Glen, you have complained about Bezos's secrecy.
Guess where he learned it? William do you still think Bezos isn't hedged?
<D.E. Shaw Founder Mulls Over Losses
After BancAmerica Partnership Sours
By PAUL BECKETT and MITCHELL PACELLE
Staff Reporters of THE WALL STREET JOURNAL
For the decade that he has managed money for wealthy individuals, David E. Shaw, former Columbia University computer-science professor turned big-time investor and policy wonk, has never had to show his hand.
Information at D.E. Shaw & Co., his hedge-fund and securities firm, was distributed on a need-to-know basis only. Employees, including a slew of Ivy League Ph.D.s who thrived in Shaw's chino-and-plaid-shirt environment, signed agreements promising not to discuss the firm's inner workings after they left, according to a former staffer.
But all that changed this week. Mr. Shaw, 47 years old, has reluctantly had to lay down some of his cards as he tries to explain how his firm's promising partnership with one of the nation's biggest banks went awry.
On Wednesday, BankAmerica Corp. disclosed it would take a $372 million write-down on a $1.4 billion loan it made to D.E. Shaw as part of a 19-month-old trading joint venture. The bank said it would take control of the venture's bond portfolio after it sustained $200 million in trading losses through September in turbulent global markets, and it said more losses are possible.
An Unusual Setback
This represents an unusual setback for Mr. Shaw, who has built an eclectic, entrepreneurial empire that includes Juno Online Services, a free, advertisement-driven e-mail service with nearly six million subscribers; an Internet service that allows interest groups to bombard congressmen with e-mails; an online brokerage service catering to gays and lesbians; and a London outfit that trades Japanese warrants. Based in futuristic offices in midtown Manhattan, the firm has offices stretching from Boston to Tokyo to Hyderabad, India.
Thursday, Mr. Shaw expressed regret about BankAmerica's loss, and
said his firm remains on a solid financial footing. "The losses we've experienced are almost completely in our fixed-income trading," he said in an interview, speaking in a soft, professorial tone. "We lost more than we expected. If we had to do it over again, we would have used less leverage."
As for the hedge fund -- which was down 13% year-to-date through last week and has dropped a bit further since then -- it is facing its first money-losing year since it was started a decade ago, according to people familiar with its returns. Compounded annual returns for the 10 years have been about 19% after fees.
Mr. Shaw, according to people who know him and have worked for him, cares little for formality and preaches passionately about the possibilities of financial technology. He takes pride in staffing his offices with well-educated employees. Indeed, in a March news release announcing a new hire, Juno Online Services boasted that the D.E. Shaw staff included "a disproportionate number of the world's leading computer scientists, system architects and financial engineers." Among his alumni: Jeff Bezos, who left the company to found Internet bookstore Amazon.com Inc.
Iron-Clad Secrecy
Part of the reason Mr. Shaw mandates iron-clad -- some say excessive -- secrecy is a desire to protect the sophisticated investing style he has focused on, known as quantitative trading. "Quants" use complex mathematical equations and massive computer programs to predict and take advantage of tiny discrepancies in the prices of financial instruments including currencies, equities and bonds.
"I've been in touch with him since he made his millions and he is the same him," said Zvi Galil, dean of Columbia's engineering department, which includes computer science. "But I'm a scientist and we have no secrets. Everything is on the table. His methods, he doesn't share."
For his part, Mr. Shaw said he simply doesn't want to inadvertently help his rivals. "We really don't want information about our formulas and strategies leaking out to competitors," he said.
Like it or not, the BankAmerica losses have highlighted some of his bets. With the $1.4 billion from the bank, Mr. Shaw's trading desk borrowed more to buy about $20 billion in bonds. They were betting that, among other things, interest rates on riskier types of bonds would fall, while rates on safe ones such as U.S. Treasurys would rise. And they bought, for example, corporate bonds and sold borrowed U.S. Treasurys, with the intention of replacing them later when prices fell. In an unusual twist on the strategy, D.E. Shaw would match those trades with bets that interest-rate spreads would widen in foreign countries. But beginning in August, turmoil in the bond markets caused the bets to go bad. (The rest of the joint venture's portfolio is up 17% so far this year, according to a person familiar with the results.)
Shaw's Other Passion
Mr. Shaw's other passion -- one which he isn't reluctant to talk about -- is technology and public policy. In 1992, he wrote a paper on proposals for U.S. technology policy and reforming the Commerce Department. He is a frequent visitor to Washington, D.C., and he chairs the education technology panel of President Clinton's Council of Advisors on Science and Technology, which recently submitted a report on the need for more government-funded education research.
"Unlike a lot of people in Washington who "author" reports, this was written by David probably from 3 a.m. to 5 a.m.," says Roger Stone, a former Washington lawyer who is now director of Juno Advocacy Network, a unit of Juno. "He is a very hard-working guy and his interests are incredibly wide-ranging."
But for now, Mr. Shaw is occupied with the BankAmerica situation and its fallout on his firm. "With any of these type of people-whether it's a securities company, a bank or a hedge fund-they're all based on confidence," said Luke Ellis, managing director of Financial Risk Management, a London hedge-fund advisory firm. "And if you lose the confidence of investors and clients, you get left with a lot of smart people in a very empty room." |
