Summers Offers Big-Picture Advice to Hedge Fund

Date: Monday, November 24, 2008
Author: Scott Patterson, Wall Street Journal

In 2006, Lawrence Summers resigned as president of Harvard University and took a position as a part-time managing director with D.E. Shaw Group, a New York hedge fund with a reputation as one of the most secretive trading outfits in the world.

D.E. Shaw is known for using sophisticated computer-based quantitative strategies to make money on fleeting movements in the stock and bond markets. The fund has been a top performer, returning 15% to 20% a year over the long term, and in two decades has grown into a global powerhouse. But like many funds, it has taken hits in the credit crisis.

During his time at D.E. Shaw, Mr. Summers came into its midtown Manhattan office once a week, usually Wednesdays. He consulted with its executive committee and gave advice about his views on macroeconomic trends. He didn't make specific investment decisions or meet with clients, according to a person familiar with the firm.

Mr. Summers declined to comment for this article.

The hedge fund was founded in a small office over a communist bookstore in New York's Greenwich Village in 1988, with $28 million of seed capital. Today, it manages roughly $36 billion and has offices in the U.S., Europe and Asia, employing about 1,600 people.

The founder and current chairman, 57-year-old David Shaw, taught computer-science courses at Columbia University in the 1980s before working for a trading outfit inside Morgan Stanley. Mr. Shaw left the investment bank in 1988 to start his fund, becoming an early innovator in quantitative trading strategies.

Mr. Shaw has long had ties to Washington power circles. In 1994, he was named to President Bill Clinton's Council of Advisors on Science and Technology. He has lobbied for greater funding of science studies and medical research.

The hedge fund has often favored academics with advanced degrees in everything from mathematics to physics, rather than Wall Street traders with business degrees. A notable employee in the 1990s was Jeff Bezos, who went on to launch the online retailer Amazon.com. The fund also considers potential employees with liberal-arts backgrounds. A current managing director at D.E. Shaw, Trey Beck, has a background in Russian studies.

Over the years, D.E. Shaw's platform spread from complex computer-based trading to more-traditional approaches, such as private equity, reinsurance and real-estate investments. Mr. Shaw no longer engages in day-to-day decision making at the fund. Instead, it is managed by a six-person executive committee.

The hedge fund has been embroiled in the credit crisis that has rocked Wall Street and the global economy. In August 2007, quantitative hedge funds suffered heavy losses, an early sign of trouble. People familiar with D.E. Shaw say its quantitative-trading strategies suffered large losses during the rout, though many recovered later in the year. The fund also weathered large losses during the financial crisis of 1998.

In March 2007, Lehman Brothers, the investment bank that filed for bankruptcy-court protection in September, purchased a 20% stake in D.E. Shaw. After Lehman's collapse, D.E. Shaw, along with a number of other hedge funds not owned by Lehman, fought to retrieve assets held within the bank's prime-brokerage units.

Earlier this year, D.E. Shaw launched a unit to invest in distressed asset-backed securities, such as subprime mortgages.

Write to Scott Patterson at scott.patterson@wsj.com