Firm Profile
Steering Strategies
Why Innovation and Creativity Matter
A continuing series
By Russell Jones, Financial Writer
Ken Tropin, chairman, Graham Capital Management, Connecticut."Wealth flows directly from innovation, not optimization . . . wealth is not gained by perfecting the known."
- Kevin Kelly
With an asset base just under $5 billion and some 125 employees, Graham Capital Management (Rowayton, Conn.), is a multistrategy hedge fund. Chairman Kenneth G. Tropin describes Graham’s investment philosophy and style as he reflects on the past—and contemplates the future—of the industry.
In business it’s important to maintain a competitive edge, and to keep a keen edge means blending creativity and innovation—and a willingness to develop ideas where other people aren’t yet.
Finding those ideas gets harder as the competition increases.
“Our firm is a multistrategy hedge fund, which means we’re involved in a variety of different styles of hedge fund investing,” says Ken Tropin, chairman of Graham Capital Management. “We are involved in global trading, markets around the world, usually using futures to trade them. For long/short equity trading, we’re involved in fixed-income trading, energy trading, in the U.S. and international.”
A key tenet of success for hedge fund investing is to also be a very good risk manager. Graham Capital uses both discretionary traders to manage a variety of portfolios and a variety of markets, as well as computer trading systems to attempt to generate profits from moves in those markets.
Tropin got into the business the late 1970s, initially as a broker on Wall Street working at Shearson (which eventually became Shearson American Express). He spent a number of years at Dean Witter before leaving a large Wall Street firm for a smaller hedge fund manager.
He knows what it takes to be successful as a hedge fund manager.
“To manage risk successfully, it’s great to perform for clients, but you’d better also manage risk successfully,” he says. “As a manager, you don’t want a negative market event to force a position where you can’t recover.”
Winds of Change?
Timing, in business as in life, can be crucial.
Steve Cohen, of SAC Capital Advisors, one of the most closely watched investment firms in the world, was interviewed in the Wall Street Journal, about changing strategies to ride the tides of low interest rates, inflation and strong corporate profits. “With about 7,000 hedge funds competing for investment ideas, good stock investments are getting more scarce. It’s hard to find ideas that aren’t picked over, and harder to get real returns and differentiate yourself. We’re entering a new environment. The days of big returns are gone. There are no more easy pickings.” Does Tropin agree that the hedge fund golden days are over?
“In the 1990s, investors very typically had a larger risk-tolerance level. Hedge fund managers therefore were inclined to take more risks than they are today. And there is always a direct relationship between how much risk you’re willing to tolerate and take and the kinds of returns you’re able to generate,” he says. “Hedge funds will continue to be attractive and successful in the years ahead, but has it gotten more competitive? Yes, it has. To some extent it is part of the elevation of the industry, which has become very much institutionalized.”
Yes, some hedge funds have taken hits. The near collapse and bailout of hedge fund Long-Term Capital Management. Amaranth’s $5 to $6 billion loss is a benchmark. Experts have been fearing the next big hedge fund collapse, and the effect that could ripple across global financial markets. Yet the markets and the Federal Reserve Bank system are healthy and robust, resilent, and moving forward.
Tropin points out that Amaranth’s loss was narrowly focused in one market, the natural gas market, and the effect of losses there simply were not systemic in nature. “While it was certainly a very significant loss, it didn’t really have any other effect on any other financial market.”
Are hedge funds seeking to build robust sustainable asset management businesses, or are they content to be boutique investment managers for an exclusive clientele?
Tropin acknowledges that most hedge funds have become increasingly institutionalized over the years.
“I think all of us who have been in this industry for a long time want to have firms that are going to be successful in the years and decades ahead, and that means building a very strong team of professionals around key people responsible for the investment process.”
“We respect our investors,” says Tropin. “The business of managing capital is one that involves a lot of responsibility for the hedge fund manager. My job is to perform for them and to manage risk successfully, every single day.”
