Inside Highbridge

HENRY SWIECA VIVIDLY REMEMBERS THE FIRST TIME HE met Glenn Dubin, his partner in Highbridge Capital Management, the New York City hedge fund firm. It was in 1960 in a Bennett Park sandbox at West 183rd Street and Fort Washington Avenue in the northernmost reaches of Manhattan.

"We shared peanut-butter-and-banana sandwiches," recalls the 47-year-old Swieca, with a grin. Dubin, also 47, just laughs, saying, "His memory is much better than mine."

The two grew up in Washington Heights, a working-class neighborhood in the shadow of the George Washington Bridge. All through their school years, they remained fast friends. Swieca attended a private school on the Upper West Side -- the Franklin School (now merged with the Dwight School) -- on a scholarship, whileDubin starred in football and wrestling at John F. Kennedy High School in Riverdale in the Bronx. But the friends, who lived just five blocks apart, would often spend hours on the phone in the evenings, with Dubin, the jokester, invariably cracking up his buddy.

The pair roomed together during their freshman and sophomore years at the State University of New York at Stony Brook. And it was at the leafy Long Island school that Swieca and Dubin teamed up for their first business venture: taking over the chocolate-distribution business of Dubin's deceased grandfather. They earned a fair amount, but, Swieca concedes, "We ate too much chocolate."

The two pals still have a taste for sweets. As founding partners of Highbridge Capital Corp., a $6 billion hedge fund, they earn tens of millions a year, counting their take from the firm's lucrative 25 percent performance fee and the gains on their large stake in the fund. That's not to mention the not inconsiderable proceeds from their other business, Dubin & Swieca Capital Management, which runs a pair of funds of hedge funds, Overlook Performance Fund and Pinehurst Partners, with a combined $1 billion in assets.

The clients of Highbridge Capital have also done rather handsomely -- and with remarkable consistency. Highbridge's returns, net of all fees, from the time the fund was launched in September 1992 through April 2004, average more than 16 percent a year, or about 50 percent better than the Standard & Poor's 500 index over the same period -- with a lot less risk (see chart, page 76). Highbridge has posted gains in an astounding 127 of 140 months since its inception, and the fund's standard deviation of 5 percent indicates that it's one third as volatile as the S&P. Moreover, Highbridge's Sharpe ratio -- its incremental return over the risk-free Treasury bond rate -- is 2.17, or more than four times that of the S&P 500 (see table, page 76).

The fund's best year was 1999, when it gained 32.4 percent -- nothing to sneer at, certainly, but not the kind of jaw-dropping return that would catapult a firm to the top of hedge fund performance tables. That very fact, however, points up the premium that Swieca and Dubin put on dependability -- on their batting average rather than their home-run tally. Last year the fund finished up 10.2 percent net of fees, or 13.6 percent gross. It was profitable in 11 out of 12 months, with a Sharpe Ratio of 3.86 and a standard deviation of 2.3 percent. The fund was moderately leveraged.

"Many people in the hedge fund industry see Swieca and Dubin as a benchmark," says Lloyd Blankfein, president of Goldman, Sachs & Co.

THE PAIR, WHO DRAW THE NAMES OF ALL OF THEIR funds from landmarks in their old neighborhood, picked an especially apt label in "Highbridge." The name refers to the old, now disused landmark aqueduct that spans 620 feet of the Harlem River between 170th Street in the Bronx and 174th Street in the Heights; built in 1848, it is the oldest extant bridge on the island of Manhattan. Just so, Dubin and Swieca are determined to see their firm endure long after they've left it. Says Swieca: "Our mantra is: We don't want to be the largest hedge fund. We want to be the hedge fund that is in business the longest."

To that end, the two have in recent years brought in seasoned outside managers to run many day-to-day operations; diversified the multistrategy Highbridge fund further by adding five more investment strategies; and allowed a few of their top portfolio managers to run money in single-strategy funds for Highbridge clients. The last move is an unusual policy designed to help the firm hold on to outstanding performers while adding to its assets without disrupting its methodically determined asset allocations (see box, page 74). The founders also recently ramped up their durable fund-of-funds business. Like the hedge fund business generally, Highbridge Capital Management has had something of a growth spurt lately. From early 2000 through the end of last year, both assets and employees tripled.

