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"The transition from fund of funds to one of the greatest in-house proprietary strategy hedge funds is a remarkable achievement," says Jones. "I don't know anyone who has done that."

Dubin and Swieca's first trial as hedge fund managers came during the great bond rout of 1994, when a spike in interest rates caused bond prices to plummet. Highbridge, basically just a convertible arb fund at that point, suffered the only losing year in its 12-year history, finishing down 2.7 percent, compared with a 1.3 percent gain for the S&P 500.

For other hedge funds, however, the bond collapse was not just a glancing blow. Some top-name traders took a beating. George Soros' Quantum Emerging and Quantum Quota funds were down 13.3 percent and 10.2 percent, respectively, for the year; Leon Cooperman's Omega Offshore fell 24 percent; and Michael Steinhardt's Steinhardt Overseas plunged 28.5 percent, according to the U.S. Offshore Funds Directory.

Highbridge, with $128 million in assets, emerged comparatively unscathed because, Dubin and Swieca contend, then as now the fund made a point of managing risk and systematically hedging interest rate exposure. Moreover, the Highbridge founders grasped the potential of a new product -- mandatory convertible preferred securities, which do well when rates rise. Mark Vanacore, Highbridge's senior portfolio manager for global equity derivatives, recalls that the fund did not have a large allocation to convertibles and wasn't heavily leveraged. Highbridge's leverage historically has ranged from two to five times the firm's equity and averaged about three.

Dubin and Swieca's postmortem on the events of 1994 nevertheless persuaded them that Highbridge needed to be more fully diversified. That same year they hired PaineWebber arbitrage veteran Richard Schneider to launch an event-driven strategy revolving around merger arbitrage to augment convertible arbitrage. They felt that mergers were about to come to life after five years of dormancy. The timing was propitious: The remainder of the decade was marked by perhaps the greatest M&A boom ever.

"Glenn and Henry correctly perceived that that was the place to be," says Schneider, who now runs his own event fund within the Highbridge fold in addition to working on the main fund. "We built the group when risk arb was nascent."

The 1994 setback did not cause Highbridge to abandon its ingrained traders' opportunism, however. The firm capitalized on securities dealers' and hedge funds' desperation to unload inventory to meet margin calls after the bond collapse. "We took advantage of more attractive prices," notes Vanacore. As a result, Highbridge had one of its best years ever in 1995: a 28.2 percent gain net of fees. Over the next two years, the fund would rack up more double-digit net returns: 18.3 percent in 1996 and 19.7 percent in 1997. Money kept pouring in, from foreign as well as domestic institutions.

But in tumultuous 1998, when Highbridge's assets topped $1 billion, the fund's risk management skills would get an even more strenuous workout than they had four years before. That was, after all, the year of Russia's bond default, the stock market's summer sell-off and hedge fund Long-Term Capital Management's virtual collapse -- a perfect market storm. As the year progressed, bubbles began to appear in a number of markets, including merger arbitrage. Both risk arb and credit spreads kept narrowing. "We saw a lot of warning signs," Dubin recalls. So in the spring and summer, as risk arb spreads narrowed to single digits and credit spreads tightened to historically narrow levels, Highbridge reduced the size of its balance sheet. "We felt we were no longer being compensated for the inherent risks," explains Dubin.

Thus battened down, Highbridge Capital rode out the tempest, finishing the year up 6.04 percent despite a drop in convertible bond prices of 15 percent at one point. Dubin says, "We tell investors that 1998 was our greatest accomplishment."

Having succeeded at being defensive, Highbridge went on the offensive. From a large cash position, the fund moved boldly to the outer bounds of its leverage range, enabling it to buy opportunistically. Highbridge picked up a bundle of Long-Term Capital's Japanese convertible bond positions on the cheap. And it leveraged up to about 5-to-1 so it could double and then triple its allocation to risk arbitrage as spreads widened and convertible valuations became cheap. "The Asian crisis and the volatile markets set us up for the tremendous year in 1999," says Schneider. Sure enough, Highbridge made a 40 percent annualized return on its risk arbitrage portfolio that year, capitalizing on major mergers such as Daimler-Benz and Chrysler Corp., Lucent Technologies and Ascend Communications, and Citicorp and Travelers Group. The upshot was that 32.4 percent record gain for Highbridge for the year.

