Institutional Investor's Alpha Magazine - September 2008 - (Page 26)

Joel Press company’s second-most profitable, its success fed by a fast-growing industry as it advised existing hedge funds, funds of hedge funds and start-ups. Some of the bestknown hedge fund names became clients, including Louis Bacon’s London-based Moore Capital Management, which manages $20 billion. Press was the accounting adviser to Daniel Och when Och left Goldman, Sachs & Co. in 1993 to launch Och-Ziff Capital Management, the $33.4 billion New York–based hedge fund ﬁrm that started out with a comparatively paltry $100 million. In 2006, when he reached Ernst & Young’s mandatory retirement age of 60, Press was out the door, though he was a long way from being ready to retire. His ﬁrst move was to team up with David Berkowitz, the former co-manager of Gotham Partners, a fund that was forced to close in 2003 in a ﬂurry of redemptions. With a $100 million seed outperformed mutual funds in their ability to respond to the market and deliver alpha. Press recently sat down at Morgan Stanley’s ofﬁces in New York with Alpha Contributing Writer Udayan Gupta to talk about where he thinks the hedge fund industry is headed. Alpha: How would you say the hedge fund industry has responded to this roller coaster of a year? Press: When the dynamics change, you have to be pre- “I don’t see government restricting the trading and creativity and innovation of hedge funds.” — JOEL PRESS pared to help your organization solve the new puzzle. In August 2007 the markets imploded — liquidity dried up. More hedge funds went out of business in 2007 and at the beginning of 2008 than at any other time. But they were a relatively small percentage, and they were ﬁ rms with a speciﬁc style. For the most part, the rest of the industry had a phenomenal 2007 relative to indexes, because compared to the indexes, the hedge funds had less volatility. No one talks about that. And in 2008, hedge funds continue to do better than the indexes. But they’ve still lost money. investment from Reservoir Capital, a New York–based group that ﬁnances hedge funds and private equity ﬁrms, Berkowitz and Press launched a small hedge fund called Festina Lente (“make haste slowly” in Latin). “Our view of the world here is superconcentrated, long-duration investing,” Berkowitz said in October 2006 at the launch of Festina Lente. But it didn’t take long for Press, the ﬁrm’s chief operating ofﬁcer, to realize that he enjoyed being a consigliere more than a manager: “I decided that I liked to give advice.” That’s when the prime brokers started calling. Press met with top executives at 11 ﬁ rms and went with Portogallo, a longtime acquaintance. “I told Rich that I was being courted by prime brokers, so he said, ‘Hell, why don’t you come here?’” Upon taking the Morgan Stanley job in January 2007, Press stepped down from Festina Lente’s day-to-day operations. Despite the recent slowdown in asset ﬂow into the nearly $2 trillion hedge fund industry, Press says that he’s convinced it is a long way from peaking. “It’s in its mid20s,” he says. “I lived with it at infancy. I lived with it at its adolescence and its teenage years. There’s a long way to go for this industry before it becomes really mature.” In fact, Press believes that hedge funds will end up being a more durable asset class than mutual funds. “The mutual fund industry is clearly in its middle age, and it’s an industry that has had issues for the past few years,” he says. Press argues that amid the market’s current volatility — volatility that may increase — hedge funds have 26 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2008 That will happen. But was it within the tolerance range for particular strategies? And if the losses were outside the tolerance range of strategies, did they learn from it? The fact that there was a double effect — brokerage houses were losing money and the hedge funds were losing money — didn’t help. Everyone was trading credit. Hedge funds lost money trading credit. And people started to realize that the valuations of the assets they had and the valuations they thought they had weren’t there. But what happened is not unusual. Go back to the savings and loans crisis and the RTC bailout: same kinds of issues. It didn’t trouble you this time around? Most of the losses have been concentrated over a short period. The question is whether they were in the tolerance range of the type of market and was it anticipated that it could be down that much. There’s nothing that’s happened that requires a change in laws. Do you think hedge funds are in danger of increased government regulation? Most government ofﬁcials recognize the beneﬁts of hedge funds: providing liquidity, creativity, innovation, in some ways helping deal with volatility. When markets move disproportionately to what is expected and what is logical, hedge funds are stepping in and risking capital. That was proven in many other examples, such as the Malaysian currency crisis of 1997, where hedge funds were initially blamed. Hedge funds actually helped stabilize the currency, and I think people realized that. I do think governments are going to try to deal with disclosure and transparency issues and try to understand what kinds of reporting are necessary to avoid unanticipated dislocations. So there will be large-trade reporting, but I don’t see government restricting the trading and creativity and

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

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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