Welcome To Superfund
Like so many other people during the 1990s, Anthony Gordon bought an eclectic range of stocks and watched with amazement as his portfolio bulged. By 2000 he had holdings worth $1.8 million. "I was elated but unnerved. It didn't seem normal," says the photographer, who lives in a loft apartment in Manhattan's trendy SoHo neighborhood. Then the bubble burst, taking Gordon's tech- and telecom-heavy portfolio down to a value of $80,000 by 2001, a disaster that he blames on his broker. "The guy told me I had the equivalent of a diversified mutual fund, but he didn't rebalance," Gordon says. Suddenly the market was no longer his friend. "I became cautious, weary, dubious, and concerned."
But not so cautious that his interest wasn't piqued two years later, when a fellow airplane passenger mentioned something called Superfund. Then he saw a cable-TV commercial in which a young man with a long, dark jacket and a clipped accent reminiscent of Arnold Schwarzenegger's said "Guten Tag." The man on the screen introduced himself as Christian Baha, the founder of Superfund. After acknowledging that viewers "probably have no idea" what kind of investment he was promoting, Baha added that "regulations prevent me from describing it on television." Gordon, who is now 42, wasn't wowed by the ad's sophistication: "I would have had him wearing a headset in front of four or five computer screens, not using a phone with a cord and a little laptop." But Baha's pitch of hedging against another potential stock crash, especially at a low cost, appealed to him. He put $5,000 in Superfund and has since invested $22,000 more.
Gordon was an early catch when the Austrian fund entrepreneur first probed the U.S. market in late 2002. Now, Baha is pumping up his marketing in the U.S. -- including new TV ads in March -- and trying to capitalize on consumer fascination with "alternative" investments amid a largely stagnant stock market. Hedge funds have headlined the alternative craze, which is the hottest investment trend since the dot-com runup.
So it's no wonder that Baha in an interview describes Superfund as "virtually a hedge fund." It's also one with a distinctly show-business sensibility. In Europe, Superfund draws attention by sponsoring professional soccer, basketball, and Formula One racing teams. "This is seen as a hedge fund for the average person," says paid spokesman Niki Lauda, the retired Austrian driving legend. None of Superfund's rivals in the U.S. can brag that they underwrite celebrity-award shows honoring the likes of Desperate Housewives star Teri Hatcher and designer Donatella Versace. Baha also takes pride in his unconventional career path: Before he got into the fund business, the voluble 37-year-old worked as a beat cop, patrolling some of Vienna's tougher blocks. Last year he opened a sparkling 7,000-square-foot investment center on Manhattan's Fifth Avenue.
Baha may be more flamboyant than his better-known U.S. rivals, but he embodies a new and frenzied atmosphere in which fund companies from Merrill Lynch (MER ) & Co. to Charles Schwab (SCH ) are trying to lure the less-than-wealthy into the hazardous realm of alternative investing. Superfund Group, to be precise, offers managed futures funds, which let investors make such esoteric plays as shorting currencies and betting on cattle prices. It's a strategy used by some hedge funds, and the two types of investment vehicles are close enough cousins that many financial firms lump them together. Based in Monaco, Superfund boasts $1.7 billion under management and 370 employees in 19 offices around the world. As do hedge funds, it charges steep incentive fees while promising high returns regardless of broader market conditions. Both types of funds tend to favor secretive, risky investing methods. Gordon, the New York photographer, like other Superfund investors, doesn't know what markets his money is in. "You have to have trust," he says.
The alternative-investment boom has reached a critical juncture. After a rush of new money and soaring returns from 2000 through 2004, many hedge and managed-futures funds floated back to earth last year. Financial advisers say the institutions and wealthy individuals traditionally drawn to alternative investments have grown leery. The $1.1 trillion hedge fund industry saw net outflows in the fourth quarter of 2005, and fund tracker Barclay Group reports that the $130 billion managed-futures business shrank by 1% for the year. But as the smart money starts to pull back, Baha and scores of competitors are amplifying their appeals to smaller investors such as the trustful Gordon.
