FOR MOST HEDGE FUND MANAGERS, POKER is a high-stakes, high-risk opportunity to show off their smarts. For Jacob Gottlieb the game is something altogether different.
Gottlieb, 40, gathers once a month in Manhattan with a small group of fellow hedge fund managers for a poker game that’s less about cutthroat competition and more about good friends catching up over a leisurely evening of cards. Gottlieb and his poker buddies, who include Marc Lasry and Boaz Weinstein, meet in one another’s homes for loose, informal games that last for hours and include a rotating cast of drop-in players.
“It’s a way for friends to get together,” says Weinstein, founder and CIO of $6 billion Saba Capital Management. “Five or six hours pass in a matter of minutes. Chips get moved around; hands are played. Nobody wins too much; nobody loses too much. There is a sense of camaraderie, and we talk.”
What these players like to talk about is business — specifically, the business of building and running a hedge fund firm. At 52, Lasry, co-founder of $13.1 billion Avenue Capital Group and a major Democratic fundraiser who maintains close ties to the Clintons, is a generation older than the rest of the players and often acts as their sounding board. He says he enjoys talking to them, sometimes offering advice from his own experiences.
The topic of business-building is something of an obsession for Gottlieb, who trained as a doctor before starting a career in finance. He founded New York–based Visium Asset Management in 2005. The firm, which today manages $3.5 billion in assets, was built around Gottlieb’s considerable expertise in health care stocks, honed over years of experience as a portfolio manager at various investment firms. Its flagship product, a long-short equity health care fund called the Visium Balanced Fund, has some $2.4 billion in assets and has generated an annualized return of 15.6 percent since inception.
Many aspiring hedge fund managers would be thrilled with that level of success. But Gottlieb has far bigger plans for his firm. He wants to transform Visium into a multiproduct, multistrategy powerhouse to rival some of the most successful managers in the history of the hedge fund industry. He has spent the past few years quietly laying the groundwork to realize his ambitious goal.
“We’re committed to running a very high-quality, high-integrity firm,” says Gottlieb. “Doing things the right way is integral to our philosophy and our culture, and we’ve built a strong firm for the long term that makes smart investments.”
To achieve his dream, Gottlieb will have his work cut out for him. Multistrategy firms, in which a pool of capital is allocated to different traders and moved around opportunistically, have become some of the most successful businesses in the hedge fund industry, but the majority of managers that have tried this approach have failed. Gottlieb has allocated significant resources to hiring top investment and operations talent to make his plan work. In December 2009 he recruited as president Jason Huemer, a veteran of multistrategy firm SAC Capital Advisors, and he has brought on experienced portfolio managers — in some cases entire teams — with a range of skills to expand the firm well beyond its original health care portfolio.
Still, Gottlieb has struggled to attract assets for Visium’s multistrategy Global Fund. To date, the fund manages just $200 million, half of which is the firm’s own capital.
Gottlieb is not the only up-and-coming hedge fund manager looking to build a successful firm. Take his poker buddies. In addition to elder statesman Lasry, who owns the group’s longest-running firm by far, there’s Weinstein, who founded New York–based Saba in 2009 and recently gained renown for betting against the so-called London Whale, a trader in JPMorgan Chase & Co.’s U.K. offices whose trades cost the bank at least $2 billion (with some news outlets reporting that losses could reach $9 billion). Peter Muller, another player, is one of the most successful proprietary traders in the history of investment bank Morgan Stanley and is now in the process of starting his own firm. Neil Chriss, the fifth regular in the group, is a quant who previously worked for SAC Capital and founded Hutchin Hill Capital, also in New York, with seed money from hedge fund firm Renaissance Technologies Corp.’s legendary founder, James Simons.