Might this whirl of activity be a prelude to Highbridge's founders walking away from the business, perhaps selling the firm or taking it public? "Not for a long while," insists Dubin. "We like to work. We tried to build an infrastructure that is less reliant on us, but not from the standpoint of retirement." He adds: "My wife is always asking me to spend more time with the kids, get home for family dinners and birthday parties. But she knows this is my passion, and she and the kids get all of my time on the weekends."

Together, Dubin & Swieca Capital, started in 1984, and Highbridge Capital Management, founded in 1992, employ 160 people today, mostly in midtown Manhattan. Highbridge Capital Management also has an office in London and is in the process of opening an outpost in Hong Kong. The total assets of Swieca and Dubin's various fund enterprises -- the funds of funds, the flagship hedge fund and the two new single-strategy funds -- amount to nearly $8 billion.

The flagship Highbridge Capital fund now deploys seven discrete strategies (listed in order of their introduction): global convertible arbitrage, event-driven equity arbitrage, special opportunities, statistical arbitrage, structured private investments, European special situations and long-short equity. Dubin and Swieca plan to add at least one more single-strategy fund later this year and perhaps another in 2005, both keyed off current strategies. However, convertible arbitrage remains the fund's main turbine. As of year-end 2003, U.S. convertible arbitrage accounted for 44 percent of Highbridge's assets, European convertible arbitrage for 12 percent and Asian convertible arbitrage for 10 percent. The remaining 34 percent was divvied up as follows: event driven and relative value, 10 percent; special opportunities, 8 percent; statistical arb, 8 percent; private placements, 4 percent; long-short equity, 2 percent; and European special situations, 2 percent.

Highbridge's client list is as diverse as it is impressive, ranging from blue-chip institutions such as insurers American International Group and Axa Group to money-center banks J.P. Morgan Chase & Co. and Citigroup to college endowments like those of Duke University, the California Institute of Technology and the University of Chicago to substantial family offices.

Investors have come to rely on Dubin and Swieca's fund for returns that may not be showy by hedge fund standards but are take-to-the-bank steady. Highbridge compounded, for instance, at a 14 percent average annual rate over the four turbulent years from 2000 through 2003, compared with a 5 percent average annual decline for the S&P 500.

"They understand risk," says Eli Broad, the founder of two Fortune 500 companies and a Los Angeles philanthropist who has long invested in Highbridge through his foundations. "During a bubble," adds Broad, "they won't do as well as others, but they average out, exceeding the S&P with less volatility and less risk. They have survived and thrived in all kinds of markets."

Private banker Edgar de Picciotto, chairman of the board of Geneva-based Union Bancaire Privée, who has been investing with Dubin and Swieca since 1993, confides, "The steadiness of their returns and volatility that is not high has made us a large investor in their fund."

The most extraordinary aspect of Highbridge may be that Dubin and Swieca -- succeeding in an industry all but created by and for larger-than-life traders -- are not hands-on traders themselves. Instead, they rigorously oversee risk and asset allocation while identifying those with superior investment skills.

"We never managed money for our investors. We are never in front of screens making tick-by-tick investment decisions," Dubin says. "This makes us absolutely unique in the hedge fund industry."

Perhaps for this reason, Dubin and Swieca may have come the closest among hedge fund proprietors to building an institution capable of outlasting its founders. Other well-known hedge funds have been so reliant on their legendary founders that they've tended to go into swift decline when the "name" partners retired. "While other hedge fund managers were trying to figure out the dollar-yen trade, where the Nasdaq or the S&P was going, we were trying to build a sustainable business," says Dubin. "Look today. We've got a business."

