Other alumni who got involved in hedge funds two decades ago are now spending more of their time in management roles. Alan Winters WG’84 joined Kingdon Capital in 1986. More recently, as chief operating officer, he has been more involved with the management and oversight of the firm.
Kingdon Capital invests in the technology, health-care, and consumer industries, in particular. “We find out how good the company’s products are, what their business model is, and we pay attention to valuation and the technical details of the firm,” he says. “We see ourselves as a fundamentally based investment shop, where we might use quantitative tools from time to time.”
Howard I. Fischer W’81 was one of several managers who had a lawyer present, and often was not able to comment on specifics regarding his firm’s structure and fields of investment. Intense and somewhat guarded, he was mostly amenable to making broader comments on the nature of the private fund industry.
Fischer arrived at Wharton in the fall of 1977 to learn about trading in the markets; he majored in finance and accounting. After graduation, he worked for a large brokerage firm for 12 years, then saw an opportunity to start his own small hedge fund in Stamford, Connecticut. He has been with it since 1993.
For Fischer, a typical day consists of leading meetings with an administration team to run the business side of the fundincluding investor relations, actively managing the trading portfolio, and making trading decisions. “I spend a lot of my time actively trading and directly interacting with the people involved in executing ideas and coming up with trading decisions,” he explains.
Hedge-fund investment strategies vary as widely as the backgrounds of the managers cultivating them. Asness’ office in Connecticut has dozens of computers and a gigantic server that is constantly running calculations of quantitative models in search of undervalued and stalled growth stocks.
“At AQR Capital, we apply quantitative and statistical models, gigantic reams of computer code and algorithms, to apply financial theory to try to make money,” says Asness. “It is one of the cleanest examples of the M & T [Management & Technology] type programwhere, without computer or mathematical skills, we would be like everyone else. We would be guys who know about stocks trying to pick stocks, but we’re not. We’re modelers. We are applying more of a scientific method to the finance side. The models are still evolving and growing, and we revise them every day.”
Asness guides the research process and is involved with every research decisiondeveloping and revising the computer models, and giving ideas to younger managers, who use the models to test them. He also oversees the models to make sure that they are providing an accurate reflection of the broader changes in the market. He has published widely in journals, including the Journal of Portfolio Management, on topics addressing policy issues on the overvalue of various markets, the necessity of expensing options, the future of hedge funds, and their relationship with other areas of the market.
“There’s a huge trend toward investing in hedge funds in the past decade,” he says, “but it’s an ebb and flow like anything else.”
Other managers who studied at Wharton approached investing with a more qualitative model. Barry Coffman W’81, whose Boston-based Boldwater Capital fund focuses mostly on high-yield bond markets, spends his day looking for mispricings or misevaluations within a company. When he finds one, he either trades on an attractive return or short-sells it. The fact that he is working for his own company gives Coffman far more options to buy and sell securities.
“You have a greater role in influencing performance of that equity,” Coffman says. “The entrepreneurial spirit exists. There is greater control, as you have the freedom to invest how you want in a way that you want it to be done.”
Jacob Doft W’91 founded his own investment firm, Highline Capital Management, in 1995. “I did not want to be an investment banker or a consultant, advising people how to invest money,” he says firmly. “I wanted to be a principal, where I would invest my own money and others’. I started my firm because I loved investing in the marketand this was the most interesting, original way to do it.”
Doft’s firm does long/short U.S. equities, mostly focusing on companies going through important transformational changes. They conduct their research by visiting and talking to companies on the phone, and brainstorming ideas in staff meetings.
“We have more of a qualitative approach for investing in good businessesthat is, companies that are improving themselves,” he explains.
“I have been involved in investing for 20 years, and it always surprised me that more institutions did not get involved in hedge funds earlier,” Howard Fischer says. “Hedge funds provide an opportunity for people to invest in more talented managers, in areas of the marketplace that were not typically accessible to the mutual-fund manager.” Given that the hedge-fund industry keeps attracting the best and brightest financial managers working in the market today, Fischer observes: “I would be surprised if that trend does not continue.”
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©2006 The Pennsylvania Gazette
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FEATURE: Betting Their Hedges