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Greg Lippmann’s Game: Structured-Products Markets

Lippmann calls the structured-products market “one of the last bastions of true alpha.” He co-founded hedge fund firm LibreMax Capital in 2010.

Fred Brettschneider and Greg Lippmann long joked about leaving Wall Street to start their own investment firm. The two have worked together since 1993, when Brettschneider showed up for his first day on the mortgage-trading desk at Credit Suisse First Boston after earning a master’s in economics from the London School of Economics and Political Science and Lippmann was assigned to show him the investment bank’s proprietary systems. In 2000, Lippmann followed Brettschneider to Deutsche Bank less than a week after his former colleague had been hired to head its asset-backed-securities trading. Both thrived at Deutsche — Brettschneider was promoted to head of global markets for the Americas; Lippmann rose to oversee all nonagency mortgage and other asset-backed-securities trading — and their conversations about going off on their own got a little more serious.

In the fall of 2009, when the world was reeling from the financial crisis and regulators were looking to impose major restrictions on the ability of banks to trade their own capital, the two old friends spied opportunity. Lippmann had been the architect of Deutsche’s large bet against the subprime mortgage market, netting the bank $2 billion — and potentially saving it billions in losses because of his caution — and making him a major character in Michael Lewis’s The Big Short. After the crisis he and Brettschneider saw that some of the very same asset-backed securities that were once considered toxic were trading at attractive high-double-digit yields. The problem was, under the expected new banking rules, the two executives would not be able to take full advantage of such opportunities if they stayed at Deutsche.

Lippmann left in May 2010. He was joined by Eugene Xu, a math whiz with a Ph.D. from the University of California, Los Angeles, who had designed the Deutsche computer models that predicted the huge subprime losses, and Jordan Milman, who had overseen subprime and nonagency trading at the bank. Brettschneider left Deutsche at the end of July. By then the others had set up a 12-person firm that was operating out of Lippmann’s Manhattan apartment. Brettschneider and Lippmann provided the working capital. “We were confident enough in ourselves that we didn’t want to sell a portion of the company,” the 48-year-old Brettschneider says of the decision not to take seed money.

That first summer was busy. Investing in the kind of structured-credit securities that Lippmann had specialized in at Deutsche required robust infrastructure and state-of-the-art computer models. While Lippmann and Brettschneider tackled the infrastructure, Xu worked feverishly with another analyst to construct the quant models that would be critical to their success. By early August, Xu and the analyst were about 90 percent done. “Building quant models is a little like hanging Christmas lights,” explains Lippmann, 45. “If one bulb doesn’t work, none of the lights go on.”







Lippmann, Brettschneider, Milman and Xu needed a name for their new business. Borrowing a page from Brevan Howard Asset Management, a London hedge fund firm whose name was created from its founders’ surnames, they came up with LibreMax Capital.

Lippmann concedes that he and Brettschneider may have overhired at first. “We started with more people than was necessary rather than having as low expenses as possible,” he says. “We wanted to build an institutional-quality firm that would have staying power.”

They also wanted to move quickly. Structured-credit markets had started to recover from the worst of the crisis; the bargains that they had spied while at Deutsche were no longer so cheap. In addition, they wanted to launch by October so they would have a full quarter of performance in their first year.

Brettschneider and Lippmann met their deadline and launched the LibreMax Partners fund on October 1, 2010, with $375 million in committed capital. By January 2012 the firm had $1 billion in assets, despite the Partners fund’s meager 2 percent return in 2011. Today, LibreMax manages $3 billion, powered by the Partners fund’s strong returns in 2012 (up 20.7 percent) and 2013 (up 12.9 percent). The firm has launched several specialized vehicles, including the LibreMax SL Fund, which invests only in asset-backed securities based on student loans.

As CIO of LibreMax, Lippmann oversees a 20-person-­plus investment team whose responsibilities are divided according to product type, including commercial-­mortgage-backed securities, residential-mortgage-backed securities, consumer-asset-backed securities and collateralized loan obligations. Each product group sifts through thousands of securities, using the firm’s proprietary computer models to analyze the underlying instruments, looking at factors like loan defaults and prepayments. The product group heads bring their ideas to the weekly investment committee meetings, over which Lippmann presides, but they also share them on the trading floor.

Lippmann calls the structured-products markets in which his firm plays “one of the last bastions of true alpha.” Unlike the traditional equity and bond markets, where spreads are tight and information is quickly disseminated, the structured-products markets are extremely opaque. The securities don’t trade on an exchange, and there can be massive disagreements on their value. Lippmann, for his part, learned to understand the intricacies of mortgage-backed securities in his first job, as an analyst at CSFB, after graduating from the University of Pennsylvania in 1991 with a BA in economics.

“LibreMax has one of the most thoughtful groups out there from the perspective of being long and short,” says Brian Walsh, co-founder of Saguenay Strathmore Capital, a Purchase, New York–based alternative-asset manager and LibreMax investor. “If you can play both sides well, you’ve got a real business.”

Brettschneider, who as president oversees the operational and client side of LibreMax, and Lippmann would agree. Together they are trying to build a firm that delivers strong risk-adjusted returns — a firm where people look forward to showing up for work. “We want everybody to be part of the family,” says Lippmann, who even though he has a big corner office spends most of his time on the trading floor, right next to Milman.

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