The Washington Post Sunday

Mas­ter mar­keter

Scara­mucci’s drummed up a fol­low­ing, even as his in­vest­ment model — funds of hedge funds — has taken a hit

- BY ED­WARD ROBIN­SON Business · Finance · Investing · Hedge Fund · Investment Banking · Banking · Las Vegas · New York · Goldman Sachs Group · United States of America · New York Jets · Rex Ryan · Antonio Brown · God · New York County, NY · Oliver Stone · George W. Bush · Fidelity Investments · Cambridge · Boston · Bernard L. Madoff · U.S. Securities and Exchange Commission · Morgan Stanley · Bank of America · Merrill Lynch · George H. W. Bush · Manhattan · Barack Obama · Venture Capital · Anthony Scaramucci · Harvard Law School · New York State Bar Association · Steven A. Cohen · Kenneth Griffin · Colin Powell · SkyBridge Capital · Michael Milken · Peter Lynch · Cambridge Associates · Morgan Stanley Smith Barney · John Paulson · Jon Stewart

An­thony Scara­mucci leaps to the cen­ter of the hedge fund uni­verse — and wants to take in­vestors along.

An­thony Scara­mucci fist­bumps in­vestors as he makes his way through a pool­side party at the Bel­la­gio Ho­tel in Las Ve­gas on a May evening.

“It’s the Mooch!” some­one shouts. Scara­mucci, a Har­vard Law School grad­u­ate who flunked the New York bar exam twice and was fired from Gold­man Sachs in 1991, is ex­actly where he wants to be: play­ing host to the hedge-fund in­dus­try as it surges past $2 tril­lion in global as­sets.

Scara­mucci is the cre­ator and ring­mas­ter of the Sky­Bridge Al­ter­na­tives Con­fer­ence, known as SALT, the largest an­nual U.S. sym­po­sium and schmooze­fest for hedge-fund man­agers and in­vestors. For three days, more than 1,750 in­vest­ment pro­fes­sion­als soaked up mar­ket in­sights from in­dus­try stars Steven A. Co­hen, Leon Coop­er­man and Ken­neth Grif­fin; geopo­lit­i­cal ob­ser­va­tions from Colin Pow­ell and Gor­don Brown; and sports talk from New York Jets head coach Rex Ryan.

At the pool­side gala, jug­glers, mimes and an Ital­ian clown rid­ing a uni­cy­cle weave their way be­tween rev­el­ers sip­ping drinks and feast­ing on roast pork.

“Can you be­lieve this?” Scara­mucci, 47, says, sa­vor­ing the fes­tiv­i­ties he’s or­ga­nized. “ You’ve got to use the skill set God has given you, and I have the abil­ity to con­nect with peo­ple. I was made to do this stuff.”

Wel­come to the An­thony Scara­mucci show. Two years ago, he was a lit­tle­known money man­ager fac­ing the fail­ure of his New York-based funds of hedge funds, Sky­Bridge Cap­i­tal, fol­low­ing the worst fi­nan­cial cri­sis in decades. Scara­mucci swiftly re­cov­ered and cat­a­pulted him­self into the cen­ter of the hedge-fund world through un­abashed self-pro­mo­tion and his gift for forg­ing re­la­tion­ships with in­flu­en­tial fig­ures.

His friends in­clude Michael Milken, who helped with the SALT con­fer­ence’s 2009 de­but, and movie di­rec­tor Oliver Stone, who gave Scara­mucci a cameo as a short seller in his 2010 se­quel “Wall Street: Money Never Sleeps.” Former pres­i­dent Ge­orge W. Bush, the key­note speaker at this year’s con­fer­ence, nick­named his dap­per host “Gucci Scara­mucci.”

“An­thony is a lik­able, self-pro­mo­tional, street-smart kid who un­der­stands the tremen­dous op­por­tu­nity for growth in the hedge-fund in­dus­try as the world grows more volatile,” says Coop­er­man, 68, the bil­lion­aire founder of Omega Ad­vi­sors.

Mass-af­flu­ent in­vestors

For all of the at­ten­tion Scara­mucci is at­tract­ing, he’s push­ing an in­vest­ment model — funds of hedge funds — that has lost as­sets and cred­i­bil­ity since the credit cri­sis. Sky­Bridge, which man­ages $2.8 bil­lion in as­sets, is aim­ing its funds of funds at mass-af­flu­ent in­vestors. They are house­holds with a net worth of $100,000 to $1 mil­lion not count­ing their pri­mary res­i­dence, ac­cord­ing to the Spec­trem Group, a re­search firm that an­a­lyzes wealth trends.

Only 3 per­cent of the na­tion’s 36 mil­lion mass-af­flu­ent in­vestors com­mit money to hedge funds. With volatil­ity in eq­ui­ties and fixed-in­come mar­kets ex­plod­ing in the wake of Stan­dard & Poor’s down­grade of the U.S. credit rat­ing on Aug. 5, Scara­mucci is bet­ting that more mass-af­flu­ent in­vestors will plunge into short sell­ing se­cu­ri­ties, fixed-in­come ar­bi­trage and other so­phis­ti­cated trades to build their nest eggs.