Managers like Gottlieb may benefit from tailwinds that are helping the multistrategy model. Institutional investors are pouring more money than ever into the hedge fund industry, and they prefer larger firms that can handle the types of big checks these organizations need to write. At the same time, some of these investors have become skeptical of funds of hedge funds, which charge an additional layer of management and performance fees on top of the typical hedge fund fees — and which recently have underperformed. As a result, some investors have pulled money from funds of funds and turned instead to multistrategy managers, which like funds of funds offer diversified sources of returns. Another advantage: When a particular strategy falls out of favor, multistrategy managers can take money out of that strategy instantly. It can take months for a fund-of-funds firm to redeem from a manager whose strategy is suddenly losing money.
But the multistrategy model is not without its challenges. In the past some managers have struggled with risk management, relying too heavily on one star trader or one big bet. Others have grappled with the problem of retaining talented portfolio managers and questions over who really provides the value to the fund — the management or the traders. Lack of transparency can also be a concern.
Recently, some firms have demonstrated just how hard it is to establish, and run, a successful multistrategy firm. Some high-profile launches have failed despite being well capitalized, while other well-known funds have gotten caught up in insider trading schemes. FrontPoint Partners, Galleon Group and Level Global Investors are among the most obvious examples of once-high-flying multistrategy hedge fund firms undone by such scandals.
The issue of how to pay top traders is another challenge for multistrategy managers. Some firms, such as Citadel and Millennium Management, have lured talent away from the banks by charging pass-through fees for the industry, thereby giving themselves flexibility to pay top traders more competitively. But these firms’ investors were willing to pay such fees because of the managers’ long track records and their reputations as moneymakers. As a relative newcomer, albeit one with strong performance, Visium has to compete with these firms for talent despite charging the 2 percent management fee and 20 percent performance fee that are standard for hedge funds.
Despite these impediments, Visium has made quality hires. One of the most important was Huemer. “Jason and I both live and breathe investing and the industry,” says Gottlieb. “This is what we do. And we’ve learned from the successes and failures of others.”
Visium has also attracted some talented portfolio managers, including credit and event-driven specialist Bradley Levie and his entire firm, Catalyst Investment Management, and 17-year industry veteran Robert Kim, who has worked at several top hedge fund firms.
Still, although Visium’s investors admire Gottlieb as a health care fund manager, some are concerned that he will struggle to transform Visium into a larger, more multifaceted firm and will take his eye off the Visium Balanced health care fund in the process, hurting returns. “It is something we worry about,” says a fund-of-funds manager who invests in Visium’s Balanced Fund but likely will not invest in the Global Fund.
Jacob Walthour, a managing director and consultant in the New York office of Marina del Rey, California–based investment advisory firm Cliffwater, which specializes in advising institutional investors on hedge funds, says he initially worried that the buildout would take Gottlieb’s focus away from the Balanced Fund. But Gottlieb was able to convince him otherwise.
“Jake understands that the goose that lays the golden egg is the Balanced Fund,” says Walthour, noting that Gottlieb closed the fund to new investments at the $2 billion mark, when he could have raised much more. “That is why he has been so disciplined about its growth.”
BORN IN BROOKLYN, NEW YORK, GOTTLIEB IS THE elder of two sons. His parents both immigrated to the U.S. from Poland in the 1960s. His father is an economist who teaches at the City University of New York; his mother is a pediatrician. Perhaps as a result, for a long time Gottlieb felt drawn to both finance and medicine. He made his first trades in baseball cards; in seventh grade he won a stock-picking contest at school, and his father set up a trading account for him. He and a friend also started a business selling sodas and snacks to golfers at the local golf course.
Gottlieb graduated magna cum laude from Brown University with a BA in economics and went on to earn a medical degree from New York University. He completed an internship in internal medicine at St. Vincent’s Hospital in New York, but he ultimately was more attracted to finance and started looking for a job on Wall Street. He landed at Sanford C. Bernstein & Co. in 1998 as a buy-side analyst covering global health care.
Thoughtful and soft-spoken in person, Gottlieb says there are many similarities between being a fund manager and being a surgeon. “Essentially, a doctor is a risk manager,” he says. Doctors tend to be very good at planning, thinking through issues methodically and cutting off risks before a problem arises, Gottlieb adds. “In medicine you have to adhere to a system and a process so you can understand what is going on and take appropriate action,” he says.
