Institutional Investor's Alpha Magazine - December 2007/January 2008 - (Page 22)

Marathon Asset Management F OR LOUIS HANOVER AND BRUCE RICHARDS, CO-FOUNDERS OF NEW York–based Marathon Asset Management, the subprime market meltdown has been a little frustrating. To their credit, Marathon, which manages more than $10 billion in hedge funds and employs 165 people, escaped the carnage. Its ﬂagship $3.1 billion Marathon Special Opportunity Fund, which invests in high-yield bonds, bank debt and other potentially distressed securities of companies in the midst of bankruptcies, restructurings or turnarounds, was up 6 percent in 2007. Even the $1.7 billion Marathon Structured Finance Fund, which and take advantage of potentially huge opportunities created by turmoil has deﬁ ned the ﬁ rm since Richards and Hanover launched their ﬁ rst fund in 1998 with just $17 million to invest in emerging markets and global credit. That year, in the wake of the Asian ﬁnancial crisis, they managed to break even — a triumph of sorts as many emerging-markets hedge funds suffered huge losses and went out of business — setting themselves up to take advantage of the big run-up in emerging-markets debt in 1999, the year they launched the Special Opportunity Fund. Similarly, they started the Global Convertible Fund in 2001 to capitalize on the increased volatility in equities that year and complement the ﬁrm’s other strategies, acknowledging that convertible bonds represent an important part of many companies’ capital structures. Both funds were up more than 20 percent their ﬁrst year. “Marathon is very good at seeing opportunities when there are very significant dislocations out there,” says Mark Yusko, president and CIO of North Carolina– based Morgan Creek Capital Management, whose clients are invested in several Marathon funds. “They look at markets others are afraid of at a particular time or don’t understand. They seek out complex markets where larger teams can get an edge.” Today, Marathon manages $10.7 billion in six hedge funds, as well as $3 billion in leveraged ﬁnance transactions such as collateralized debt obligations and collateralized loan obligations. Hanover, the chief investment ofﬁcer, is also head portfolio manager of the Special Opportunity Fund. CEO Richards crafts the overall strategy, develops the business lines and new funds and their investment strategies, and is the public face of Marathon, meeting with current and prospective investors. He also sits on the investment committee with Hanover and global head of investment management Richard Ronzetti. Outsize investment returns are not the objective at Marathon. Instead, Hanover and Richards seek to provide an attractive absolute and risk-adjusted rate of return for their more than 450 investors, almost all of which are institutions. Consistency is paramount. Marathon’s funds have delivered double-digit annual returns — typically in the 12 to 20 percent range — virtually every year of their existence. “Looking out over a decade, we don’t think every strategy will provide great opportunities every year,” says Hanover, 42, who is known for being laid-back and able to ask probing questions without being threatening. “So we must have a full game.” “Marathon is very good at seeing opportunities when there are very signiﬁcant dislocations.” specializes in asset-based lending — one of the hardest hit parts of the market — managed to stay in the black, up about 2 percent. But as Hanover and Richards readily concede, they missed a golden opportunity to make considerably more money for their investors by aggressively shorting the subprime market as the crisis was unfolding. And when Marathon ﬁnally did start shorting subprime issues, they were too quick to cover their positions, spooked by the spikes in volatility. “It was a disappointing year for us,” says Richards, who acknowledges that Marathon initially underestimated the degree and depth of the credit contagion. “But we lived to play another day.” For R ichards and Hanover, friends since they met in the ﬁ xedincome department at brokerage firm Smith Barney in the mid’90s, investing truly is a marathon, — MARK YUSKO, PRESIDENT which demands discipline and enAND CIO, MORGAN CREEK durance. Richards and Hanover CAPITAL MANAGEMENT have largely run the race in silence. Last summer, however, they agreed to a series of interviews with Alpha, even as the ﬁrm was going through one of its toughest years. Despite Marathon’s inability to take full advantage of the opportunities at the start, the subprime crisis could represent one of the next great legs of the race for Richards and Hanover. Late last July, they ﬁred off a letter to existing and prospective investors to gauge interest in a new vulture fund that would buy up troubled subprime loans, asset-backed securities and collateralized debt obligations on the cheap. Andrew Rabinowitz, the ﬁ rm’s president and CFO, worked long hours to get the fund up and running in just one month, about one third the time normally required to launch a new offering. When the Marathon Distressed Subprime Fund debuted on September 1, Hanover and Richards had exceeded their goal of raising $250 million to $300 million; by year-end the fund was managing more than $600 million. “This is one of the most signiﬁcant distressed opportunities the markets have ever seen,” says Richards, a former mortgage-backed-securities trader. “When markets are most distressed, we should be deploying capital.” Marathon’s ability to sidestep market meltdowns 22 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2007/JANUARY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2007/January 2008

Institutional Investor's Alpha Magazine - December 2007/January 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Liberal Returns The Good Guy: Inner-city MVP Cover Story: Marathon Men Interview: Rizk Management Profile: Living on Hostile Ground Profile: Buy and Hold In Theory: The Fallacy of Portable Alpha Strategies: Changing Course Alpha Bytes: Behind the Scenes Unhedged: Commentary: An Activist Alternative

Institutional Investor's Alpha Magazine - December 2007/January 2008

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