PROFILE
With a reputation over the years for being one of the most secretive hedge funds around, D. E. Shaw & Co. is also atypical compared to its conventional Wall Street colleagues. Founded in 1988, the company favors hiring individuals with outstanding achievements, often in the fields of math and physics, but not necessarily from the financial arena. The firm uses quantitative mathematical techniques and large amounts of computing power to identify profit opportunities in “pockets of anomalies”. Its investment portfolio is dynamic and constantly changing based on where the profit is, what the risk is and what the transaction costs are.
Since its inception when it focused on quantitative strategies, the firm has broadened its activities to include qualitative strategies based on expert human analysis. It also provides customized debt and equity financing to selected companies, invests venture capital and creates projects of its own relating to new technologies. Its founder’s approach to investing has been systematically based on risk management, preferring preservation of capital to abnormally large profits. Historically it has been tight-lipped about details on strategies and holdings, leaving investors in the company to decide if they will accept faith rather than total transparency.
Trading in the firm is done almost round the clock, with tens of thousands of transactions being completed per day as portfolios are continuously re-optimized. This level of activity is a natural consequence of the core trading philosophy of the company, relying on the analysis of very large amounts of data from many countries, and applied to many asset classes. The firm continues to use proprietary computing models and strategies, developed according to D. E. Shaw “at a cost of hundreds of millions of dollars.” The software is written with the aim of integrating the complex interlinks between large numbers of different financial instruments to identify the pockets of opportunity referred to above.
On the other hand, the company looks to qualitative trading as a source of growth for its activity. In this case, human judgment is paramount in successful investment. Flexible financial engineering then allows the company to create solutions rapidly for financing requirements for different investment projects. Preferred or common equity, and senior, mezzanine or convertible debt are all instruments that are deployed according to requirements. The company also develops innovative research methods outside other mainstream approaches to support qualitative investment approaches in areas where it has extensive in-house experience relating to the sector concerned.
Founder David Elliot Shaw’s background was originally academic. A Stanford Ph.D., he taught in the Computer Science Department at Columbia University, before moving to work in computational finance for Morgan Stanley & Co. in 1986. There he introduced distributed computing techniques to process vast amounts of data to arbitrage on small, short-term anomalies in the prices of securities. He left Morgan Stanley in 1988 to start D. E. Shaw as “a research lab that happened to invest” and hired his first employees among people with similar backgrounds to his own.
In 2002, David Shaw created an executive committee of six people and effectively transferred day-to-day management to the team. The team is recognized for its cohesion, its critical thinking and its cooperation for efficiently moving capital between different areas of investment. It continues to apply the methods and attitudes of the company’s founder, meeting weekly face to face to advance on company-wide issues and opportunities. The six managing directors Anne Dinning, Julius Gaudio, Louis Salkind, Stuart Steckler, Max Stone and Eric Wepsic each have individual responsibilities for particular areas of the company’s activities. Dinning is responsible for real estate, insurance, long-short equity, institutional asset management and energy trading. Gaudio takes charge of credit, special-situations investments and convertible securities. Salkind’s fief is direct capital investments, venture capital and private equity. Steckler oversees back-office and administrative functions, including legal aspects and compliance. Stone runs activities in fixed-income and macro investments. Wespic deals with systemic investment activities.
Louis Salkind, the second employee hired, was a Unix programming expert at the time. Anne Dinning joined D. E. Shaw as a junior researcher after her Ph. D. in computer science, and was more attracted to the firm for its “short-term feedback loop”, than specifically for its financial aspects. Stuart Steckler is in a sense the exception as he was already a partner in the accounting firm of Oppenheim, Appel, Dixon & Co. Max Stone was working in psychiatric hospital in Providence, Rhode Island, after graduating in psychology from Brown University at the time of his job interview at D. E. Shaw. Julius Gaudio graduated in economics from Harvard. Before joining D. E. Shaw, Eric Wespic was pondering an academic career as a math professor after degrees in the same subject from Harvard as well.
David Shaw, while remaining chairman of D. E. Shaw & Co. now devotes more of his time to other computational projects, including “Anton”, a supercomputer designed for running detailed simulations on molecular dynamics of proteins. He has served on the President’s Council of Advisors on Science and Technology for Presidents Clinton (1994) and Obama (2009). Other distinctions include co-chairing the High-Performance Computing Initiative as part of the Council on Competitiveness and fellowships of the American Academy of Arts and Sciences, and the American Association for the Advancement of Science.
Statistics for 2010 showed D. E. Shaw falling from fifth place to twentieth place in the rankings of US hedge funds for assets under management. Assets in the company decreased by 40% during 2010. Gaudio cites an influx now of capital from countries outside the United States. D. E. Shaw has also become more open with investors about where and how their money is being used, an important tactic in the wake of the global financial crisis if the company is to retain the loyalty of existing customer and attract new ones.
SHAREHOLDER LETTERS
MEDIA
The Power of Six (Alpha – March 2009)
25 Leaders Reshaping New York (Crain’s New York Business, September 29–October 5, 2008)
D. E. Shaw’s Max Stone Takes On “Risk” (Absolute Return – April 2008)
The Risk Awards 2007: Hedge Fund of the Year (Risk – January 2007
D.E. Shaw And Insiders Love These Stocks (Seeking Alpha – September 28, 2011)
A Peek Behind the Curtain at D. E. Shaw. (Wall Street Journal – March 8, 2011)
Operational Due Diligence (CFM – March 1, 2010)
D. E. Shaw Layoffs Show Wall Street’s Pain Spreading (NY Times – September 28, 2010)
Interview With David Shaw, CEO, De Shaw and Co. (AllBusiness.com – June 21, 2000)
VIDEOS
The Anton Supercomputer at D.E. Shaw
QUOTES
“We have the distinction of being the only investment bank to be started above a communist bookstore.”
“Our goal is to look at the intersection of computers and capital, and find as many interesting and profitable things to do in that intersection as we can.”
“Finance is really a wonderfully pure information-processing business,”
“For us, proprietary trading is still very important and very good, but that’s partly because we lucked out.”
“A hedge fund can put on seemingly perfect hedges for the many specific scenarios it envisions. But the world can unfold in unpredictable ways, and this can mean that sometimes broader protections are in order. Hedging is often better when it is more general.”
“Risk management is a deep focus of each strategy group, not just the risk department. If it only matters to some risk group down the hall, then traders might be implicitly getting the message that if a risk isn’t picked up by the risk system, it doesn’t count, whereas in fact those are some of the risks that may count the most.”