While Gottlieb was learning his trade on Wall Street, a Russian-born trader named Dmitry Balyasny was building a star reputation at Schonfeld Group Holdings, a privately held day trading and investment firm run by Steven Schonfeld and based in Jericho, New York.
In 2001, Balyasny started looking for a health care trader to add to his group. A mutual acquaintance recommended Gottlieb, who by then was working as a health care portfolio manager at New York hedge fund firm Merlin Biomed Group. Impressed, Balyasny hired Gottlieb, and when he left to form his own firm the next year, he took Gottlieb with him.
At Balyasny Asset Management, a multistrategy hedge fund firm based in Chicago, Gottlieb built up both his team and his reputation. His health care portfolio gained 11.25 percent in 2002, 48.57 percent in 2003 and 19.16 percent in 2004, making him the top earner at the firm. By the end of 2004, BAM’s assets stood at about $500 million, but Gottlieb felt he could manage more money. He and his team left, and, with about $300 million in seed capital from BAM, they started Visium.
Gottlieb’s basic investing approach has not changed much since his BAM days. It combines an intense focus on research with a rigorous review process for security selection. Gottlieb sits down with individual portfolio managers to discuss how best to execute a trade, making sure the manager has considered all possible angles and uncovered any weaknesses in the idea. Then he and the manager evaluate the investment instruments that can be used to structure the trade in an optimal way.
Visium’s 27 health care investment professionals — many of whom have experience in the health care industry and some of whom have medical backgrounds — rely on a homegrown network of industry contacts, doctors, consultants and experts to gather information. In 2009, during the heath care reform debate, the firm sent at least two investment professionals a week to Washington to monitor the situation; Visium recently sent investment staffers to the Supreme Court hearing on the Affordable Care Act.
Every week Visium’s analysts and portfolio managers obtain a report of how many prescriptions were filled at various pharmacies around the world and then comb through the data, cleaning up any inaccuracies or errors. The process is labor-intensive, but it makes the information much more actionable. “I don’t think a lot of firms could afford to have a few people doing that,” says one investor.
Ryan Ogg, who joined Gottlieb in November 2002 from the equity research department at Dresdner Kleinwort, works as a partner and biotechnology portfolio head for Visium. Ogg, who holds MS degrees in biochemistry and molecular biology from the University of Colorado, says that in addition to Visium’s in-depth research process, the firm also focuses on modeling and analysis.
Investors praise Gottlieb’s creative use of options and derivatives to put on a trade. Rather than just buying or selling a security, he will look at the best and most economical way to structure a trade, often using derivatives. “He looks for anomalies and ways to trade around an event,” says an investment consultant. “He is a little bit unique in that respect.” In health care — where the outcomes of clinical trials or a Food and Drug Administration decision can prove critical — such an approach makes a good deal of intuitive sense.
Ogg is just one of many on the Balanced Fund investing team who have been with Gottlieb for close to a decade. “That is very rare in this industry,” says Kim, who also serves as director of research for the Global Fund. He adds that this stability was one of the things that impressed him about Visium. Kim, who has worked as a portfolio manager at SAC Capital, Soros Fund Management and Millennium Management, and as head of proprietary trading for Royal Bank of Canada, joined Visium in April 2010 to launch a tax-efficient fund.
Visium’s Balanced Fund returned 14.19 percent in 2006 and 17.05 percent in 2007; by the end of that year, the fund had $2 billion in assets under management and a staff of more than 40. Like plenty of hedge fund firms, however, Visium struggled in the difficult markets of 2008. The Balanced Fund lost 13.95 percent, Gottlieb’s first down year with the fund. Because of those losses, combined with redemptions as investors sought liquidity, the fund shrank to $1.3 billion in assets.