LIKE MANY SUCCESSFUL marriages, Swieca's and Dubin's partnership is a blend of opposites. A lifelong Democrat and a supporter of John Kerry, Dubin is the more outgoing, public figure, a former star athlete who chairs fundraisers for the Robin Hood Foundation (he helped found the charity). The Dubins have a weekend place in rustic-chic North Salem in Westchester County. By contrast, Swieca, who is stumping for George W. Bush, is a strictly behind-the-scenes backer of civic and religious causes, and he and his family spend summers and holidays in the low-key community of Atlantic Beach, just over the New York City border on Long Island. "You'll never find two people who are so dissimilar yet are so bonded," concedes Dubin.

What the pair, who lunch together at least twice a month, have in common at the core are their roots in Washington Heights. When they were coming of age, this blue-collar enclave of parks and stunning riverside vistas, populated by Irish and German-Jewish immigrants (many of the latter refugees from Nazi Germany), was beginning to succumb to urban decay. By the 1970s, when Dubin and Swieca were in high school, the Heights was chiefly known for being the birthplace of graffiti -- popularized by neighborhood figures like "Taki 183," who lived on 183rd Street and whose ubiquitous scrawled signatures symbolized New York City's blight to many. By the 1980s, long after most of the Irish and the German Jews had fled, the Heights had become the crack cocaine center of New York City.

In this deteriorating environment, the two grew up striving, in the New York version of the classic American dream, for something better -- beyond the confines of the old neighborhood. Not that they ever left the Heights completely behind; elements of the old neighborhood remain with them, indelible as graffiti, in everything from the names of their funds to their outlook on life. "Growing up in a working-class family and neighborhood instilled important values and made me ambitious," says Dubin, who is of Russian and Austrian Jewish descent.

His U.S.-born father labored for most of his life as a taxi driver until he went to work with Dubin's uncle, a dress manufacturer. Dubin's mother, an émigré from Austria, was a homemaker. Swieca's parents were Polish Holocaust survivors who emigrated to the U.S. from France in 1955. His father, an accountant, gave Henry an appreciation of classical music (and a dislike of accounting). His parents' wartime experience fostered his interest in history.

Before they'd even reached their teens Dubin and Swieca took part-time jobs, the former scaling fish at Frank's Fish Market in the neighborhood, the latter cleaning shelves at the bookstore in the Port Authority George Washington Bridge bus terminal at 178th Street. "We were always commercially driven," says Dubin. But they had lots of other interests as well. Dubin, for instance, learned to play the guitar; Swieca, who used to blast the Rolling Stones from his room, notes dryly, "I played the harmonica."

Dubin captained the football and wrestling teams at Kennedy High and later the football squad at Stony Brook as a running back and outside linebacker. At the same time, he edited the college newspaper. "Competing in sports has been a very important part of my life," he says. "I'm competitive, driven and focused." Tennis opponents like his good friend Paul Tudor Jones II, the famous founder of hedge fund Tudor Investment Corp., might well attest to that. "He's only beaten me once in 20 years," Dubin reports.

Swieca, by contrast, was the nonathlete. He remembers once refusing to follow Dubin on a physically demanding and precarious climb up steep ledges at Fort Tryon Park. "I thought the risk-reward wasn't good," says Swieca, smiling. "Glenn was more of a risk taker." Besides, he adds, "my mother would have killed me."

Tragedy struck the Swieca family when Henry was off at college. In 1976, when he was 19, his mother died of Lou Gehrig's disease, and six months later his father died of a heart attack. Dubin's parents welcomed Swieca into their home, where he often stayed during college breaks. "He essentially became part of the family," Dubin recalls.

Swieca met his future wife, Estee Tobaly, through Dubin; she was a friend of a girl that Dubin was dating. The Swiecas today have four children. It was Estee who proposed that Dubin and Swieca go into business together. Dubin eventually married a former Miss Sweden and Ford model, Eva Andersson, who is a corporate physician. She and Dubin have three children.

Upon graduating from Stony Brook -- Dubin in 1978 with a degree in economics and Swieca in 1979 with a degree in economics and French -- they both became stockbrokers. Dubin joined E.F. Hutton & Co.; Swieca, Merrill Lynch & Co. Inspired by his dentist uncle, a stock market investor, Swieca had been trading the $50,000 he'd inherited from his parents since his senior year in college. He later used Dubin as his broker. "He wouldn't pay any commissions," Dubin says. "He still dislikes paying commissions."

