- Billionaire Steven Schonfeld’s hedge fund was quick to adopt algo-trading strategies and now has 75 portfolio managers across the world.
- Schonfeld Strategic Advisors has been open to outside capital for just over three years and has bold aspirations — its chief investment officer says the goal is to be the premier equities hedge fund in the world.
- The firm keeps to its roots, though, with 50 old-school traders still working in Long Island, roughly half of whom have been with the firm for more than 15 years.
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Schonfeld Strategic Advisors — the hedge fund that grew out of the fortune of billionaire trader Steven Schonfeld — has seemingly bold aspirations given it has been open to outside investors for just three years.
"Our goal is to be the premier equities hedge fund globally," said Ryan Tolkin, Schonfeld’s chief investment officer, in an interview with Business Insider at the firm’s midtown Manhattan office.
A lofty target, but the firm’s ambitions might not be as much of a reach as they sound — it has been steadily adding strategies over the years, enjoys stable financial backing from its founder, and has demonstrated an ability to navigate change in the past.
Schonfeld, known in the 1980s for using legions of Long Island-based traders to essentially do quant trading by hand, now has 75 hedge fund portfolio managers across the world that employ event-driven equity, quant, and discretionary long-short strategies, with $2.6 billion in outside assets.
And the firm once said to be a part of "Wall Street’s B-list" by a Wall Street Journal article in 2009 is outperforming many of its better-known peers in Chicago, Greenwich, and Stamford, posting 16% return last year when many funds lost money. With solid performance and consistent backing from its namesake, Schonfeld might be one of the most stable hedge funds in the game right now.
This year, sources say, the firm’s flagship is up nearly 10% through July, besting the average hedge fund. The firm declined to comment about its performance.
The right moves at the right time
Schonfeld started trading more than 30 years ago, and he personally got rich with short-term trades that he’d often get out of in a day or so. He built his own wealth to the point where he was able to hire as many as 1,100 traders at Schonfeld Group’s then-headquarters in Long Island to work the same kind of strategy.
That labor-intensive approach made him a billionaire, but Schonfeld was also quick to adapt to the sea change that many stock-picking hedge fund managers are still struggling with: the move to quantitative, computer-driven strategies. Andrew Fishman, the firm’s president since 2000, called Schonfeld "one of the great natural statisticians," and said that helped him be more flexible with his approach.
"Math has always been one of the elements that has defined us, and Steve kept up with what was the lastest and greatest coming down the pipe," Fishman said.
The result was a statistical arbitrage fund launch in 2007, which is now the biggest product at the firm and has 22 portfolio manager teams in the US, Europe, and Asia. While the firm had made its name by executing trades relatively quickly, stat arb funds took Schonfeld and others’ human-run strategies and super-charged them, with positions sometimes bought into and sold out of in the matter of seconds.
The financial crisis helped the firm grow its nascent strategy quicker than expected as Wall Street and other hedge funds hit hard pushed talented people to the street, Fishman said. Regulations on banks’ ability to trade on their own accounts created a surplus of investors in the job market.
"In some ways, we were able to get a jump-start on the talent scene," he said.
The stat arb fund now makes up between 50% to 60% of the risk the firm takes. A discretionary stock-picking fund, which was launched in 2012 and has 37 portfolio managers, assumes 25% to 35% of the firm’s risk. An event-driven equity strategy assumes the rest of the firm’s risk, except for roughly 3% still being run by a group of 50 traders in Long Island.
The goal of the collection of strategies is to cover every part of the stock on every time horizon, Tolkin said.
"Try to make as many different bets across stocks as possible," he said. "You make an overall portfolio that combines different market environments."
This build-up led to the opening of the multi-strategy hedge fund to outside investors under the name Schonfeld Strategic Advisors right as investors were moving away from single-manager, single-strategy funds. Schonfeld himself had stepped away from running the day-to-day operations of the firm before the funds opened to outside investors.
Fishman said the firm benefitted from the movement away of large institutions away from fund-of-funds and into managers that blend several different strategies.
A patient short-term trader
The reality is that while the timing of many of Schonfeld’s moves might have been right, the firm still needed to add quality people to execute the vision.
The firm "became a place people want to come," said Tolkin, because of several factors. The first is the stability offered by the capital invested in the funds and business by Steven Schonfeld. But another big one is the "patient approach that has always been a part of our DNA" when dealing with investment staff, Fishman said.
"It’s one of the things that has really separated us then and now," Fishman said.
The reality, Tolkin said, is that not every portfolio manager is going to crank out returns all the time. But the firm believes in catering to its portfolio managers’ needs — whether it’s for data, technology, additional analysts, or more — is a better approach than firing.
"Some of our most successful PMs would have been fired by our competitors because they initially struggled," Tolkin said.
The patience can be seen with the remaining traders still working on Long Island, roughly half of whom have been with the firm for more than 15 years and are now personally invested in the hedge fund, Fishman said.
"It’s a differentiator, this history and this culture," Fishman said.
Last year, the firm hired 38 investment professionals, and has added some big names this year, including two former BlueCrest Capital PMs, Alex Codrington and Russell Hartley, and one of Glenn Dubin’s top quants Ricky Shi. Codrington and Hartley started up the London office, and the firm’s plans to expand internationally include the decision to merge with Folger Hill, retaining a majority of the manager’s investment teams in Europe and Asia.
The firm’s success in building a business has also attracted competitors to come after some the architects of the young hedge fund. Schonfeld sued Michael Gelband’s ExodusPoint last year for poaching Alessandra Sassun, head of human capital, Valmiki Prasad, head of execution research, and Gregoire Vidal, head of business development for quantitative strategies. ExodusPoint countersued Schonfeld, saying the hedge fund "systematically under-compensated employees," and in April, a judge denied an injunction request from Schonfeld that would have stopped Sassun and Prasad from contacting people they worked with at Schonfeld.
Schonfeld and ExodusPoint declined to comment on the lawsuit.
A focus abroad
The next step in the firm’s ambitions for global domination is its expansion into overseas markets, where it hopes 30% to 35% of its risk will be soon.
The belief is that there’s alpha to be mined from international markets, especially compared to the US, said Tolkin. But the firm does not want to grow for growth’s sake alone, Fishman said.
"I don’t think you have to continue to scale to get the advantages of scale, at a certain point there is diminishing returns," he said.
"We’re not going to hire a US consumer group that’s doing the same thing our current US consumer group is doing just for the sake of growing."
The expansion will be into areas and equities the firm doesn’t have exposure to right now, but without a huge rush to get there. Fishman knows the manager has a good base to work off, with decades of proprietary trading data, technology infrastructure, and Schonfeld’s capital and reputation, as well as the current "luxury of good performance" that makes it easier to be selective with expansion plans and additional investors.
"We want people that understand our business, " he said of potential investors.
"You can be consistent with your objectives."
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