Superfund's main fund lost 10% in 2005. It has a name that many Americans associate with toxic-waste sites. And yet coming next month, along with the new wave of U.S. TV commercials, will be a national print-advertising campaign, a series of investor seminars around the country, and direct mailings to 600,000 brokers and advisers and to millions of potential customers. Imitating a stunt he has employed in Europe, Baha is building a mobile investment office that will travel across the country on an 18-wheel truck.
Only 4,000 of Superfund's 50,000 investors worldwide are Americans, but Baha cheerfully emphasizes that the U.S. client base grew by one-third last year. Nothing if not upbeat, he stresses that most of his customers saw gains of at least 7% in the month of January, easing the pain of last year's losses. "People pay attention to performance," he says, playing down Superfund's volatility. "Everybody who invests in stocks would be much better off to invest in hedge funds."
He has plenty of company in the U.S. among purveyors of alternative funds trying to entice smaller investors. Hedge funds, which are only lightly regulated, typically set investment minimums at $250,000 or more. They are required by law to limit their individual clientele to people with a net worth of at least $1 million, or $200,000 in annual income for the previous two years -- itself not such a daunting hurdle anymore.
But big names such as Merrill Lynch and Deutsche Bank (DB ) are inviting investments as small as $25,000 in funds that invest in hedge funds. Charles Schwab, UBS (UBS ), and other major firms set minimums even lower for mutual funds that are designed to mimic hedge funds. Superfund, meanwhile, welcomes investments beginning at only $5,000, a stark break from the typical minimum in managed futures of $50,000 to $250,000.
The situation makes some financial veterans nervous. "There's this belief that truly smart people have [investment] exposure to hedge funds," says Wendell L. Perkins, the 43-year-old chief investment officer at JohnsonFamily Funds in Racine, Wis. "You have to ask if a whole lot of folks are investing where they shouldn't be."
Superfund's U.S. managing director, Aaron Smith, 26, impatiently rejects such suggestions. "It's offensive to me to suggest that someone's net worth correlates with their sophistication," he says. "It's un-American!" Smith started at Superfund four years ago after graduating with a business degree from New York University.
HOOPLA AND SALESMANSHIP
A closed-door section of the financial industry that used to be characterized by confidential offering documents and intimate relationships with the hyperrich is morphing into a full-scale retail business with almost a carnival atmosphere of hoopla and salesmanship. Third-party marketers have taken to blast e-mailing promotions about funds they barely know. Financial planner Lane Jones of Evensky & Katz in Coral Gables, Fla., says he gets up to 10 cold calls a day from people hawking alternative investments. He used to get four or five a year. Wood River Capital Management engaged several outside promoters to boast about its returns -- which they did until only weeks before the Ketchum (Idaho) hedge fund collapsed last fall amid accusations of fraud and reckless investing.
Jason Okie of Snug Harbor Capital Advisors sent some of those e-mails but says he was "simply a conduit for Wood River's marketing material." It's investors' responsibility to investigate such claims, he adds. Lawsuits concerning Wood River are pending, and its principal, a previously unheralded stock analyst, denies fraud. But investors almost certainly will end up losing millions of dollars.
Regulators worry that relatively unsophisticated investors are betting on funds they don't understand. For several months, the NASD , A securities-industry self-regulatory group, has been looking into whether Merrill Lynch, UBS, Citigroup (C ), and other major firms have improperly marketed hedge funds to individuals who don't meet the financial eligibility requirements. NASD officials won't discuss the particulars of their probe, but they do say that because of concerns about the aggressive marketing of hedge-fund-style products to retail investors, they have made this area a priority for 2006. NASD's enforcement chief, Barry R. Goldsmith, says he is especially concerned about the growth in funds where "a substantial portion of the investment is coming from investors who are purchasing at the minimums" -- which may indicate an influx of smaller fry who can't afford the risks. (Merrill and UBS declined to comment. A spokesman for Citigroup's Smith Barney unit said: "We did get an inquiry, and we're providing the information.")
