p19-20HFRJul04managingmoney.qxd 30/6/04 5:45 pm Page 19 MANAGING MONEY Adapt or die Hedge fund founder Paul Tudor Jones wants to extend a two- decade run of returning 26% annually by stepping up investment in China BY KATHERINE BURTON In the first year that Jim Pallotta joined Tudor necticut, and offices in Boston, Washington, and Investment Corporation, the $9.4bn hedge fund London and Epsom in England. Tudor, the firm founded by Paul Tudor Jones, he learned world’s seventh largest hedge fund group has 35 “I wanted the cameraderie of working how his boss managed to rack up one of the best equity partners. performance records of any hedge fund manager. As Tudor grows, so does the need to generate Pallotta, 46, says he was talking to Jones one profit to keep the organisation running and the with folks and my appetite was such, day in 1994 at around 6pm, when Jones told him traders happy. In 1985, Tudor’s first full year of he had made a large bet that the US dollar would trading, Jones returned 136%, followed by 99% wherever there was opportunity, I was rise against the yen. “It’s my favourite position,” in 1986 and 200% in 1987. As funds get larger, Pallotta remembers him saying. the ability to make such outsized returns dimin- going to go” When Pallotta woke up the next day he looked ishes because with bigger investments it’s more on Bloomberg and saw that the dollar had been difficult to get in and out of positions. PAUL TUDOR-JONES crushed. He called Jones expecting the worst. Since 1995, when Tudor BVI became a multi- Instead Jones told him he had woken up in the strategy fund – expanding beyond futures con- middle of the night, seen something that tracts to include such investments as stocks and changed his mind and reversed his wager so he private equity – the fund’s returns have averaged would make money if the dollar tumbled. “He about 18% a year, investors say. COMPOUND AVERAGE ANNUAL RETURN made a killing,” Pallotta says. Jones says China is the next place to look for Jones, a blue-eyed, Memphis, Tennessee-born profits. “China is set to overtake the US in GDP trader who looks younger than his 49 years has supremacy in our lifetime,” Jones says, pointing Tudor BVI Fund posted an annualised return of about 26% since out that Chinese GDP growth has an effect on CSFB Tremont Hedge opening his flagship Tudor BVI Fund in 1986, everything from commodities prices, because Fund Global Macro Index investors say. China is a huge manufacturer, to US interest S&P 500 Index Few managers of hedge funds can boast as rates because the country buys US bonds. strong or as steady a performance. Some money managers, including George Nasdaq Now Jones is set to expand his business into Soros, are not as confident about making money 0481216 Asia, with plans to open a trading office in China, in China, even while the country’s economy grew Return (%) and he’s looking to add other seasoned fund man- by 7%-9% in each of the past three years. As at 31 January 2004. Source: Bloomberg, agers in the US and Europe to the 45 who trade “China is in an incipient asset bubble and it’s such things as commodities, US and European very difficult to find vehicles for investing,” FUND ALLOCATION equities, global bonds and the yen. Soros, 73 and founder of the $8.3bn Quantum “You adapt, evolve, compete or die,” says Endowment Fund, said in a Bloomberg News 10% Miscellaneous strategies Jones, who hunts pheasant, fishes for trout and interview in January. bass and owns property in the Florida Keys; Jones says Tudor has already turned a profit in along Maryland’s Chesapeake Bay; in Pawling, China, where it has made private equity invest- New York; and in Zimbabwe. ments since 1993. By following that rule, Tudor has managed to Some of the investments have been through or 30% increase its assets more than 30,000-fold since with Cathay Investment Fund Ltd, a private Global stocks Jones opened his first fund with $300,000 two equity pool run by an affiliate of Greenwich- 60% Macro trades decades ago. The one-man trading office he based hedge fund firm Paloma Partners LLC. In started in Manhattan now has about 300 the 1990s, Cathay and Tudor invested in China As at 31 March 2004. Source: Bloomberg employees with headquarters in Greenwich, Con- Yuchai International Ltd, one of China’s largest www.hedgefundsreview.com July 2004 | HEDGE FUNDS REVIEW | 19 p19-20HFRJul04managingmoney.qxd 30/6/04 5:45 pm Page 20 MANAGING MONEY diesel engine makers, and held stakes in a food Soros scaled back the risk level in his trades