On Wall Street, where name recognition is half the sizzle and people are tripping over themselves to get on TV, Joseph A. DiMenna, co-founder of the Zweig-DiMenna partnerships--the fifth-largest hedge fund--is about as low-key as you can get.
"Joe DiMenna is the best stock-picker no one has ever heard of," says Steve Taub, editor of the Individual Investor Online who ran Financial World's annual ranking of Wall Street's highest-paid money managers for 12 years. In 1998, for instance, DiMenna was near the top, earning more than $50 million, according to Taub.
LEAN TEAM. DiMenna's better-known half is Martin E. Zweig, the market strategist for the hedge fund. Zweig, who sold his mutual fund company last year, remains a regular on the popular TV show Wall Street Week. But it is the more publicity-shy DiMenna who almost single-handedly calls the shots on trades worth tens of millions of dollars each day for the $4 billion portfolio. DiMenna relies on a remarkably lean research team: two longtime partners, Brenda Earl, who helps manage the portfolio, and Jeff Perry, who specializes in risk arbitrage and short selling. They are backed up by only five other research analysts.
The long-term results are impressive: Zweig-DiMenna has had a 15-year annualized return, after fees, of 25%, vs. the 18.6% annualized total return for the Standard & Poor's 500-stock index. "They have been one of the top ten performing hedge funds over the last decade," says Antoine Bernheim, editor of www.hedgefundnews.com, who tracks hedge fund results. "And they are only one of two hedge funds with a history going back prior to 1987 not to experience a negative year," he says.
In 1987, when the market crashed, Zweig had its highest net return ever-- 58%. And just last year, when Long-Term Capital Management blew up and the average return for large hedge funds was 7%, Zweig-DiMenna was up about 26%. No wonder well-heeled investors have been flocking to the fund. Minimum investment is $1 million.
The fund's stock-picking formula is about as simple and straightforward as a hedge fund can get. It invests primarily in U.S. equities: 250 stocks on both the long and short side. There are no exotic derivative trades or heavy leverage. "Zweig-DiMenna has never blown up," says Taub, "because they don't invest in cockamamy countries like some other hedge funds do."
DiMenna, a 40-year-old former high school chess champ, wears few of the badges of hedge fund managers: no Hermes ties, no French cuff shirts. There's not a lot of hubbub in his office, either. No shouts to traders; most trades are done by E-mail.
But DiMenna is quick to move when news strikes, even when there is a reporter in his office. When Earl informs DiMenna on June 29 before news hit the street that there are outages on eBay Inc., an Internet auction site and one of the fund's larger holdings, DiMenna quickly attempts to sell a quarter of the fund's huge position. Within three minutes, the stock is down five points. DiMenna pulls most of the order. He feels the market has overreacted. He starts to buy. eBay comes back on the Internet about half an hour later and the stock rebounds. By the next day, the stock rises an additional 10 points.
"Joe has one of the most flexible minds on Wall Street," says his partner, Jeff Perry. "He could be long a stock one day and short the next. Where people make mistakes is when it becomes a personal fight for them and they stay too long."
But it isn't just individual stocks that matter, it's also macro issues. In 1987, after a strong first half with the fund up more than 30%, Zweig and DiMenna decided to hedge the portfolio by selling many stocks and adding to their short position. It was a prescient call.
"BEST MOVE." Recently, some of the big winners are Liberty Media Group and Enron. Iridium World Communications Ltd., a satellite phone system, has been one of their successful short positions.
Finding good stocks is about judging future perception, says DiMenna. "According to Keynes, if you're going to bet on who's going to win in a beauty contest, don't bet on who you think is most beautiful, but who you believe the judges think is most beautiful."
If beauty is in the eye of the beholder, than the market must be a heart-stopper for DiMenna. The son of an elementary school principal and nurse, he has been passionate about his focus since he was 13. In 1976, s a finance student at Fairfield University, in Fairfield, Conn., he penned letters to Zweig, whom he had never met, sharing with him some investment ideas. His precociousness paid off: Zweig hired him sight unseen as a summer employee. "It was one of the best moves I've ever made," says Zweig.
In 1984 the two decided to start a hedge fund with $2.5 million. "I didn't know enough at age 25 to be as scared as I should have been," says DiMenna. For years, he worked more than 100-hour weeks. Now married and an avid horseback rider in his off hours, he has a bit more time to reflect.
When Zweig-DiMenna came on the scene more than 15 years ago, there were a handful of hedge funds. Today there are thousands. DiMenna suspects that future volatility and a downward trend in the market could be troublesome for many of the newer players. "I think a lot of people are very inexperienced....And when a downturn comes, it's a hard time to figure out how to be short and how to be hedged."
If 1987 is any guide, it should be a no-brainer for Zweig-DiMenna.