MICHAEL BURRY PREFERS NOT TO DISCUSS THE FUND MANAGERS WHO
HAVE invested with him. But when it comes to Chalkstream
Capital Group and its CIO, Andrew Tsai, the California
physicist-turned-hedge-fund-manager, who earned a fortune
shorting the U.S. subprime market, makes an exception. I
found Andrew and his team to be highly intelligent, very
engaged and very well informed as to their understanding of the
space, says Burry, who wasnt always on the very
best of terms with all his investors. Today, Burry manages only
his own money.
Tsai needs to be exceptional. Chalkstreams small
client base consists almost entirely of hedge fund executives
and partners at major banks and asset managers who have
entrusted the New Yorkbased firm with their personal
capital. As some of the worlds top investors, they have
high expectations none more so than Tsais business
partner, Peter Muller, a former proprietary trader at Morgan
Stanley who left the bank last year and launched quantitative
hedge fund firm PDT Partners.
Muller and Tsai founded Chalkstream in 2003 as a family
office to run Mullers money. From the start, though, they
planned to attract like-minded capital and create a bespoke
firm catering to sophisticated investors. The pair found
clients who could stomach relatively high risk and volatility
in exchange for the potential payoff from bold bets on unique
opportunities. We want to traffic in areas where there is
not a lot of capital chasing for returns, says Tsai in an
interview at Chalkstreams Midtown Manhattan offices in
the Random House Tower, an address the firm shares with
Tsai and his 12-member team have caught some of the most
interesting and profitable trades of the past decade. Despite
Chalkstreams impressive pedigree and investor base,
however, its overall returns have yet to truly impress. But the
firm is confident that it can hit a home run with its biggest
bet yet: on Japan, the graveyard of many a brave fund. If
Tsai succeeds, Chalkstream will have lived up to
With $700 million in assets and a dozen significant
outside clients, Chalkstream is a hybrid of family office and
fund of hedge funds. When it isnt developing its own
investment ideas, it looks for one-of-a-kind managers like
Burry and his former firm Scion Capital. Chalkstreams
fund-of-hedge-funds portfolio consists of 15 to 20 managers,
and it keeps a second, less-liquid portfolio for major tactical
though not necessarily directional bets and
private-equity-type opportunities. The mix can vary, but the
firm typically splits its assets about 60-40 between the two.
Chalkstream charges an annual 1 percent management fee and 10
percent performance fee on the hedge fund portfolio, and a 15
percent private-equity-like performance fee for the illiquid
The firms philosophy sets it apart from institutional
investors and funds of hedge funds that focus on asset
allocation and avoid market timing. Chalkstream tries to stay
out of step with stocks and bonds its clients have
enough exposure to both and makes large calls that would
spook more-traditional investors. We think traditional
asset allocation is very dangerous, Tsai says,
since people are allocating on the past, not the future.
We are not in the business of filling buckets; we are in the
business of finding opportunities.
Besides shorting subprime mortgages in 2007, Chalkstream
profited from 2009s run-up in Brazilian commercial real
estate and the 2010 subprime rally. To really thrive,
though, the firm must grow its assets. With that in mind, Tsai
and Muller want to start attracting institutional capital.
Theyre keen to lure some big fish: corporate pension
funds and other institutions that might see their shop as an
idea generator as well as an investment opportunity.
But even a sophisticated hybrid firm like Chalkstream faces
the same headwinds as other hedge fund advisory businesses.
Many investors are unwilling to pay the double layer of fees,
the cost of doing business and the barriers to entry are
rising, and few managers are posting extraordinary returns.
Investors may admire Chalkstream, but privately some admit to
disappointment with its performance. Through the end of 2012,
it had returned an annualized 5.6 percent net of fees since
inception in 2003, compared with 50 basis points for the HFRI
Fund of Funds Composite index, but Chalkstream was stung hard
in 2008, when its hedge fund portfolio finished the year down
44 percent. (The firm declined to comment on performance.)