TENNIS WITH THE PRINCE
Superfund's Baha argues that the real risk comes from investing only in stocks and bonds, with no protection should markets go down. "The superrich are used to going long and short," he says, referring to bets that markets will rise and fall. "Why shouldn't everyone be able to make above-average returns in any market?"
That message resonates with Ashok Kukadia, a urologist who lives in the leafy Long Island (N.Y.) village of Manhasset. He dipped in three years ago after hearing an interview with Baha on the radio. "He sounded so optimistic about hedging," says Kukadia, 40, who automatically puts in $1,500 a month after having invested an initial $10,000 stake and persuaded his father-in-law to invest $10,000, too. Superfund's drop last year was "a letdown," Kukadia says, but he's betting on a solid payoff down the road. So is Stephen Scott, a 54-year-old corn and wheat farmer in Burlington, Colo., who has $88,000 in Superfund. "We've never done hedge funds before," Scott says. But he notes that, figuratively speaking, "going to Vegas is nothing new" for family farmers dependent on the weather and fluctuating market prices. Even so, Superfund's rapid swings can be unnerving, he admits. "I'm not so young that I can afford to lose a lot of money."
Superfund's glassed-in headquarters in Monaco overlook the Riviera principality's Formula One Grand Prix route. In addition to sponsoring a racing team, the firm is developing its own Formula One series -- a great marketing vehicle, Baha says. A man with an earnest demeanor who favors finely tailored suits and resembles the actor Gary Oldman, he moved to Monaco seven years ago. He clearly enjoys the swanky feel of the place and mentions that he has played tennis with Prince Albert, the local monarch. Baha insists that before settling in Monaco, he didn't know about its fame as a haven from income taxes. He now has blood ties to the tiny enclave: A former girlfriend resides there with their 2-year-old son, Dorian.
Standing against a backdrop of enormous yachts in the agate-blue marina nearby, Superfund's founder reflects on a lifelong fascination with finance. During a boyhood holiday near Hungary's Lake Balaton in the 1970s, a prepubescent Baha paid 100 shillings, about $10, to buy 100 tubs of Tiger Balm. He smuggled the pungent Oriental ointment across the Austrian border and sold the tubs for five shillings apiece to flea-market vendors in his native Vienna. "500% markup!" Baha brags. (Actually, 400%.) "Trading was always in my blood," he adds, perched next to a table displaying Superfund-branded cabernet sauvignon.
Baha grew up in a middle-class Vienna family. His father, an insurance executive, wanted him to work for a bank someday. But Baha says that the death of his mother when he was 13 made him crave independence and adventure. He loved the action on Miami Vice, a popular TV import in Austria in the 1980s. At 15 he defied his father and enrolled in the Vienna police academy. Reality, however, didn't match television. After graduating in 1987, Baha spent four years patrolling down-at-the-heels precincts populated by new immigrants. He found it boring.
While still a cop he enrolled part-time at the University of Vienna, where he rekindled his fire for finance. The thrill of a seminar featuring top bankers remains vivid. "My heart was beating hard," he says. Walter Krippner, who for a time worked the night shift with Baha at a Vienna jail, recalls that even then his friend expressed irritation that only the wealthy had access to exotic investments. "He would say: 'Why should only rich people be able to get richer?"'
Baha never finished his university degree. A former professor, Edwin Fischer, says his student was fascinated by computer programs for predicting market performance, "but he wasn't so interested in studying." In 1992, at the age of 24, Baha says he paid the equivalent of $5,000 for a tiny Vienna firm called Austria Broker Service, where he had moonlighted when not in uniform. He soon left law enforcement, and the brokerage became the seed that blossomed in 1996 into a fund company. He took on as a partner a quiet software designer named Christian Halper, who developed algorithms to predict trends in commodity-futures markets. Baha says he decided that with Halper's software he could devise "a way for people to make money under any conditions."
