Hedge funds did not really take off until the 1980s, when such legends as Michael Steinhardt W’60, George Soros, Julian Robertson, and Michael Milken WG’70 epitomized the extreme risk-taking nature of investing in hedge funds. Steinhardt actually formed his Steinhardt Partners in 1967 and went on to earn billions—then, following some losses in the market, abruptly closed his fund in 1995 to devote his time and fortune to his Jewish Life Network/Steinhardt Foundation. He chronicled some of his financial feats in his 2001 autobiography, No Bull: My Life In and Out of the Markets [“Briefly Noted,” Jan/Feb 2002].

In the mid-to-late 1990s a new generation of money managers emerged, inspired by Steinhardt’s success in the financial markets but determined to invest on their own terms. Asness and Daniel Och W’82—who left larger investment houses like Goldman Sachs and Morgan Stanley to start their own funds, AQR Capital and Och-Ziff Capital, respectively—are among the Penn alumni who have played prominent roles in the success of this new wave of hedge funds. (So have certain educational institutions, including Yale University, which sought out these firms early in their development and put significant percentages of their endowments in the hands of superstar investors.)

While Och politely declined to be interviewed for this Gazette article, several other managers agreed to talk, though they often had legal counsel present during interview sessions or requested to review quotes before the article came to print.

Their backgrounds are as diverse as their investment strategies. While most studied finance, computer science, or accounting as undergraduates (taking courses in portfolio management and speculative markets), and about half received MBAs, they entered the industry from a broad range of professional backgrounds. Most hedge-fund managers who left larger banks to start their own firms cited the potential increase in salary and the desire to be their own boss as their primary reasons for leaving.

Asness, for example, entered Penn’s Jerome Fisher Program in Management & Technology in the early 1980s. He originally focused on computer engineering and mathematics, and expected to go to law school.

“I was exposed to computer engineering, discrete math, computational math, speculative markets, options, futures, derivatives, and portfolio theory at Penn,” he recalls. “Back in the ’80s, my dad and I thought that combination of the finance and engineering programs was perfect for the future.”

Having particularly enjoyed the theoretical side of finance, Asness enrolled in a Ph.D. program in economics at the University of Chicago, picking up an MBA there on the side. His studies at Penn and Chicago helped him develop his own theories on efficiencies in the market and quantitative models for investing. While working on his thesis, he joined Goldman Sachs’ asset-management group, applying quantitative techniques to a much broader set of decisions, and soon began investing in world bond markets and even currencies. Yet it wasn’t long before he became restless.

“Goldman was a huge place,” he points out. “I had a tremendous desire to be my own boss; focus on research, writing, and trading; and be more entrepreneurial. I used to work on writing papers on models, and now I get to write on policy.”

After Barry Friedson EAS’90 GEAS’90 graduated from Penn with a B.A. and master’s in computer-science engineering, he went to work for the aerospace industry. He credits his finance classes at Wharton with (belatedly) inspiring him to go back to graduate business school at NYU and earn his MBA after he observed the aerospace industry go into decline. Having studied emerging markets at NYU, he worked as a data provider at Lawrence Capital, a standard mutual company, and is now vice president for hedge-fund technology with Deutsche Asset Management in New York.

“I left to work at a hedge fund because I wanted to get exposed to many strategies: stressed debt, long/short selling, and arbitrage,” Friedson recalls. “It was definitely an opportunity to learn more.”

Friedson directs the building and development of the quantitative model and the trading application for his firm’s funds. He has built a number of portfolio optimizers (computer programs designed to select the best portfolio for a client in terms of risk and reward), which the managers use to make their investment decisions.

“We do both single manager in-house funds and funds of funds,” Friedson explains. (Funds of funds allow individuals to pool their investments over a larger group of money managers, which means they can enter the hedge-funds game with a lower level of income and wealth than those who invest in other funds.)

When Robert Bliss W’82 came to Wharton in the late 1970s to learn about finance, there were no courses in alternative investing. After a stint at Merrill Lynch, he worked for his family business in chemical manufacturing for 10 years. After his family sold the company in 1996, Bliss, who had accumulated some capital from the sale, pondered his next move.

“My feeling was to allocate a large amount into hedge funds and learn about the quantitative strategies needed to beat the market,” he explains. Bliss soon developed a technical, model-driven strategy; tested it with his own money, then with his friends’ and investors’ money; and finally, after developing a successful track record in the industry, brought in outside investors. At his firm, Windmill Capital in New York, hedge-fund managers invest in a wide range of funds.

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Last modified 08/31/06

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FEATURE: Betting Their Hedges
By Aaron Short

Sept|Oct 06 Contents
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