Bloomberg Businessweek (North America)
Yale investor Bracebridge rakes in moola moola for the Boola Boola
▶ Bracebridge Capital is the biggest hedge fund run by a woman ▶ “The bonds don’t know who owns them”
Last year was a tough one for hedge fund managers, but the Yale Endowment’s bet on one little-known Boston fund has continued to pay off.
Nancy Zimmerman’s Bracebridge Capital has gone from $5.8 billion in assets four years ago to $10.3 billion. That makes it the largest hedge fund in the world run by a woman. Despite this, Zimmerman, who survived a 1990s scandal involving Russia, her husband, and Harvard, has largely avoided the limelight.
Bracebridge was staked with $50 million in 1994 by David Swensen, who runs the Yale Endowment, and Thomas Steyer, founder of Farallon Capital Management. It has returned about 10 percent annualized since its inception and has been one of Yale’s most profitable investments. It represents $1 billion of the endowment’s $25.6 billion in assets.
Swensen, one of the most successful and closely watched endowment managers, has over the years moved away from investing directly in stocks and bonds. At the same time, he’s added to hedge funds and so- called absolute return strategies. Such investments are ideally supposed to move independently of the ups and downs of the broader market, with more of the return depending on the skill of the manager executing them. They can be opaque to outsiders. Here’s how Swensen describes Zimmerman’s approach: “She’s employing this leveraged strategy to exploit pricing differentials in the fixed-income world with an obsessive focus on risk.”
Zimmerman herself offers an example of what this means in practice. Bracebridge will buy a corporate bond it considers to be underpriced, while at the same time purchasing a credit default swap, a kind of insurance policy on the bond. The fund makes money on the difference between what it earns from the bond and what it pays for the insurance. It might do the reverse as well and bet against a bond that seems
expensive. Leverage boosts returns when its bets make money, but can also magnify losses. Since 2009, Bracebridge has had only eight losing months. The fund gained just 2 percent in 2015, but that performance eclipsed the industry, which was up 0.6 percent on average, according to data compiled by Bloomberg. Hedge funds had trouble navigating unexpected events, including a devaluation in the Chinese currency in August, a rally in European government bonds, and a steep drop in oil prices. “There were a lot of gopher holes that you could step in,” says Gabriel Sunshine, Zimmerman’s partner at Bracebridge. “We managed to miss most of them.”
Bracebridge’s biggest win came in 2009: After losing 18 percent in the financial crisis, it posted a 35 percent gain. That surpassed the 25.8 percent return on its nearest benchmark, the HFRI Relative Value index.
The fund’s strategy doesn’t always work so well. Long-term Capital Management, a highly leveraged hedge fund run by John Meriwether, had an approach similar to Bracebridge’s. In 1998, after Russia stiffed lenders including LTCM, that fund failed and was bailed out by its Wall Street competitors. The fall of LTCM hit other hedge funds including Bracebridge, which held some of the same assets. Bracebridge lost about 26 percent for the year.
Investments in Russia cast another kind of shadow over Zimmerman’s early career. A few years before LTCM’S fall, in 1992, her husband, Harvard economist Andrei Shleifer, signed on to help privatize the Russian economy under the auspices of the university and the U.S. government. Zimmerman bought up beleaguered Russian debt, betting its value would rise, court filings show.
Complaints arose about Shleifer and his business partner allegedly using their position and influence for personal gain, according to court documents. Harvard, Shleifer, and the U. S. Department of Justice eventually reached an agreement in which the university paid $26.5 million to settle a lawsuit and Shleifer paid $2 million. Zimmerman’s company paid $1.5 million to resolve civil claims that it improperly used resources and staff from the government-funded project. Neither Zimmerman nor her husband admitted wrongdoing in connection with their Russia dealings.
Steyer of Farallon cashed out after the Russia episode, but Swensen stuck with Zimmerman’s fledgling fund. “We took a hard look and found no reason to modify our relationship,” says Swensen, who describes himself as a close friend of Zimmerman’s.
Zimmerman, 52, was born and raised just north of Chicago in Skokie, Ill., the youngest of two girls. While attending Brown, she worked summers at a Chicago derivatives trading firm, where she stayed for three years after graduating. Her first job there was buying Japanese yen options. She owns most of Bracebridge, according to a 2015 filing with the U.S. Securities and Exchange Commission.
Zimmerman plays down the challenges faced by women in a maledominated industry: “The bonds don’t know who owns them.” Sabrina Willmer and Tom Moroney The bottom line One of Yale’s most successful investments has been a hedge fund making complex leveraged bets on bonds.