Speculating on commodities is one of the oldest and most volatile forms of investing. Whether it was Holland's famed frenzy over tulip bulbs in the 1630s or today's markets in pork bellies, currencies, or gold bullion, people often seek to profit from shifts in aggregate demand. The value of futures, which are contracts to buy something on a set date, doesn't necessarily move in sync with equity markets. Trading futures thus is one way to "hedge" bets on stock or bond prices.
Using Halper's algorithms, Baha says, Superfund invests in more than 100 markets based purely on past trends in prices, trading volume, and other factors. Like most practitioners of "technical analysis," though, Baha won't reveal his proprietary methods or which of those markets he's currently in.
Like other managed futures and hedge funds, Superfund tries to boost its returns by investing with lots of borrowed money. That allows it to buy contracts with face values that far exceed invested equity, magnifying potential profits -- and losses. "These funds can go poof!" says New York financial consultant E. Lee Hennessee. Last year was rough for a lot of highly regarded futures traders. One of them, John W. Henry, principal owner of the Boston Red Sox, saw his 11 funds lose a total of more than $300 million in 2005. Henry's firm called the results "an aberration."
"NO MORE HUMAN EMOTION"
When Baha and Halper launched their original fund nearly 10 years ago, investors could buy a stake for as little as $2,500. "We wanted something where we could invest ourselves," Baha says. The fund, then known as Quadriga, lost over 10% its first year, which Baha blames on jangled nerves. After a series of bad computer-driven bets on gold futures and other markets, the duo pulled money off the table and missed a big upswing. By late 1997 their system was fully automated -- "no more human emotion," says Baha -- and Quadriga reported a 21% return in 1997, followed by 63% the next year. Wooed by minimum payments then set as low as roughly $100, more Austrian and German investors sent in checks. Banks in those countries, initially hostile to Baha, eventually bought into Quadriga. He branded the U.S. product Superfund and officially renamed the whole company in 2004 to avoid confusion with a European provider of digital service to hotels and other companies. (KPMG LLP says that it has audited Superfund's U.S. arm since its start in 2002. Superfund says that KPMG's overseas affiliates have audited its funds in Europe.)
Baha and Superfund have received plentiful media coverage in Europe as the result of promotional events seemingly more suited to a beauty pageant or circus. Last year he became the primary sponsor of the World Awards, initiated in 2001 by Austrian author and Superfund public-relations consultant Georg Kindel as a way to honor "men who exemplify the best attributes of mankind." Among the eclectic honorees: Paul McCartney, the late Nazi hunter Simon Wiesenthal, tycoons Richard Branson and Ted Turner, and pop singer Michael Jackson. Mikhail Gorbachev hosts the annual ceremony. In an e-mail interview, the former Soviet president praises Superfund, noting that he "always [tends] to support good ideas that are a benefit to the average person and not only an additional privilege for the wealthy."
In November, Superfund sponsored a Women's World Awards in Leipzig, Germany. Winners included the designer Donatella Versace, former Pakistani Prime Minister Benazir Bhutto, supermodel Linda Evangelista, and Alison Lapper, a British multimedia artist born with shortened legs and no arms.
Now, Baha is trying to generate excitement in the U.S. Unlike in Europe, where he can boast in TV ads about Superfund's 531% cumulative return over 10 years, U.S. securities regulations permit him to mention only the product's name. (In person, Superfund reps are happy to talk about the 35% and 56% cumulative returns in the A and B series of the U.S. fund since late 2002.) The very notion of advertising volatile investments on TV might still backfire if the spots remind veteran investors of the "Come Grow with Us" commercials in the 1980s featuring First Jersey Securities Inc. frontman Robert Brennan hopping out of his helicopter. First Jersey collapsed, and Brennan went to prison for fraud.