Although Chalkstream quickly bounced back, the 2008 stumble
also raised questions about the teams ability to time its
best ideas given its relatively early exit from the subprime
trade. These are questions that the firm hopes to silence with
the new Japan investment.
That trade has an equity and a credit component. Known for
its deep-dive investment process, the team has been researching
the Japanese market for at least six years, led by partner and
investment analyst Rishi Shah, who has visited the Land of the
Rising Sun alone and with Tsai. In Tsais view the current
Japanese economy shares some structural similarities with the
U.S. subprime market before 2007. As proof of its conviction,
Chalkstream is raising its first-ever stand-alone fund for the
I look at what they are doing in Japan right now, and
I really like their thesis, says longtime Chalkstream
investor Arjun Divecha, chairman and head of emerging markets
at $106 billion, Boston-based money manager GMO (formerly
Grantham, Mayo, Van Otterloo & Co.). What is exciting
to me is the way they are going about it. For more than
two decades, Japan has proved a terrible place to invest,
Divecha notes, but Tsai and company have found a can
opener to open the can that has real potential, he
Tsai, 41, was born in St. Louis; his family had moved there
from Taiwan so his father could earn a Ph.D. in engineering.
The younger Tsai graduated from the Wharton School of the
University of Pennsylvania in 1993 with a BS in economics; he
wrote his senior thesis on how to set up a hedge fund.
After interning with broker-dealer Susquehanna International
Group, working as an open-outcry trader on the floor of the
Chicago Mercantile Exchange, Tsai joined Lehman Brothers
Holdings fixed-income trading desk in New York. In 1997
he left Lehman to become CIO of New
Yorkbased Integrity Capital Management, a
quantitative hedge fund he launched with four other partners,
including two former Goldman Sachs Asset Management executives.
At Integrity, Tsai got to know Chalkstream co-founder Muller,
an investor in the fund. I was just really impressed by
how he thought, how he conducted business, his character and
his passion, says Muller, whose PDT Partners manages more
than $2 billion in assets.
Integrity closed its doors in 1999, a victim of the crash
that brought down its much larger rival Long-Term Capital
Management. Tsai joined the tech boom, becoming president of
Urbanfetch, a start-up with offices in
New York and London that let customers order whatever they
wanted online and receive it by messenger. By 2003, Urbanfetch,
like many other dot-coms, had folded. Tsai was working in
London as CEO and director of Global Name Registry, an Internet
infrastructure company backed by U.S. private equity firm
Carlyle Group, when Muller came knocking.
Now 49, Muller grew up in Philadelphia and New Jersey and
majored in math at Princeton University. After college he moved
to the San Francisco Bay Area and took a job as a researcher
and programmer at pioneering quantitative research firm Barra.
In 1992 he moved to Morgan Stanley, where he built up its famed
proprietary quantitative trading business, PDT although
the bank never broke out returns, this unit was known to be
highly profitable and quickly established a reputation
in the close-knit quant community.
I think the first time I ever spoke to Pete, he called
me up to yell at me, says Clifford Asness, founding and
managing principal of $70 billion, Greenwich,
Connecticutbased quantitative alternative-investment firm
AQR Capital Management. Muller had gotten wind that AQR might
be interviewing someone from PDT, and he was not happy. The two
quickly put the matter behind them and became friends, but
Asness says Muller remains quietly one of the most
competitive guys youll ever meet.
While at Morgan Stanley, Muller started investing his own
money with hedge fund managers. I realized that trying to
pick good funds, keep track of how they were
doing and figure out how to allocate was just as challenging an
investment business as running a hedge fund, he says.
If I was going to do it, I wanted to do it well,
and I didnt have time or inclination to run another
Muller decided to launch a family office and put Tsai
in charge, but he knew he would have to be open to accepting
other peoples money. I didnt have enough
capital to afford Andrew and a world-class team, says the
skilled pianist and songwriter, who has performed at numerous
venues in New York City. So the idea was that over
time if we were successful and we liked doing it, we would
bring in outside investors.