Still, Gottlieb navigated 2008 better than most managers. The average hedge fund lost 19.03 percent in 2008, according to Chicago-based Hedge Fund Research, and the Standard & Poor’s 500 Index plunged 38.49 percent that year. Overall hedge fund assets dropped from a high of more than $2 trillion in the first six months of 2008 to $1.4 trillion six months later, according to HFR. The hedge fund industry underwent retrenchment and consolidation: HFR registered 1,471 hedge fund liquidations in 2008 and a further 1,023 in 2009.
Amid the chaos, Gottlieb spied opportunity. The time had come, he reasoned, to turn Visium into the multistrategy manager he had always wanted the firm to be. In fact, Visium had already started a multistrategy fund using internal seed capital in late 2007. It survived 2008 well, returning 4.5 percent, and performed impressively in 2009, gaining 113.34 percent. At that point, Gottlieb prepared to open the fund to outside investors. He closed his main health care fund — which had a strong 2009 and 2010, returning 22 percent and 24.45 percent, respectively — to new money and hired Huemer as president.
At SAC, which Huemer joined in 2005 from Merrill Lynch & Co., the former financial journalist had helped raise more than $6 billion in capital. He left in January 2009 to join a new hedge fund, Atlas Capital Management, as its CEO. After Atlas shut down, Huemer served as a consultant to several hedge funds, including Visium.
Soon after Huemer joined Visium, he and Gottlieb started looking for talented portfolio managers to add to their team. They also explored the strengths and weaknesses of the multistrategy model, looking to the industry for examples of best and worst practices. They wanted to do things the right way.
In 2011, a challenging year for many hedge fund managers, Visium’s Balanced Fund returned 2.07 percent; its multistrategy Global Fund gained 1.75 percent. This year the health care fund returned 6 percent through June, while the Global Fund was up 9.5 percent. Almost all of the investors who left Visium in 2008 and its aftermath have returned.
HIRING IS AN IMPORTANT PART OF SUCCESS or failure at any multistrategy firm. Some of the industry’s best-known firms — including SAC, Odyssey Partners and Tiger Management Corp. — have used a psychiatric evaluation as part of the hiring process. Huemer, who worked closely with SAC’s own staff psychiatrist, the late Ari Kiev, had started using an adapted version of the test employed by Odyssey. When he joined Visium, he brought that process with him. The test focuses on areas such as leadership, problem solving and decision making, personal organization, time management and interpersonal dynamics.
“We have gotten good at the hiring process because we have done a lot of it, and you learn along the way,” says Huemer. Though the psychiatric test adds a layer of standardized process that is valuable, the way Visium uses the results varies from situation to situation. “It does not end with the test,” Huemer notes. If a test raises real concerns, “we will reengage and spend time with the candidate,” he explains. “What the test shows you is tendencies, not outcomes.” A candidate who is weak on self-structure, for example, might compensate in other ways.
One group that successfully got through Visium’s review process was Catalyst Investment Management. Based in New York, Catalyst was founded in 1995 to manage money for a wealthy international family. Catalyst ran a credit and special-situations fund, and the team had expertise in distressed credit and restructuring. Catalyst founder Levie and Huemer had known each other for close to a decade when Huemer called Levie to ask for his advice because Visium was looking for an event-driven team. Within a matter of days, they had the framework for a deal that would bring the entirety of Catalyst over to Visium; the team joined in April 2010.
Kim, who arrived the same month as the Catalyst team, was another significant hire. From 2004 to late 2005, he worked as the CIO of his own firm, but he says he did not enjoy the experience. “I really underestimated the business aspect of running the firm,” he says. “What I do well is build out an investment strategy.” Kim joined Millennium, and when he left that firm in 2009, he was not interested in starting up his own firm again. When Gottlieb and Huemer approached him about working for Visium, he was intrigued.
When it comes to building its multistrategy team, Visium has been cautious. Today the firm has 17 investment professionals working exclusively for the Global Fund. Recent hires include Stayton Creech, previously a portfolio manager with FrontPoint; David Ferrara, a former senior analyst covering industrials for Hunter Global Investors; and ex–D.E. Shaw Group energy portfolio manager Fauzia Rashid. They and the rest of the Visium investment team apply the same rigorous investment approach the firm uses in the health care fund to the multistrategy product.
