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Tilden Park Capital Management co-founder and CIO Joshua
Birnbaum possesses the classic traits of a great trader:
discipline, patience and intestinal fortitude, as well as the
ability to see the big picture and think on his feet. All were
on display the morning of April 27, 2010, when Birnbaum and
three other Goldman Sachs Group executives appeared before a
U.S. Senate subcommittee to testify on their firm’s role
in the 2008 financial crisis.
“It was political theater,” says Birnbaum, 41, who
as co-head of Goldman’s structured products group had
generated $3.7 billion for the bank in 2007 by shorting the
subprime mortgage market. During the five-and-a-half-hour
hearing, the four executives came under repeated attack as
senators questioned why Goldman sold subprime securities to
investors at the same time that it was shorting them. Birnbaum
calmly defended his actions, describing the factors that led
him to turn negative on the subprime market in late 2006, the
short positions his group put on and the instructions by senior
management to reduce those positions in the spring and summer
of 2007.
“It was frustrating to us that the tenor of our holding
period wasn’t commensurate with the opportunity,”
explains Birnbaum, who says Goldman could have made two to
three times what it did if management had kept the short
positions. “Nothing against our managers at the time
— Goldman is a bank, it’s not a hedge fund, and they
were doing their jobs — but we realized that this was not
necessarily the right platform for us.”
Birnbaum left Goldman in April 2008, after more than 14
years with the bank. He was followed by Jeremy Primer, a
Goldman research strategist who had developed computer models
to assess the likelihood that the mortgages underlying the
securities the firm traded would be paid off early. By the
second half of 2006, Primer and his team at Goldman had built a
model to analyze options on the newly created Asset-Backed
Securities Index (ABX), which tracked the value of subprime
mortgages. That model tipped off Birnbaum that the subprime
market was severely mispriced, confirming his assessment of the
sector’s rapidly deteriorating fundamentals. “What I
saw in Josh was that he was not just a trader but a builder of
businesses,” says Primer, 49, Tilden’s chief risk
officer and head of research, who has a master’s in math
from Harvard University. “So I left Goldman to participate
in the growth of a new firm.”
The two longtime Goldman colleagues soon had a third
partner, Sam Alcoff, who had known Birnbaum since they were
undergraduates at the University of Pennsylvania in the early
’90s. In 2008, Alcoff was working in the technology and
risk management group at New York–based hedge fund firm
Drake Capital Management, but the bulk of his career had been
spent at asset management giant BlackRock.
As co-head of BlackRock Solutions’ software engineering
group, he helped develop the architecture for its trading
system applications and infrastructure.
Joining Birnbaum “was really an unprecedented
opportunity to reflect on my experience and build a system that
addressed a lot of the shortcomings,” says Alcoff, 42,
Tilden’s chief operating officer and chief technology
officer.
By summer 2008, Alcoff, Birnbaum and Primer had leased
office space in New York and begun to build their business.
They made the unconventional decision to turn away outside
money initially and focus instead on building valuation,
analytical, risk management and back-office systems and growing
their team. “Part of what made us successful was that we
were very process-driven, and that meant having a robust set of
tools that allowed us to come up with our investment
approach,” Birnbaum says. “We took the approach that
we were going to build this stuff on our own dollar.”
The build-out took 18 months. Tilden — named after a
park near Oakland, California, where Birnbaum grew up —
started investing in February 2010 with a $25 million managed
account. “We used to joke that we were the smallest fund
with the biggest infrastructure,” says Alcoff, who has a
JD from Villanova University School of Law in addition to his
BS in engineering from Penn. A year later the firm launched the
Tilden Park Investment Master Fund. Today it has 25 people and
manages $2.3 billion. Through April the master fund delivered a
total cumulative return of 101.8 percent and experienced just
two down months.
Tilden Park invests both long and short across a variety of
asset classes, including mortgage-backed securities,
nonmortgage asset-backed securities, collateralized loan
obligations, equities and credit default swaps. The firm does
capital structure analysis, rotating between stocks and credit
depending on where it sees value. “In 2012 we were
essentially constructive on credit versus stocks,” says
Birnbaum, who graduated from Penn’s Wharton School with a
degree in finance before joining the mortgage group at Goldman.
“We flipped that switch in 2013, fortunately, because
stocks ripped.”
Tilden’s investment strategy combines top-down macro
themes with bottom-up securities selection. At the
macro level Birnbaum and his investment team try to
identify broad trends, employing both their quantitative models
and qualitative judgment. At the same time, Tilden’s
traders look for attractive individual investment
opportunities. “If you boil it down to its most simplistic
level, what we’ve been effective at doing is identifying
cheap options,” Birnbaum explains.
In the spring of 2012, one of Tilden Park’s traders
came across an option whose price was seriously out of whack.
Further investigation led the firm to the source of that
option, Bruno Iksil, the JPMorgan Chase & Co. trader known
as the London Whale because of the size of his positions.
Tilden Park was one of just a handful of hedge fund firms to
make money betting against the London Whale, whose ill-fated
trading strategy led to $6.2 billion in losses for JPMorgan
that year — and more fame for Birnbaum.