Institutional Investor's Alpha Magazine - July/August 2008 - (Page 37)

Profile Small Hedge Funds I n December 2005, Hemant Baijal and Wim Vandenhoeck launched a New York–based hedge fund called Aravali Partners after quitting their jobs at Havell Capital Management, a ﬁ xed-income shop where they had worked since 1996. Although 2005 had been a good year, Baijal and Vandenhoeck yearned to strike out on their own. “We felt we could do a lot more with our experience in munis and Treasuries,” Vandenhoeck says. “We just needed a more active and aggressive style to generate alpha.” From the outset, Aravali — named for a mountain range in northwestern India, where Baijal was born — has focused on arbitraging municipal bonds. The historically low-risk strategy is relatively simple, albeit arcane: Buy municipal bonds; ﬁ nance the purchase by issuing tax-free, shorter-term securities at a lower yield, and pocket the difference, while hedging against volatility by shorting U.S. Treasuries or using swaps. As long as the yields of the municipal bonds stay in line with Treasury yields, as is usually the case, the strategy works. But if the two yields diverge, as happened in August 2007, the strategy can unravel. Before last August, Aravali, which has six employees in addition to its founders, was managing $180 million, up from $100 million when Baijal and Vandenhoeck started the ﬁ rm. As the municipal bond market dived — along with most financial markets — the value of Aravali’s portfolio plummeted. In August and again in November, it was down by almost 15 percent; in February 2008 it did even worse. But in the three months Staying Alive By Udayan Gupta that followed, the fund regained more than half its losses — up 18 percent in March, 33 percent in April and more than 20 percent in May — as the municipal market recovered, fueled in part by opportunists like value Small hedge funds, investor Wilbur Ross, who bought more than hobbled by their $1 billion of the bonds at a 5.5 percent interest rate. size, have managed to (In mid-July, however, the stay competitive firm reported a “singledigit decline” over the by investing in niches, preceding six weeks.) Toiling in the shadow keeping operations of hundreds of bigger, often better-known hedge lean and avoiding funds, Aravali is among a excessive leverage. scarcely chronicled army of mostly unknown and unheralded small funds. Others include Blueﬁn Investment Management, a $55 million Philadelphia-based long-short equity manager, and Full Circle Capital, a $70 million ﬁrm in Rye Brook, New York, that focuses on lending to small and midsize media and communications companies. The very existence of tiny funds like these seems to defy the odds. But even larger funds, like Whale Rock Capital Management — a Boston-based $550 million, valueoriented ﬁrm that specializes in technology and consumer stocks — face a difﬁcult battle. Big hedge funds rule the earth today; little ones are JULY/AUGUST 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 37

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - July/August 2008

Institutional Investor's Alpha Magazine - July/August 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Mr. Big Goes Small The Good Guys: Adopt This School! Interview: Man's Great Hope Cover Story: The Gentleman Activist Strategies: The New Bankers Profile: Staying Alive Research Center: The Best of the East The Asian Sensations Alpha Bytes: Into the Light Unhedged: Commentary: Speculating on Washington

Institutional Investor's Alpha Magazine - July/August 2008

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