Backing Cruise Could Be a Risky Business (No Schiesse, Sherlock)

During an internal presentation on film financing last year, Merrill Lynch & Co. executives entertained employees with the famous video of actor Tom Cruise manically bouncing on Oprah Winfrey's couch as he sang the praises of his new girlfriend.

Amid the laughter, recalls someone who was in the room, Michael Blum, Merrill's head of structured finance, asked: "How does one hedge that risk?"

It's a question many hedge-fund managers may be asking now that Cruise's rich production deal from Paramount Pictures has been abruptly severed by Sumner Redstone, chairman of Paramount's parent company, Viacom Inc. In the wake of the move this week, Mr. Cruise and his production partner, Paula Wagner, say they will finance future films with money raised from unnamed hedge funds.

That's a rich vein to tap into: More than $4 billion in new movie financing has poured into Hollywood from hedge funds and other institutions recently. Outside financiers ranging from hedge fund Stark Investments to the private-equity arm of Bank of America Corp. have put large sums of money into movie slates at studios including Time Warner Inc.'s Warner Bros. and News Corp.'s Twentieth Century Fox.

But even as Cruise and others talk of winning some of that money, there are signs the trend is cooling, as Hollywood's newest investors learn about the risks that for decades have dealt hard lessons to other would-be movie moguls.

Earlier this year, Stark Investments, a St. Francis, Wis., hedge fund that manages about $9 billion, parted ways with the executive who ran its film-financing vehicle after several movies it had backed, including "Poseidon" and "V for Vendetta," failed to generate attractive box-office returns.

Another newcomer, Legendary Pictures LLC, backed among other sources by private-equity money, has drawn scrutiny early in its effort to produce 25 movies in five years given disappointing performances for investments including "Lady in the Water" and "The Ant Bully." Earlier this year, meanwhile, an ambitious effort known as Hemisphere, which sought to raise roughly $800 million for a pair of producers for big-budget movies, failed to come together.

Given such difficulties, the question is: Will investors be willing to back a single -- and sometimes volatile -- producer like Mr. Cruise? From "Risky Business" to "War of the Worlds," the actor's movies have generated billions of dollars of revenue over his 25-year career. But Mr. Redstone told The Wall Street Journal this week that the star was dumped because his sometimes outlandish behavior -- including publicly campaigning for the Church of Scientology, of which he is a member, and against psychiatry and antidepressant drugs -- was believed to have cut into his last film's box-office performance.

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