Swieca made a tidy profit on South African gold mine stocks during the inflationary upsurge of the late 1970s. He used part of the money to send his younger brother to medical school. "I bought heavily on margin," he recalls. He quit Merrill after two years to enroll at Columbia Business School.

In 1981, while Swieca was grinding out his MBA in finance, he and Dubin, still at Hutton, chipped in to buy a seat on, and became founding members of, the New York Futures Exchange, where Swieca found time to trade index options. "The buzz was that the NYFE was going to introduce stock-index futures," Swieca recalls. "I figured, if it worked, it would be a home run as an investment." Futures did indeed take off, thanks to an incipient bull market in 1982, and the two made five times their investment when they sold the seat two years later.

Dubin began to focus on managed futures. Swieca, meanwhile, joined Dillon, Read & Co. as an institutional salesman. Then in 1984 he jumped to Hutton, where he and Dubin persuaded their bosses to let them start their own asset management and brokerage group under the Hutton umbrella.

Shortly thereafter, Swieca and Dubin had the inspired idea of combining portfolio managers who had different investment styles and followed different asset classes. This was the origin of their multistrategy approach. The hitch was that they had to operate within the confines of Hutton's Suggest Program, an early wrap product that charged a hefty 3 percent fee. "It was fine for the dentist or the pension plan with $200,000," Dubin says ruefully, but institutions shied away because of the price tag.

Serendipitously, Hutton was just then moving into managed futures. "We came upon the industry in its infancy," Dubin recalls. "So we had early mover advantage." In 1987 they were pioneers in starting, under the Hutton imprimatur, one of the early funds of funds. Reaching back to the old neighborhood, they named the fund, which specialized in commodities managers, the Fort Tryon Futures Fund. It got off to a good start, and the following year they launched the Overlook Performance Fund, a diversified fund of funds named after Overlook Terrace, also in the old neighborhood.

"We applied modern portfolio theory early on," says Dubin. One of their key insights: Combining commodities managers with securities managers tempers volatility, because their two asset classes tend not to be correlated. At the time, investing in commodities and derivatives and mixing them with stocks while using leverage was regarded as cutting-edge. Dubin and Swieca grasped what global macro managers would later realize -- that they could obtain more consistent results if they acted on their economic insights through both commodity instruments, like currencies and futures, and securities in the same fund.

"It was a true frontier," says Tudor's Jones. "They were called CTAs -- commodity-trading advisers. They were extraordinary as salesmen and at identifying talent."

Jones was one of the hedge fund managers that the pair tagged as having great promise. Dubin and Swieca gave Tudor $250,000 in 1985, when Jones's firm had all of $4 million in assets. Another manager they spotted and funded well before he became famous: Louis Bacon of Moore Capital Management.

The 1987 stock market crash posed the first big test for Dubin and Swieca. Their Fort Tryon fund finished the year up 65 percent net of fees -- a stunning performance for any year but especially for one in which the stock market plunged 22 percent in a single day. True, a significant part of Fort Tryon's return came from Tudor's striking 201 percent gain that year as well as from strong performances by other commodity-trading advisers, such as Caxton Associates' Bruce Kovner. Still, Dubin and Swieca's multistrategy theory seemed to have passed with flying colors.

But rumors percolated that the crash would force the closing of Hutton, and Swieca and Dubin feared that they would lose most of their net worth, which was tied up in the brokerage firm's deferred-compensation program. In December 1987, in the nick of time, Shearson Lehman Brothers came to the rescue of Hutton and, incidentally, Dubin and Swieca.

At this point, the pair were still nominally employed by a Wall Street firm, with all that implied in insecurity, bureaucracy and forgone opportunity. So in late 1989 they arranged to have Dubin & Swieca spun off from Shearson as a money management operation; in return they agreed to direct business to the firm.

The divorce was happier than the marriage had been. By 1992, Fort Tryon, Overlook and related managed accounts, representing $1 billion in all, were thriving. Nevertheless, in September of that year, Swieca and Dubin decided to put the flourishing fund-of-funds operation on the back burner and launch their own actively managed hedge fund, Highbridge. As Swieca succinctly explains, "That's where the margins are in this business."