trading life is against being too conservative. “You company and a drugmaker. Tudor president for several years. Today, he is again near the top get so you really want to avoid drawdowns because Mark Dalton, who joined the firm in 1988, of the hedge fund heap. Robertson closed Tiger. they are so painful,” he says. While some fund man- declined to name the companies or comment on Giving traders autonomy and responsibility agers aren’t easily thrown off a position once they performance numbers. may be the key to Tudor’s longevity, says David take it – even if it’s losing money – Jones, who says In 1994, Tudor opened a Shanghai office run Smith, a Tudor client. “The people who have sur- he spends about 90% of his time trading – sees no by Kyle Shaw. That lasted until Shaw left for vived have branded out into new investment point in suffering if a bet moves against him. “All Hong Kong in 1997 to open his own fund. areas,” says Smith, chief investment director of day long, I try to find a happy place,” he says. Through Shaw, Tudor successfully invested in a multi-manager funds at GAM, a unit of UBS AG About half of Jones’s trading depends on tech- Shenzhen-based construction products company that farms out $17.5bn to hedge funds. nical analysis using historical price charts to pre- in 1997, says Dalton, who declined to provide “To adapt to the new world order, you need dict market moves, he says. Jones’s toughest time additional details. “For the last 10 years, we’ve new skills.” Tudor, for example, was one of the in recent years was in 1999 when he had trouble gone through a crawl, walk and run process [in first macro managers to develop an expertise in trading both stock indices and currencies. “Person- China] and now it’s time to act,” Jones says. trading stocks, Smith says. ally, I contributed squat. I was completely, totally Chief operating officer John MacFarlance, 49; He adds that hedge fund managers sometimes wrong – and early – that the Nasdaq would break.” Dalton, 53, and Jones are each planning trips to get too greedy and lose discipline and creativity, Even though Jones barely made any money for Asia, including stops in Taipei, Singapore, Bei- which is one reason that GAM generally doesn’t Tudor BVI that year, other traders did. In Boston, jing and Shanghai to find an executive who can stay with a fund manager. “Managers often Pallotta’s portion of the fund returned 98%. lead their expansion there, Dalton says. become distracted by the financial reward and “We have 45 portfolio managers and at any Jones, who wears two braided African they lose their ambition,” he says. Tudor has been one time, a handful will have markets that bracelets on his wrist next to a Rolex, says he a GAM manager since 1994. “They’ve never present good opportunities, while other portfolio feels more pressure to perform well now than relaxed,” Smith says, “they’ve had a great strength manages are inactive or playing good defence,” when he started the fund, because he has almost in Europe and now they have to push into Asia.” says COO MacFarlane, who joined Tudor in three dozen partners whose net worth and annual 1998. The approach lets Tudor traders practise pay are tied to the performance of the funds. “It is really easy in this company to patience, Jones says. “If you don’t see anything, Partners and employees are the largest you don’t trade. You take risk only when you see investors in Tudor investment pools, he says. beat yourself up if you’re doing an opportunity.” That isn’t unusual for large funds that have been Managers are given plenty of leeway. The nine- in existence for a long time. “It is really easy in poorly, because we have so many person management committee meets each this company to beat yourself up if you’re doing quarter to discuss which assets of the $3.8bn poorly, because we have so many people taking Tudor BVI Fund each manager will trade. risks successfully,” he says. people taking risks successfully” Over the past few years, about 60% of assets During Tudor BVI’s 18-year history, Jones has have gone to Jones and other macro traders. An more than doubled the average annual return of PAUL TUDOR-JONES additional 30% is dedicated to global equities the Standard & Poor’s 500 Index. His track record and the balance to other strategies. is similar to that of Bruce Kovner, who runs Tudor opened its first European office, in The trader then is left alone. Each manager Caxton Associates LLC, which controlled $12bn London, in 1992 and it now has two offices in the has a maximum loss level.