The computer skills he learned on his hiatus gave him an advantage. “Suddenly, in my early 20s, I had a competitive edge over all kinds of people. It was very useful,” Mr. Bader said. First jobs at New York merger specialists IFB Managing Partnership, where he was a financial analyst, and as director of research at Gruss Partners LP, gave Mr. Bader a sharp taste for the art of deal-making.
He joined Halcyon Asset Management in New York in 1990 as a portfolio manager. Mr. Bader has been at Halcyon ever since, remaining a portfolio manager and active member of the investment team even after he added chairman and CIO to his list of titles.
How did you get involved in money management? After working in merger arbitrage at IFB Managing Partnership after college, I went to work with Marty Gruss at Gruss Partners LP in 1987. That was a terrific experience. Gruss had a little broker-dealer. We had a merger and special situations trading business. It was all Marty's money. His father, Joe Gruss, was a legend in the investing business who came to this country with $5 million ... and turned it into hundreds of millions.
It was the heady days of merger investing in the mid-1980s, which was an incredible time for that business. It was surreal because of the sheer volume of activity and deals. At a young age, I was given an opportunity to be in the firing line, which was a great way to learn about investing. Marty Gruss was a great investor and he taught me a great deal.
I was very lucky because it was such a good time to be in the merger business that a lot of the mistakes you made early on didn't cost you. You could make it back some other way.
What were the best lessons learned at Gruss? One of the big lessons I learned there was that sometimes if you are in the right strategy at the right time, you can make a lot of money. For instance, in 1988, we were up over 70%. It was a little like shooting fish in a barrel at that moment in the merger business.
I was, on the one hand, green, and on the other hand, I was smart enough to understand that I was in the right place at the right time.
I recognized in the fall of 1989 after the failed leveraged buyout of United Airlines (now United Continental Holdings) that things were getting ugly. I thought “boy, we're about to enter a credit crunch” and realized that the merger business wasn't going to be so attractive. And I got very interested in the distressed debt business.
Is that why you left Gruss to join Halcyon? I really left Gruss for two reasons. One was that I wanted the opportunity to invest in other things, strategies that I thought had a lot of potential. Also, I thought it was a little hard — in terms of a career because it was all Marty Gruss' money — to be a partner in somebody else's bank account.
What was it like to be an early investor in distressed debt? Again, in the early days of distressed debt, in the early 1990s, it was like shooting fish in a barrel. It was a very small community with about 15 distressed debt managers, 15 lawyers and 15 investment bankers. They did all the deals and everyone knew everyone else intimately. We had each other's home phone numbers, knew the names of wives and children.
Markets were terribly inefficient, so it was a great time to be investing in distressed debt. In the early days, I made all kinds of mistakes, but that old adage was true — the rising tide lifts all boats. Mistakes didn't cost that much in terms of returns because the market offered so many opportunities.
This time period impressed on me that you can generate alpha not just by investing in the right security or instrument within an asset class, but also by allocating at the right time to the right asset class.
What are the right asset classes and the right allocations now? One thing we see is that governments are printing money like it's going out of style. Ultimately, this will lead to inflation. I can't tell you exactly when, whether it's two or five years out.
But inflation will rise, so I like that Halcyon's multistrategy funds are adding a natural resources allocation. We recruited an energy-power-infrastructure team and started them with a small allocation — about 3% — so we aren't deviating too much from our allocation. We also will help them raise external money for their new hedge fund.
Is this practice of hiring new strategy teams how you built Halcyon's capabilities? Halcyon has always recruited internal talent, like the new energy team, who manage particular strategies used within the multistrategy hedge funds.
But we also have an affiliate program. In 2004, I realized that it was increasingly difficult to recruit the best and the brightest. Back then, it was easy to hang out a shingle and start a hedge fund with no track record, just a good pedigree. It's obviously less simple today. And some people just want to go out on their own.
I don't want to hire second-tier people, but want to add new strategies to our multistrategy funds that are relevant to what we do and timely. It might be an inefficiency that a particular team has discovered that can produce alpha, or we may have a gap in the fund that a certain investment approach can fill.
So we identify the strategy we want to add and find a team that can best do it. I commit a minimum amount but make sure I have variable capacity going forward. We take a stake in the firm, set them up with a fund of their own and raise external money for them. Halcyon also provides all the infrastructure the team needs to run a fund.
What is Halcyon's history with institutional investors? I think we're in the third inning of institutional investment in hedge funds. It's really just in the beginning stages and a lot more institutional capital is going to come into the hedge fund industry. Hedge funds have always been included in the “alternatives” category, but I think that label is going to go away and hedge funds will become mainstream investments, but it will take time.
A hedge fund is just an investment vehicle and in many recent cases, we are providing institutional investors with solutions that aren't a hedge fund at all. This is where the industry is going. The question shouldn't be "Are you a hedge fund?' but rather "What solution can you offer me?' n
This article originally appeared in the June 10, 2013 print issue as, "The right place at the right time".