Frustrated that he has attracted only $110 million in U.S. investments, Baha held a brainstorming session recently at his Fifth Avenue retail center across from the main branch of the New York Public Library. He says he chose the location because it's on "one of the most important shopping roads in the world." But this stretch of the avenue is south of the chic stores; on its side of the street, Superfund's neighbors are an electronics discounter called On/Off Digital World and a T-Mobile outlet.
ADS AND IVY LEAGUERS
"Take out some paper, please!" Baha says sharply to Smith, his youthful U.S. manager, and four other tie-clad salesmen, all in their 20s and 30s. "What is the main reason we don't sell more in the U.S.?" Baha asks. Looking uncomfortable, the underlings begin to write. Smith, who is wearing Superfund cufflinks, notes that the market is saturated with investment products and that most ordinary investors don't understand what Superfund is selling. Baha agrees: "People think it's hocus-pocus or something." His remedies include buying more advertising and hiring from Ivy League universities. "The best guys want to go into hedge funds," Baha explains.
Investors need a lot of faith in Superfund's secret formula to jump on board. With all its management, sales, and incentive fees, clients in the less aggressive A fund need an 8.75% return just to break even; the B fund has to earn 10.63% before investors see a profit. Such fee structures are not unheard of in the alternative-investing world. They are part of the reason John Valentine, a financial adviser in San Ramon, Calif., warns that Superfund "should never be a first, second, or even third investment." While Valentine has suggested that some wealthy clients allocate 18% to 22% of their portfolio to Superfund for diversification, he would hate to see, say, an ordinary young couple trying to build a nest egg bet big on the fund.
A couple of Valentine's well-heeled clients have already dropped out. One objected that Superfund didn't directly hedge against downturns in the equity market. Another didn't like that as its own broker-dealer, Superfund charges clients $16 or more for trades that might cost only $3 or $4 at a discount brokerage. Baha responds that his fees are similar to those of some rivals, adding that "discount brokers are not capable of handling this business."
Then there's the issue of Superfund's growing heft. Funds have a harder time staying nimble and incognito in the markets when they near multibillion-dollar status. Even the motto -- "Superfund: the Future of Investing" -- might strike a flat note with some in the U.S. "It's a pretty arrogant name," Valentine chuckles.
To Baha, Superfund "says everything." And the toxic waste association? Not a problem. Says Baha: "O.K., so we clean up the markets!"
Some Superfund loyalists wish the fund wasn't trolling for small investors. Clarence Parsons, a retired Merrill Lynch broker and multimillionaire who bought into Superfund almost three years ago, would rather it restrict itself to customers like him. "I wish they had a $100,000 minimum," says Parsons, who invested based on Superfund's European track record. Scott, the Colorado farmer, was briefly tempted last year to flee Superfund but is feeling calmer now that performance has picked up. Even so, he wonders when the fund's computer model might, as he puts it, "go away."
Baha says that won't happen. Without disclosing any secrets, he says his program incorporates more historical data than those of his rivals and adapts to any conditions. Superfund lately has received clearance to operate in the Netherlands, Sweden, and Dubai. It has products newly available in Japan, where investors can get in for roughly $850. It's also the "first hedge fund to start operating in Poland," according to a spokesman for the Polish Securities & Exchange Commission. Superfund, says Baha, "will work forever."
|Corrections and Clarifications "Welcome to Superfund" (Special Report, Mar. 6) said that financial adviser John Valentine has suggested that some wealthy clients allocate 18%-22% of their portfolio to Superfund for diversification. Mr. Valentine clarifies that the figure is 10%. Mr. Valentine says that the 18%-22% figure represents the range that he might recommend for investments in all Non-Correlated Asset Classes.|
By Diane Brady, with Anne Tergesen in New York and bureau reports