The scale of Visium’s ambition is evident in the firm’s new office space. Visium’s old Midtown Manhattan offices offered neither attractive views nor a prestigious address, but in April the firm moved into new digs, at 888 Seventh Avenue. Located on the 21st and 22nd floors of the 46-story building, Visium’s offices boast an open-plan layout with sweeping views of Central Park.
The offices are undoubtedly an upgrade, with plenty of room to expand if Visium grows according to plan. Tellingly, the new offices are in what is considered one of the premier hedge fund buildings in New York, with an A-list roster of tenants: Pershing Square Capital Management, Soros Fund Management and TPG-Axon Management.
A former tenant of Visium’s new building, however, serves as an example of why people raise questions about multistrategy funds, and of the challenges in running a business with a so-called eat-what-you-kill culture that rewards individual performance rather than teamwork. On November 22, 2010, the Federal Bureau of Investigation raided the New York and Connecticut offices of Level Global, a multistrategy hedge fund manager and tenant of 888 Seventh Avenue, along with the offices of two other hedge fund firms. The raids were part of an investigation into insider trading at hedge funds. Level Global, responding to a tide of redemption requests, returned all money to its investors and shut its doors; eventually, firm co-founder Anthony Chiasson was arrested.
Level Global is not the only multistrategy hedge fund firm undone by probes into insider trading post-2008. The most dramatic example is Galleon, which at its height was a $7 billion multistrategy firm with an expertise in technology stocks. Its co-founder Raj Rajaratnam was found guilty on 14 counts of securities fraud in May 2011 and sentenced to 11 years in prison. FrontPoint was also caught up in an insider trading scandal, related to its health care fund, and has now all but shut down.
The multistrategy model is obviously vulnerable to ethical transgressions. Gottlieb, however, says that with the right monitoring and processes in place, firms can avoid these problems. Hiring the right people is critical. “It is hard to pass on that big moneymaker who is a jerk,” Huemer admits, but he says Visium does just that. Irrespective of how talented portfolio managers are, they won’t get hired if they don’t pass that personality test. The same is true of progressing up the ranks. “One of the criteria for making partner is that you have to work well and play well with others,” Gottlieb says.
Kim appreciates the collaborative culture at Visium. He also values the systematic nature of the investment approach. “We are very focused on the process, and that allows Visium to look across a lot of different strategies,” he says.
Levie agrees with Kim’s assessment of Visium’s culture. “It is not a shark tank,” he says. Ogg adds that Gottlieb is a very levelheaded boss: “Jake is very analytical and very consistent. He does not get too high when things are going well, and he does not get too low when things are going poorly.”
Lasry — arguably one of the most successful business-builders in the hedge fund industry, having sold a 20 percent stake in his firm to Morgan Stanley — has confidence in Gottlieb. “I think he will be able to build a business because he has that skill set,” says Lasry. “But he will also be able to grow the business because he knows how to generate returns.”
Gottlieb’s success to date is all the more impressive, says Lasry, because in the hedge fund world he is something of an outsider. He did not have the contacts and network that many successful hedge fund managers — including some of those in his poker circle — used to build their businesses. He doesn’t boast a white-shoe hedge fund résumé, burnished by stints at Goldman Sachs Group or Tiger.
“For him to get where he is was ten times harder,” Lasry says. “He didn’t have the advantages that other people had. He is succeeding based on his raw ability. As you spend more time with him, you realize how much smarter he is than other managers. What a lot of managers sell is pedigree; what Jake brings is raw talent.”
Recently, Gottlieb took his friend and poker buddy Chriss to see the new Visium offices — not to show off, but because he was genuinely pleased with the new space. As they stood in the conference room, looking out over Central Park’s manicured lawns and wooded hills, they talked about the growing complexity of the hedge fund industry. After all, Gottlieb and his fellow poker players want the same thing: to build good businesses that will last. • •