Letter #283: Steven Schonfeld (2012)
Founder of Schonfeld | Finding Talent in Shuttered Hedge Funds
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Steven Schonfeld is the founder of Schonfeld Strategic Advisors. He started his career as a stockbroker at Prudential Bache, where he spent seven years trading stocks for wealthy customers. After devising a proprietary database of thousands of successful trading strategies, he left Prudential in 1988 and started a proprietary trading firm (the predecessor to Schonfeld Strategic Advisors) with $450,000 in savings. Over an 11 year period, his average ROE was 70%, and by 2005, the firm’s revenues exceeded $250mn. In 2006, Schonfeld moved to algorithmic trading as it recognized that computer driven strategies would be faster than traditional trading. By 2009, Schonfeld had switched from being a prop shop to a family office. Then, in 2015, the firm began accepting outside capital as it changed once again, this time to a multi-strategy hedge fund. As of 2022, the firm had ~$32bn in AUM.
Today’s letter is the transcript of an interview with Steven in 2012 where he discusses finding talent in shuttered hedge funds. At the time, Schonfeld funded 25 portfolio management teams through his prop shop operation, and was looking to expand. Steven shares that in recent years they had gone aggressively into quant and relative value strategies and why, the types of talent they are looking to hire, how their structure allows them to be more flexible and creative, how their model differs from other models such as Steve Cohen’s SAC Capital, thoughts on starting a hedge fund, and why he’s not retired.
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
Related Resources
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Quants
Transcript
Host: Our next guest funds 25 portfolio management teams through his $2bn proprietary investment firm, and he is looking to expand. Says he's recruiting talent from shuttered hedge funds such as Galleon and Diamondback Capital. Steven Schonfeld of Schonfeld Group, joins me now right here at post night. Nice to have you.
Steven Schonfeld: Good to see you.
Host: Our viewers may at least know the name, and then when they think about it as so many others, they think, okay, a lot of short term traders coming in every day, using largely your capital, you trading as well, and then everybody goes home. But that's not your business any longer.
Steven Schonfeld: No, it was a major part of our business for years, but it's about 10% of our business now. Most of our business has been focusing on the hedge fund world, and we've been a hedge fund since 1995 as a major investor, and more recently, in the last five years, six years, we've been very aggressively gone into quant and more recently, relative value.
Host: Why relative value?
Steven Schonfeld: Feel it's--stock pickers--there's always going to be reasons for stock pickers. For a few years, they underperformed, mostly because of high correlation of stocks to each other, led mostly by the euro. As the Euro went so did stocks, and a fight to ETF, which by definition, stocks went in parallel to each other. Phil, that's going to ease over time, and
Host: You do, you thinks that's going to start to change--
Steven Schonfeld: Absolutely.
Host: I mean, we've had hedge funds underperforming now I think it's going to be three years in a row.
Steven Schonfeld: With every bubble and burst comes opportunity, and I feel those are two good strategies. It's a really more consistent model as far as quants and relative value, diversified, numerous groups, covering different parts of the marketplace.
Host: So that's where you're putting a lot of your money to work in terms of hiring a couple of guys to manage whatever funds you want to allocate towards them. And now that we should say that as well. So you're hiring people, I guess--
Steven Schonfeld: Exactly. Right. Yeah, we're out their hiring, we're looking for the best talent. And the big thing is, versus hedge funds, as prop, we have flexibility. We have a lot of--we care a lot about their wish list, want list, need list of the managers. And to find and attract the best talent, you need to offer them something. So we offer a package that we feel is unparalleled by many. In the prop world, family office, it's easier for us to do that creatively. Example would be paying up for consistency. So we're looking for the best consistent quants, the best consistent relative value performers, and we have some special internal metrics to give them higher payouts than they can get at other hedge funds or banks.
Host: Steve, how does your model differ from that of let's say Stevie Cohen? I know SAC takes in outside capital, but most of it is Mr. Cohen's.
Steven Schonfeld: Correct.
Host: A lot of it is allocated towards the kinds of people you're describing, towards different guys he brings in, gives them a certain amount of money, and says, Go to it, and then give me some of your ideas, and we'll talk as well. I know you still trade also. How are you different from that?
Steven Schonfeld: It's similar in the way we both back strategists, but his is more--he's at the hub. Great trader--Steve is one of the best traders of all time on Wall Street, and he's always sharing ideas, best ideas, with all his portfolio managers. And a lot of it gets filtered through him. He's very, very involved in the books. My managers are more passive investments, where I'm not dealing with them day to day, month to month, quarter by quarter, and sharing ideas. They do their own thing. I do my own thing.
Host: Now, it is all your money, isn't it?
Steven Schonfeld: Correct.
Host: That's a nice problem to have. And so the SEC, in terms of at least--most hedge funds have to register with the SEC. You don't have to register with the SEC.
Steven Schonfeld: As a family office, we don't have to register, but we're still regulated by the SEC, just like everyone else.
Host: Of course. What about the hedge fund business overall? How hard--is it any harder to start a hedge fund? I mean, we may see some very talented guys come from a number of these firms that at least are having some issues at this point. Are they going to have an easier or harder time raising money?
Steven Schonfeld: Well, there's seeders out there--seeding is pretty much at a low where there's not a lot of entities are out there seeding. We're different in the fact that seeders typically try to own 20-30% of the GP, where we're just looking for capacity and trying to invest in the manager and talent. But as far as overall hedge funds, the big guys, like the big names, have underperformed for a while. They're great, they have great track records, but a lot of them have too much money to manage, and they're over capacity, where they might have a guy who might--his sweet spot is $300mn would be perfect for him to trade and have a great, consistent track record at 300mn, and because they have so much money and they need return, they have to push 800mn, 1bn to him, and he might go into strategies or holding times or products that aren't his core competencies.
Host: Now, you made your money, obviously, in trading, but why not do something else? In other words, again, this is your money. You're making a decision this is the best way to allocate it, the best way to get a return on it. There's a lot of other things you could be doing, I would assume.
Steven Schonfeld: That is true. I just have a passion for the business. But I really do have a passion for short term training, which I've always had, but I really have a passion for the quant world and relative value world. And they are just more consistent because they're not taking a lot of market exposures. They're more neutral-based strategies.
Host: They may not get the returns then, either.
Steven Schonfeld: Right.
Host: You're happy with that.
Steven Schonfeld: Happy because it's more of a consistent, diversified model.
Host: Steven Schoenfeld, appreciate you coming down and joining us.
Steven Schonfeld: Thank you, David. You're very welcome.
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