This Billionaire Is Building His Own All-Star Trading Team

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Steven Schonfeld

Schonfeld Group's CIO Ryan Tolkin, from left, CEO Steven Schonfeld, and President Andrew Fishman. Photographer: Michael Nagle/Bloomberg

Steven Schonfeld amassed a billion-dollar fortune by seizing on short-term market moves. Sitting in a Park Avenue office dressed in a black hoodie and white sneakers, the 55-year-old former stockbroker described a plan to compound his wealth by finding and funding a new crop of star traders.

Schonfeld Group Holdings already has 34 teams managing $7.5 billion of positions and is seeking to get bigger. His family office offers a home for top Wall Street portfolio managers as banks are constrained by new rules limiting trading for their own books. One of the biggest teams, Quantbot Technologies, which has been working for him for six years, is run by a nuclear physicist who helped establish electronic-trading platforms at Morgan Stanley and Merrill Lynch & Co.

“We can be flexible, entrepreneurial and nimble,” said Schonfeld. The Dodd-Frank Act and the Volcker Rule have meant “the banks lost a lot of talent, and we were able to have an offering that was unbelievably competitive.”

Schonfeld is trying to lure trading teams through an unusual structure. He helps pay startup costs, gives access to the family office’s technology and vendors, and provides capital. The new company, which agrees to manage only Schonfeld’s money for the first few years, doesn’t have to give up a stake in the firm or in its intellectual property.

Schonfeld also is willing to have his money locked up for a long time. He signed a seven-year agreement with Quantbot in 2009 and last year extended it through 2027.

Poolside Cabana

“All of us are competing for the best talent,” said Schonfeld, a Long Island native who built a $90 million home there in Old Westbury with a poolside cabana and a nine-hole golf course. “If we’re going against firms with $20 billion, $30 billion, $40 billion of cash and hundreds of billions in notional positions, you have to figure out a unique differential of why would you come here.”

While Schonfeld seeks money managers ready to start their own funds, Quantbot is using the extended commitment to add strategists who have new trading ideas but haven’t gained experience implementing them.

Other funds are seeking to train young traders who no longer have the option of seasoning on banks’ proprietary desks. Hedge-fund billionaire Paul Tudor Jones is backing a joint venture called LaunchPad Trading that will give 20 young macro traders a chance to develop skills before managing client money. Brevan Howard Asset Management is allocating a portion of its master fund to be overseen by younger employees with expertise in computer-based strategies.

Prop Trading

Schonfeld was 29 in 1988 when he started a proprietary-trading firm with about $400,000 accumulated from stockbroker jobs. Now he has 14 quantitative teams and 20 so-called fundamental equity groups that make longer-term bets in a single industry. Those teams each manage from $100 million to $1.5 billion in positions, according to executives at the company.

They said the teams have had annualized returns of more than 20 percent over the past five years. That has outpaced the Bloomberg index of long-short equity hedge funds, which topped 10 percent only once since 2009.

The executives won’t disclose how much of Schonfeld’s money they manage, other than to say that teams can invest their own money alongside his and that the $7.5 billion of positions is obtained through typical hedge-fund leverage, which can double or triple the initial capital.

The positions are up from $2 billion in December 2012, increased by returns and additional investments from Schonfeld. The firm is looking to increase that total by 15 percent to 20 percent a year, said Chief Investment Officer Ryan Tolkin, who joined two years ago from Goldman Sachs Group Inc.

Bucking Trend

Schonfeld is bucking the broader trend of family offices, which manage about $4 trillion globally, according to London-based researcher Campden Wealth. Many are outsourcing fund management, seeking lower costs and expertise across asset classes, said Eileen Foley, managing director of family office and charitable solutions at Bank of New York Mellon Corp.

“It’s really hard and expensive to attract and retain really good investment talent in-house,” Foley said.

While family offices are attractive to some seasoned traders because of their flexibility in investment scope and long-term horizon, they often have to convince potential employees that their strategy is a permanent one, said Sarah Burley Reid, a partner in recruitment firm Spencer Stuart’s asset and wealth-management practice.

“Some investment professionals who are more risk-averse may be less interested in a family-office situation if they are concerned that the family may reduce their commitment to the investment program at some point,” she said. “Family offices with significant capital can often have an easier time attracting top investment talent.”

Shumway, Soros

As some hedge-fund companies give back capital to clients and convert to family offices, they are using variations of Schonfeld’s strategy.

George Soros’s family office is putting in as much as $500 million to help Isaac Corre open Governors Lane, which will focus on event-driven investing and seek other investors, according to people familiar with the firm. Chris Shumway, who runs Shumway Capital, has provided startup capital from his family office to get new hedge funds off the ground in exchange for an ownership stake.

Schonfeld said he achieves higher returns than a more traditional family-office approach, even with the cost of paying more than 250 people.

“A great investor is someone who fully, fully understands the risk-reward and is able to stick through tougher times and not be nervous and jerky like many investors are,” Schonfeld said.

He also said he would find indexing and outsourcing boring compared with trying to lure talent away from the largest global hedge funds and banks.

Quantbot Arbitrage

Some of that talent is heading to Quantbot, a statistical arbitrage fund that bets on small price differences in correlated securities and has 25 employees managing $1.5 billion in positions. It was founded in 2009 by Michael Botlo, a 56-year-old Austrian known as Michi who was a staff physicist at the Superconducting Super Collider in Texas before going to work on Wall Street. The firm is hiring and expanding its strategies into additional markets including China and into futures in all asset classes.

QuickBooks Cram

“We needed to grow faster and better,” said Botlo, whose education includes a doctorate in experimental nuclear physics from the University of Vienna and a weekend cram session with QuickBooks to learn how to create a balance sheet. “At some point, with all these great ideas, you still run out of alpha.”

Schonfeld’s own firm has changed dramatically over the past 27 years. He took the money he made at brokerages Blinder Robinson & Co. and Prudential Bache Securities and hired traders to execute his strategies. His company grew to 1,100 employees by 2000, thriving during the Internet boom as day-trading came into vogue. The firm handled about 150 million shares a day in 2005, according to a company statement at the time.

As electronic and algorithmic trading eroded some advantages, Schonfeld began shrinking that operation, which now accounts for only about 5 percent of the firm’s revenue. He helped spin out a hedge fund led by one of his former traders, Dmitry Balyasny, whose Balyasny Asset Management now oversees more than $8 billion.

Round Trip

In 2003, Schonfeld started taking outside money from friends and family members. The experiment lasted a few years.

“When we ran third-party money briefly, it always surprised Steven and me how focused investors really are on month-to-month returns,” said Andrew Fishman, president of the family office. “Our view was after managing investors’ money for a few years, we’d rather just go back and manage Steven’s money because he’s thinking long term and that allows us to think long term.”

In 2008, the firm faced regulatory claims that it used round-trip trades to make up capital shortfalls. Schonfeld and his firm paid $1.1 million to settle allegations that they neither admitted nor denied. Schonfeld was suspended from supervisory activities for 90 days.

One advantage of the current structure is that the funds are responsible for their own compliance and issues at one won’t affect other teams, Tolkin said.

Schonfeld’s firm plans on adding three to five teams a year out of the hundreds that seek to manage his money. The push will diversify his company and boost returns beyond what he could find with a more conventional model, he said.

“We feel so confident we can well, well outperform versus doing it the other way,” Schonfeld said. “We bet on ourselves.”

(An earlier version of this story had an incomplete name for the joint venture LaunchPad Trading.)

(Updates with comment from Schonfeld in 20th paragraph.)
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