Sums up Dubin: "For us, 1998 to 1999 was a seminal event. We protected capital through one of the most vicious periods in hedge fund history. We distinguished ourselves as good managers of risk. We went into 1999 seeking opportunities and had our best percentage return ever."

Not surprisingly, Highbridge held up a lot better than most hedge funds during the postbubble bear market. The fund managed to post 27.3 percent, 12 percent and 8.2 percent returns in 2000, 2001 and 2002, respectively, while the S&P 500 fell 10.1 percent, 11.9 percent and 22.2 percent.

Astute asset allocation is, of course, critical to achieving such results. Highbridge now draws on ultrasophisticated quantitative models to help make allocation calls. Last September, Swieca and Dubin hired Subu Venkataraman, who came from Morgan Stanley with a Ph.D. in finance, as chief risk officer to not only enhance risk management but also to refine capital allocation.

The process is far from pure mathematics. "I always felt that asset allocation is one part science, one part art," says Swieca. Dubin adds that a lot of Highbridge's asset allocation decisions continue to be based at least as much on art as on science -- namely, on his and Swieca's well-honed intuition. "We use the most sophisticated efficient frontier models," he explains, "but we infuse them with 20 years of practical experience and judgment of hedge fund investing -- which is very powerful."

Rarely does Highbridge alter its asset allocations in big, wrenching ways. Swieca and Dubin won't, for example, suddenly scale back the fund's convertible bond exposure from, say, 30 percent to 10 percent just because credit spreads have grown exceedingly narrow. The process is more gradual, and the firm brings leverage into play. Over the past six months, Highbridge has increased its allocations to statistical arbitrage from 8 percent to 10 percent and to the event-driven strategy from 8 percent to 12 percent.

When Dubin and Swieca perceive a significantly better opportunity in one asset class than another, they won't simply remove money from the latter and bestow it upon the former. Rather, they will increase their borrowings from prime brokers to expand exposure to the more promising asset class. Conversely, when they want to scale back an investment, they will reduce leverage. They reckon that they alter their allocations three or four times a year -- more frequently when markets are volatile. For instance, they sharply reduced Highbridge's allocation to convertible bonds in early 1998, only to expand it when the crisis began to abate.

"We expand or contract our balance sheet to address market opportunities," says Dubin. "One of the successes of our long-term track record has been the judicious use of leverage." Dubin and Swieca seek to control risk, not avoid it. That is apparent from their tactics ever since the bubble burst. In 2001, with the markets reeling, the fund ventured in a small way into privately placed convertible bonds of publicly traded companies, known as PIPEs. Dubin describes it as "a boutique strategy, but a very profitable boutique."

Highbridge embraced two other new strategies in 2001: special opportunities and equity relative value. The former comprises four event-driven approaches: distressed debt; direct debt investments such as bridge loans and mezzanine financings; asset-backed portfolio acquisitions involving such investments as secondary market pools of hard assets, including collateralized loans; and special- situation equities linked to liquidations, litigation claims and bankruptcies.

In another of Highbridge's innovative portfolio management arrangements, the special opportunities strategy is run by Daniel Zwirn, a Highbridge portfolio manager, through Highbridge/Zwirn, a joint venture between his D.B. Zwirn & Co. and Highbridge.

Highbridge veteran Schneider manages equity relative value. This strategy exploits valuation discrepancies that are usually the result of so-called broadly defined events, such as market dislocations, the lack of sell-side following for a stock, mergers, equity offerings and spin-offs.

Besides adopting new strategies, Dubin and Swieca have begun systematically delegating day-to-day operating responsibilities. In September 2002 they brought in a chief operating officer, Robert Caruso. The now-35-year-old COO had been CFO of brokerage Robertson Stephens Investments and before that a member of PricewaterhouseCoopers' global capital markets advisory practice. Caruso is today in charge of the back office and information technology -- "anything non-investment-related," he says. Ronald Resnick, 40, who has been Highbridge's chief administrative officer and general counsel since January 1993, looks after administrative, legal and regulatory matters as well as human resources and special projects.

"They have taken a lot of roles from us," says Swieca. He and Dubin, however, make all strategic business decisions. Swieca concentrates on supervising risk management, compliance, financing and operations, while Dubin concerns himself with strategic planning, client relations and technology. The two continue to oversee the overall investment process. Dubin characterizes their respective roles this way: "Henry is the head defensive coach, and I am the head offensive coach, and we are both the general manager."

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