From day one after receiving a law degree from the University of Houston, Clint D. Carlson knew he liked markets.
So, armed with the J.D., as well as an MBA from Rice University, Mr. Carlson began building a career that would move from traditional money management to risk arbitrage to managing money for the Bass family in Fort Worth, Texas, and finally, in 1993, to his own hedge fund firm, Carlson Capital LP in Dallas.
His aim as a hedge fund manager was to apply a variety of strategies he knew well — risk arbitrage, convertible arbitrage, equity pairs trading — to his hedge funds. And his strategies are getting flows — $1 billion so far this year, mostly from institutional investors like the $139 billion New York City Retirement Systems, which hired Carlson to run $250 million, and the $39.6 billion Teachers' Retirement System of the State of Illinois, Springfield, $50 million.
Mr. Carlson in the past has served on the boards of the University of Texas Investment Management Co., Dallas Museum of Art and the Texas Ballet Theater, and currently is on the boards of Rice University Management Co., the university's Jones School of Business and Greenhill School, a private high school in Addison, Texas. Carlson Capital also has offices in Houston, New York, London and Greenwich, Conn.
What got you into investing? When ... I passed the bar, I was looking at what do I want to do. I realized I really love the stock market, and that's really where I wanted to go, what I really wanted to do. I was able to get a job in traditional money management with Texas Commerce Bank in Houston, and I worked for another mutual fund company. In 1984, I got the opportunity to go to one of the risk arbitrage shops in Houston, working for Charles Horowitz (at Maxxim Inc.) and the multiple entities that he had. I got this offer and said, “This is kind of interesting,” and then did some research and said, “This is very interesting.” I worked for them for about three years and then got an offer from the Bass family to run their risk arbitrage group. I love the business. What we look for in our people is those with a real passion for the business.
How did Carlson Capital's strategies evolve? The idea was to be a multistrategy business, because my experience taught me that some strategies go in and out of favor. And almost all hedge fund strategies are cyclical, and you needed to be able to allocate in multiple strategies because of the possibility that one could be suboptimal at any given time. We started out with risk arbitrage, convertible arbitrage and a strategy we call equity relative value, which is equity pairs trading, industry-neutral. In 2002, there was a big dislocation in the credit markets and we saw an opportunity there, (so) we started to build a credit team, and that became the fourth strategy. Then in the intervening years we've added traditional long/short and also residential mortgage-backed securities strategies, and those are our new strategies, including a thematic long/short equity portfolio. So that's how the firm evolved.
What about your flagship fund? The Double Black Diamond Fund has just over $5 billion in assets. It has eight separate strategies, and we allocate between those strategies where we see the opportunities at any given time. We do it on an incremental basis; we're not super aggressive, saying we're going all out of this and into a new strategy this month, but we do change the allocations on a regular basis.
For example, convertible arbitrage used to be a very big part of our portfolio, and we now have less than 10% of our allocation in convertible arbitrage. So we'll go in and out of strategies based on their relative attractiveness. The fund's generally run with a non-directional bias, which means our default position is to be hedged. We run a pretty low beta, about 0.05 right now, so we are non-directional; if you want to use the buzzword “alpha,” it's fine with me. The goal of the fund is to really have our investors have more money at the end of the year than they started with. That's a pretty simple strategy. After we focus on that, we worry about how much that is. The philosophy's pretty simple.
What is the general structure of your firm? Double Black Diamond is our flagship fund; we also have a smaller multistrategy fund. And then we have five single-strategy funds that are slices of the flagship fund. We decided to offer them separately either because we felt like there was an opportunity beyond what we could do with the multistrategy fund or because we had a request from one of our investors who wanted to do something separately.
With the structure of the firm, we really believe in decentralized decision-making. We have 27 portfolio managers. Each one of them has a high degree of autonomy. We're not a very siloed shop, so even though the portfolio managers have a high degree of autonomy, we encourage them to talk with one another, to talk to people in other strategies, to work together on ideas. We really focus on trying to build a collegial culture but still give people the freedom to do what they want to do.
Is there anything on the horizon that could be of investment interest? We have a diversified range of strategies which I think give us a tremendous amount of flexibility, so there's not a burning need to go into anything new. We're now very focused on performance. Looking forward, our priority for 2014 would be Japan — not for the beta opportunity but for the alpha opportunity. We think it could be a very good stock-picker's market there at some point. Interest in the market has revived. Initially you see investors getting into Japan just to get the exposure to the Nikkei. I think the second step is to pick individual stocks, and we think that would be really good for our pairs trading strategy. That would be a longer-range plan where we see an opportunity. So it's not really expanding into a new strategy; it's expanding one of our current strategies. Now near term, to us, the best risk-reward out of all our strategies is non-agency RMBS. It's done very well over the last four years, but we've had a correction over the last couple months, at the same time fundamentals just keep improving. That's where we're allocating near term.
How active are you personally in managing your firm's assets? I'm very active. I spend 60% to 70% of my time either running a portfolio, working with the PMs, working on individual ideas. I would prefer it would be 100% of the time. It didn't work that way. I run two books within the firm, where some of the ideas I like the best are put to work on the firm's account, and I also run a macro overlay to the multistrategy fund. ... It's a rare occasion when I tell (portfolio managers) what to do. The big thing is when we think they're getting off track on mandate or risk exposure, then I'll tell them what to do. In terms of their opinions of certain stocks, as long as it fits their mandate, I'm going to let them make that decision.
Are you looking to add more offices? To do it right we may have to be in Tokyo. We're very deliberate in researching these markets and what resources do we have to have. What I learned early on at Bass in Europe was that you have to identify not only what's the same but also what's different. You can't go in assuming that that market is going to work just like the U.S. market, because that's where the big mistakes are made.
Are you concerned about competition from hedge fund replication and alternative beta strategies? I think they'll take market share, at least in the short term, but I'm not really worried about it slowing down flows. I think in the end, it'll prove an investment fad, and I do think hedge funds will outperform those strategies. I don't see them as a long-term threat because at the end of the day, we're in a performance business. If we perform well, we'll attract capital.
Any possibility that your firm could be up for acquisition? I can sum it up pretty easily — I don't need a boss. I understand the reasons why people do these transactions, but I really don't have much interest.