Dubin and Swieca set out to build a multistrategy fund -- one with broad diversification. They drew on Swieca's hands-on experience trading index options and equity options at the futures exchange and their combined knowledge of a multitude of markets, exemplified by their success at running multistrategy funds of funds.

From the outset Dubin and Swieca structured Highbridge so that it would not depend on a single dominant trader. They recruited a number of top-notch portfolio managers, paying them generously. And they adopted a companywide operating platform. Moreover, the partners set up Highbridge as a broker-dealer, facilitating the fund's use of leverage (and, coincidentally, bringing it under the purview of the Securities and Exchange Commission -- which may once again be a case of Dubin and Swieca being ahead of their time).

"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."

Highbridge's portfolio managers largely call their own plays. Indeed, Dubin and Swieca's decision to let crackerjack portfolio managers set up hedge funds of their own under the aegis of Highbridge is a logical extension of their managers' comparative autonomy. Two such special funds have been created so far. The Highbridge Event Driven/Relative Value Fund, which started trading on February 1, is managed by Schneider, a Harvard-trained lawyer who was a manager of merger arbitrage at PaineWebber before joining Highbridge in 1994. The Highbridge Long/Short Equity Fund, which began trading on May 1, is managed by Alec McAree, a former managing director of Soros Funds Management, who most recently was director of research for the Long/Short Diversified Fund of the Citadel Investment Group.

Later this year Highbridge plans to introduce the Highbridge European Special Situations fund, managed by Ralph Berstecher, who joined the firm last year from Perry Partners in Europe.

Dubin and Swieca say that one purpose in sponsoring these single-strategy funds is to secure additional capital for the firm's portfolio managers and their teams without jeopardizing Highbridge's risk profile. The setup also makes it much easier to attract and retain the best and the brightest, Dubin contends. At the same time, he adds, the arrangement enhances Highbridge's franchise value through the branding of additional high-quality hedge fund products.

"We are addressing a really critical issue -- providing larger pools of capital for talented professionals without their having to respond to the siren song of all of the money floating around the hedge fund business today," says Dubin. And as the managers are spared the hassle of running a business, Swieca and Dubin have prospered in part because they've been spared having to fixate on trading screens.

In January 2002, Highbridge hired a team of quantitative analysts away from D.E. Shaw Group to do statistical arbitrage, one of the seven core strategies. This arcane strategy analyzes technical and fundamental data to take advantage of the many small anomalies in even the world's most-liquid equity markets, executing trades on an automated basis. And in July 2003, Highbridge introduced a long-short equity strategy that concentrates on the consumer, business services and media stocks that make up roughly 40 percent of the S&P 500 by market capitalization. The firm also set up a European special situations team that operates out of its London office.

Each strategy, says Dubin, came about because Highbridge spotted a market opportunity and found the right person to exploit it. The fund got into European special situations, for instance, chiefly because Dubin and Swieca were able to hire Berstecher, an expert in that specialized field. And in July 2003, Highbridge recruited McAree for the long-short equity strategy.

"You can track the market's opportunities with the development of our business," Dubin says.

That is why he and Swieca, coming full circle, are again trying to grow Dubin & Swieca, their fund-of-funds business, capitalizing on the tidal surge of money flowing into hedge funds and funds of funds. In recent months they've hired two critical managers: Tracy McHale Stuart, former head of global multimanager strategies at Goldman Sachs Asset Management, as D&S president; and Anthony Anselmo, who had been chief administrative officer of Blackstone Alternative Asset Management, to be COO and CFO.

DUBIN AND SWIECA KID EACH OTHER THAT THEIR relationship is like a marriage, though few modern marriages survive as long as their friendship has. Their words and actions convey the intimate reflexes of a lasting partnership. At a recent breakfast meeting, as a waiter stood by patiently, Dubin interrupted his partner's soliloquy on trading to say, with amused tolerance, "Henry, order." Which Swieca promptly did.

For two people to know each other so well and be friends for so long is "pretty extraordinary," says Dubin. But he adds that "to continue the friendship and create one of the most successful hedge fund businesses is really unique."

