Highbridge Capital Management is a global alternative investment management organization founded in 1992 by two childhood friends Glenn Dubin and Henry Swieca with an initial capital of $35 million that they collected from their phenomenal success as stock market traders in the late 1980s. Headquartered in New York, the firm has offices in London and Hong Kong, and presently manages $28 billion in capital with its affiliates.
JP Morgan Asset Management, a division of JP Morgan Chase, acquired a majority stake in the company in 2004. Later in 2009, the entire firm was purchased by JP Morgan. The latter deal was believed to be worth $1.3 billion. While Mr. Swieca left the fund in 2009, Mr. Dubin continued to be the CEO as part of the succession strategy.
Named after the nineteenth century aqueduct that connects the Bronx with Washington Heights, Highbridge Capital Management addresses the peculiar investment requirements of a variety of clients such as high net worth individuals, large institutional investors, foundations, public and corporate pension funds, endowments, and family offices.
In order to cater to such a diversified clientele, the firm offers numerous investment platforms such as hedge funds, credit-equity investments with longer holding periods, and traditional investment avenues.
Mr. Dubin and Mr. Swieca first met in kindergarten when they were five and continued to be together at college at SUNY Stony Brook. Mr. Swieca started as a trader by buying and selling stock from the money left behind by his parents. He then joined Merrill Lynch and was one of the founder traders of equity index options at New York Futures Exchange. Later, Mr. Swieca advised institutional investors at the Dillon Read Investment Bank.
Mr. Swieca joined E.F. Hutton & Co. in 1984 where Mr. Dubin was already working as a retail stock broker since 1978. Joining forces, these two created their own group named Dubin and Swieca Group at E.F. Hutton & Co. after convincing their employer of the viability of their group.
Dubin and Swieca Group was amongst the earliest ‘fund of funds’ or a multi manager investment, a kind of mutual fund that invests in other mutual funds instead of direct investment into securities. They were guided by the modern portfolio theory that advices careful weighted investment in various unrelated assets of a portfolio.
This group also led the way in devising a combined strategy for investment in traditional securities and in derivatives. They successfully implemented this strategy and also made provisions for seed capital needed by Paul Tudor Jones and Louis Bacon.
Nothing succeeds like success and this is precisely what happened with Mr. Dubin and Mr. Swieca in late 1980s. In 1987, when the market as a whole dropped by 22 percent Messrs. Dubin and Swieca recorded an incredulous 67 percent gain. Growing in confidence from this performance, they decided to form their own company and established Highbridge Capital Management in 1992 with $35 million capital.
A direct consequence of the innovative or pioneering tendencies of the founders can be seen on the investment philosophy of Highbridge Capital. Over the past nineteen years, the company has devised as much as six different investment strategies. All these strategies are guided by the cornerstone of Highbridge’s work ethic – capital preservation through risk management.
Being a global investment manager, Highbridge Capital aims to provide consistent capital appreciation through arbitrage and absolute return investment strategies. This helps their clients to profit from the anomalies presented by price differences of similar assets in different markets. Akin to all other arbitrage hedge funds, Highbridge attempts to make profits irrespective of the directional price movements in the market.
Highbridge’s main strategies related to absolute return of investments include Statistical Arbitrage, Convertible Bond Arbitrage, Long / Short Equity, Global Macro, and Credit. All these strategies take into consideration the risk-reward profile of an investment in order to make least risky and most profitable investments in the given situation.
A combination of sophisticated quantitative models and qualitative estimates are employed to implement the various strategies. The models provide the technology to simplify calculation and point to trends while judgment adds an element of human intelligence to the process of construction of portfolio and allocation of resources.
Arbitrage requires quick trading decisions and such human-automated models come in handy. Highbridge Capital also seeks proper navigation and orientation of this process so that they “encounter” suitable investment opportunities in continuously changing global markets, instead of getting narrowly focused on one segment and missing the big picture necessary to see arbitrage-prone inefficiencies in different markets.
Needless to mention, JP Morgan Chase is one of the most (if not the most, period) stable of the large banks. Being a universal bank that combines commercial and investment banking, JP Morgan is comparatively less affected by market volatility. During the crisis of 2008, since JP Morgan was a partner of Highbridge Capital, the hedge fund had the required collateral stability to survive through the disastrous volatility.
(The year before the financial crisis, i.e. 2007, however, was also an average year for Highbridge Capital. Master Fund, the flagship of Highbridge Capital, recorded only 8.5 percent returns, while Highbridge Statistical Opportunities Fund lost 14 percent.)
At the Bloomberg’s 2010 Hedge Fund Conference, in a somewhat lessons-learnt mode, Mr. Dubin commented on the increasing complexity of the hedge fund business. While risk distribution requires investment in unrelated assets, this is becoming increasingly difficult in a world that is getting extremely interconnected and events in one part of the world have consequences in other parts as well almost simultaneously.
Mr. Dubin also referred to the basic nature of hedge funds when he said that they should not be looked upon as long term durations. Short term investment with arbitrage remains an effective strategy in this business.
With relatively humble beginnings as a retail stock broker in 1978, Mr. Dubin has come a long way and so has Mr. Swieca who started as a small trader from a meager inheritance. Their strategy of absolute return regardless of market condition and balancing quick arbitrage trading with risk management inspires trust. Yet, the strategic partnership with JP Morgan Chase did play a role in maintaining the company’s stability during the 2008 crisis, when quite a few trade-oriented hedge funds dropped to oblivion not for lack of skill but capital. Perhaps aligning with a bulge bracket was the best risk-off trade of Messrs. Dubin and Swieca.
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We have a much more diverse business today than we did six years ago. Dealbook – December 2, 2010
Heightened security is here to stay. Dealbook – December 2, 2010