NEWS CLIPPINGS ABOUT Elliott Associates suggest that it is a super-aggressive vulture investor. It picks fights with major corporations (Procter & Gamble), US federal court judges (in a high-profile asbestos case), and even entire nations (Peru). Anne Krueger, the first deputy managing director of the IMF, has denounced the fund, alleging that it has undermined the entire structure of sovereign finance.
Ask its investors about Elliott, though, and you'll get a very different story. Over the course of its 27 years of managing money, Elliott has never returned more than 25% in any given year; its compound annual return is a respectable 14.1%. The fund is so cautious that some investors left during the stock market bubble, seeking higher returns from more aggressive managers. They generally returned, chastened, after the bubble burst.
Sophisticated investors tend to be particularly impressed by Elliott, whose proudest achievement is that over the course of its history it has outperformed the S&P500 by 130 basis points, while having only one-third of the index's volatility. It's an extremely impressive low-risk, moderate-return fund. Larry Simon, the founder of Ivy Asset Management and a very early investor in Elliott, says that Paul Singer, Elliott's founder, "is in the pantheon of risk-adjusted investment managers that I know of".
That said, the headlines aren't necessarily wrong about the fund's aggressive approach. Elliott is a highly conservative hedge fund, but it does seek out situations where it can make money by pursuing legal strategies in markets worldwide.
Like a professional limit poker player, its ability to make relatively modest but consistent returns is a direct consequence of its fearlessness in situations where it has a great deal of experience and expertise.
Singer rarely grants interviews. He is a cautious and private man, and was very concerned that this story be about Elliott rather than about him personally – he was adamant that he did not want his photograph taken. In truth, though, there are few, if any, differences between Elliott and Singer. The company is born of the man, and the man was born of the brutal bear market from 1968 to 1974.
Singer graduated from Harvard Law School in 1969 with a strong interest in the markets. He read a lot of books, was open to investment ideas, and tried out various investment strategies while pursuing a career as a lawyer. None of them worked. It was just as well he had a day job: he lost a lot of money, both for himself and for his family.
It was an expensive, yet effective, education. "From 1968 to 1974, investors were run over by a series of unpredictable moves culminating in a crushing bear market," he says. "Risk consciousness was seared into my mind as a result of my experience during that period."
Pioneer of market-neutral investing
The entire philosophy and history of Elliott Associates was, in a sense, written before it was even founded. Singer will never forget how gruesome markets can get, and one of the few places that his name can be found in the public domain is as the author of a chapter on risk control and risk management in an Institutional Investor book on hedge fund strategies.
He looks carefully at every kind of risk a hedge fund manager faces, from obvious ones such as leverage to much less obvious ones like hubris. Since September 11, Singer has been ever more attuned to large event risk: the kind of thing that is incredibly difficult to hedge.
The experience of the bear market led Singer to seek out trades that made money no matter what the rest of the market was doing. Virtually all hedge funds call themselves "market-neutral", of course, but Singer was one of the very first to actively hedge his positions on behalf of investors.
It all started with the publication of a couple of books on convertible arbitrage in the mid-1970s. Singer was working as a lawyer at Donaldson Lufkin & Jenrette Real Estate at the time, and managing his family's money on the side in his spare time. He started buying convertible bonds while shorting the underlying stock, and found that it really worked: he was making money in up markets and in down – nothing spectacular, but certainly a good steady income.
This was at the very beginning of the options market, when no-one really knew how to value the securities that were being traded on the brand-new Chicago Board Options Exchange. "Markets were primitive; we were primitive," says Singer, with hindsight. But in fact he was ahead of the curve all the time.
At no point did Singer plan a career as a major hedge fund manager. He never went out and marketed his new fund at inception: it was born much more gently than that. Essentially, Singer, together with his first large client, negotiated some of the first short-sell rebates with such brokerages as Merrill Lynch and EF Hutton.
Before he came along, you could borrow stock from the brokerage, but when you sold it, you had to give the proceeds back to the bank as collateral, and they kept the interest on that cash. Singer was among the very first independent investors to persuade the banks to let him keep a chunk of the interest, thereby essentially giving birth to a whole new asset class.
"Elliott was formed because we were able to get that deal," says Singer: it was now possible to sell stock short as part of complex related-securities arbitrages, rather than simply as a bet on it going down.
Better than being a lawyer
After that, the business maths was relatively easy – certainly easier than the Fischer Black options pricing model he was using. If he aggregated all the money that he was managing for his family, friends and clients anyway – it came to $1 million in total – Singer worked out that the management fee on those funds would roughly equal his salary as a lawyer. Since investing was always where his heart had been, he took the plunge and formed the company, giving it his middle name.