Small fund, big $ |
Date: Monday, January 4, 2010
Author: Kaja Whitehouse, New York Post
Call it the best little hedge fund you never heard of.
Hoboken, N.J.-based Barnegat Fund is up a whopping 132 percent this year -- or $352 million -- hoisted through 2008's turmoil by its 40-year-old founder Bob Treue. By way of comparison, the average hedge fund is up less than 19 percent this year, and only a handful of funds have recovered 2008's harrowing losses.
Treue's fund lost 37 percent during the turmoil of 2008, but his triple-digit gains in the last 12 months have more than made up for the damage.
The Detroit native, who lives just six blocks from his office and bikes to work, attributes his success in part to the lessons he learned from his first experience with financial calamity in 1998. It was the year of the infamous implosion of Long-Term Capital Management, a hedge fund that lost $4.6 billion in a matter of months, triggering fears of a wider financial damage and requiring a bailout orchestrated by the Federal Reserve.
Back then, Treue had just started managing money, employing the same strategy as LTCM. Known as fixed-income arbitrage, the strategy seeks to locate mispriced debt securities such as interest-rate swaps, public and private distressed-debt offerings and secondary offerings, and invest in them or short them, to profit when prices normalize.
Traders on the Street refer to this type of trading as collecting nickels in front of a steamroller, for the perilous nature of the fixed-income arb market.
"The taboo of fixed-income arb was so severe," that no one would invest with him for years, Treue said. The situation was so dire in the beginning that he found himself checking prices of interest-rate swaps on a computer at the New York Public Library on 33rd St. and Madison Ave.
Today, Treue has three Bloomberg terminals in his office to get quotes and manages $450 million at Barnegat Fund Management.
Treue says that unlike the typical hedge fund, which makes money on 20 percent fees, he and his staff make far more money from the fund's returns, thus aligning their interests with investors.
"Hedge fund incentives are very messed up," he said. "We're the second largest investor in our fund. What we care about is our own investments in the fund."
Treue is true to his word when it comes to fees. The fund charges far less than the industry standard with a management fee of just 1 percent of assets topped by a 15 percent cut of profits. Most hedge fundscharge 2 percent of assets and 20 percent of profits. He attributes his recent success not to his trades, but to his ability to keep enough cash on hand to ward off the kinds of disasters that bring other funds to their knees when things go haywire and brokers make those much dreaded margin calls.
As a safeguard, Treue keeps up to 50 percent of assets in cash for just such occasions.
"Other guys were in similar trades but they didn't have the backup and were levered more than we were," he told The Post.
Indeed, several of Treue's bigger name competitors, including the founder of LTCM, John Meriwether, have closed shop or locked down their funds as a result of recent economic events.
In July, Meriwether closed down his JWM Partners, the fund he opened after LTCM collapsed that also focused on fixed-income arbitrage. Parkcentral Capital Management, which manages money for Ross Perot, also liquidated its fixed-income hedge fund following big losses in late 2008.
Going into 2010, Treue sees another good year for finding mispriced debt securities. The opportunities won't be as juicy as those experienced following the collapse of Lehman Brothers, but better than any time before then, including after the implosion of LTCM, he said.