed income division. Prior to that, she was general counsel at Salomon Smith Barney where she ran the legal and compliance departments for Citigroup’s global corporate and investment bank — a job that likely kept her extremely busy.

Toomre Capital Markets LLC wonders what the actual monthly nut is for a large hedge fund like Eaton Park. Without knowledge of the total headcount for the entire operation, it is hard to even estimate and we welcome comments that include more details about the cost of operations. Is the 'nut only $5 million per month or is it approaching $10 million per month? Thoughts and comments are welcome.