Yet for all their success, Swieca and Dubin "don't have a swagger," says Michael Minikes, treasurer of Bear, Stearns & Co., which has long provided Highbridge with prime brokerage services. "They handle themselves with a lot of humility. It is genuine." That impression is shared by Michael Price, a retired Goldman Sachs partner who not long ago started a hedge fund of his own, Empyrean Capital Partners, in Los Angeles; he has been close friends with Swieca and Dubin for a decade. "They are just great guys, down to earth and well rounded," he says.

Those traits were on display one sunny day in April when the pair paid a visit to Washington Heights -- their first in several years -- for a photography session that produced some of the pictures surrounding this story.

Their old neighborhood has gone through several transformations, from working-class enclave to graffiti parlor to crack den to proto-yuppie neighborhood today. Strolling down bustling West 181st Street between Broadway and Fort Washington Avenue, Swieca and Dubin were delighted to note that remnants of the Washington Heights of their day still exist: Joseph's Shoes, Gruenebaum Bakery and Frank's Fish Market.

Heading instinctively to the local basketball courts, they reminisced for a few moments with a middle-aged man shooting baskets about people they all knew back in the day. When the name of one of their old buddies was mentioned, Dubin exclaimed, "He was the only Jewish guy in the neighborhood who could dunk."

In the end, of course, that's not their game: no flashy slam dunks for Dubin and Swieca, just a strong, steady, enduring below-the-rim performance, long on fundamentals, short on bravado.

When the photo session ended, the pair of friends climbed into their car to head out of the old neighborhood and back to ritzier precincts downtown.

"We're the American dream," says Swieca.

And, he might have added, the American investor's dream, as well.

Highbridge's franchisees

That old Wall Street saw about the assets of financial firms being the people who walk out the door at night is especially true for hedge funds. After all, star portfolio managers for large hedge fund firms like Highbridge Capital Management can readily set up their own shops, luring clients away from their old employers and collecting lucrative performance fees for themselves. By no coincidence, the net $75 billion that poured into hedge funds last year helped to spawn almost 500 new funds, according to Hedge Fund Research, a Chicago-based hedge fund information company.

At Highbridge, Glenn Dubin and Henry Swieca have devised a system to retain -- and attract -- top portfolio managers in the face of the siren song of independence. They have begun to let their ace managers operate hedge funds of their own within the Highbridge fold so that they can take advantage of the firm's economies of scale and global reach.

These select managers still run money in their specialties for clients of the multistrategy Highbridge fund. But they also get to run funds built around those special strategies. Although Highbridge retains ownership of the performance record, the managers receive a prearranged share of the management and performance fees. "We share generously in the economics of the funds," says Dubin.

The goal is to grow Highbridge's assets and increase the strategy groups' capacity without jeopardizing the flagship fund's low-risk profile -- while also making Highbridge more appealing to portfolio managers. "This directly addresses how we will attract and retain top managers," says Dubin. "It gives us the ability to attract the best and the brightest."

The arrangement has a bonus: Clients get to invest additional money in, say, Highbridge's event-driven strategy without compromising the fund's carefully wrought asset allocation and risk management formulas for its seven discrete strategies.

Highbridge shares intellectual capital -- its assorted equity, credit and derivatives specialists -- with the in-house, semi-independent managers. It also makes available the firm's back-office services. The portfolio managers can concentrate on investing without the distraction of having to run a business.

"The portfolio managers have access to the high-quality technology, risk and financial professionals at the firm," says Dubin. "We have a deep and important relationship with all of the counterparties on Wall Street. There is no way with even $1 billion of assets that you can have that level of talent and access."

Highbridge already has a reputation among hedge funds for holding on to its best people. The fund has lost just one portfolio manager in its 11-year history -- Alexander Jackson, who left in 2002 to start his own hedge fund. Swieca and Dubin accordingly insist that they weren't forced to embrace the new portfolio manager arrangement. Nonetheless, Highbridge, like most hedge fund firms, has palpable incentive to act the part of the enlightened employer. -- S.T.