“I want to be the Peter Lynch of the hedge-fund in­dus­try,” Scara­mucci says, re­fer­ring to the Fidelity In­vest­ments money man­ager and TV spokesman who helped pop­u­lar­ize mu­tual-fund in­vest­ing in the 1980s and 1990s. “I want to make hedge-fund in­vest­ing ap­proach­able to the av­er­age Amer­i­can in­vestor.”

The funds-of-funds ap­proach is fraught with chal­lenges, says Deirdre Nec­tow, man­ag­ing di­rec­tor for busi­ness de­vel­op­ment at Cam­bridge As­so­ci­ates, a Bos­ton-based in­vest­ment con­sult­ing firm. Bernard Mad­off ’s $20 bil­lion Ponzi scheme re­vealed that some funds of funds failed to de­tect how he had faked his per­for­mance for more than 20 years as they chan­neled mil­lions of dol­lars of their clients’ money into his firm. While Mad­off ’s fraud is a unique case, the dif­fi­culty of re­search­ing the prac­tices of dozens of man­agers who typ­i­cally com­prise a fund of funds has left in­vestors wary.

“You have 30 to 35 man­agers in one fund, but if one is a Mad­off, you have a prob­lem,” says Nec­tow, who ad­vises many clients to in­vest di­rectly in hedge funds.

Funds of funds dis­gorged $2 bil­lion in cap­i­tal in the sec­ond quar­ter as in­vestors with­drew from the cat­e­gory, ac­cord­ing to Hedge Fund Re­search. In con­trast, in­vestors poured $29 bil­lion di­rectly into hedge funds, which are on course to record their high­est net as­set in­flows since 2007.

Then there are the costs. In­vestors have to pay funds of funds a man­age­ment fee on top of the typ­i­cal 2 per­cent on as­sets and 20 per­cent of prof­its that hedge funds charge. Sky­Bridge asks 1.5 per­cent an­nu­ally and no per­for­mance fees, and its clients may have to pay bro­kers a one-time place­ment fee of up to 3 per­cent. Funds of funds mostly haven’t de­liv­ered on those higher costs: The S&P 500-stock in­dex’s 2.4 per­cent av­er­age an­nual gain in the five years ended on July 31 beat the HFRI Funds of Funds in­dex’s 1.7 per­cent per­for­mance.

“When you layer on the fees, you’re just guar­an­tee­ing a lower re­turn,” says Janet Tavakoli, founder of Tavakoli Struc­tured Fi­nance.

Scara­mucci has had some suc­cess at­tract­ing well-off in­vestors who aren’t su­per-rich. About two-thirds of the 13,000 in­vestors in Sky­Bridge’s funds of funds are mass-af­flu­ent house­holds and high-net-worth in­di­vid­u­als, says Ray Nolte, a Sky­Bridge man­ag­ing part­ner.

More ag­gres­sive

In­vestors in the firm’s $1.7 bil­lion flag­ship, the Sky­Bridge Multi-Ad­viser Hedge Fund Port­fo­lios, have to qual­ify as ac­cred­ited in­vestors with a net worth of $1 mil­lion un­der Se­cu­ri­ties and Ex­change Com­mis­sion rules. The fund of funds has a min­i­mum thresh­old in­vest­ment of only $25,000, and Sky­Bridge sells it through Mor­gan Stan­ley Smith Bar­ney, Bank of Amer­ica’s Mer­rill Lynch unit and other re­tail bro­ker­ages.

“We see mass -af­flu­ent house­holds start­ing to loosen up and be­come more ag­gres­sive with their risk tol­er­ance,” says Thomas Wynn, a di­rec­tor at Spec­trem.

Sky­Bridge of­fers in­vestors en­trée to top-shelf man­agers whom in­vestors might not have the in­flu­ence or wealth to reach on their own. Led by port­fo­lio man­ager Troy Gayeski, the firm’s flag­ship fund com­mits 8.5 per­cent of its in­vest­ments to Don Brown­stein’s Struc­tured Ser­vic­ing Hold­ings. It bets on the spreads be­tween mort­gage-backed se­cu­ri­ties and was the top-per­form­ing hedge fund in Bloomberg Mar­kets’ an­nual rank­ing this year, with a 49.5 per­cent re­turn.

Sky­Bridge puts 8.1 per­cent of its flag­ship fund’s as­sets in Daniel Loeb’s Third Point Ul­tra, which ex­ploits price swings in se­cu­ri­ties linked to merg­ers and ac­qui­si­tions, and an­other 5.9 per­cent in John Paul­son’s Re­cov­ery Fund port­fo­lio, which hedges dol­lar-linked risk by be­ing de­nom­i­nated in gold. Sky­Bridge also in­vests in Pass­port Cap­i­tal’s Global Strat­egy fund, which fo­cuses on com­modi­ties pro­duc­ers. Sky­Bridge’s flag­ship fund is up 6.3 per­cent this year through June 30, com­pared with a 6 per­cent rise for the S&P 500 in that pe­riod.

Sky­Bridge’s Multi-Ad­viser fund is far more com­plex and risky than the typ­i­cal ac­tively man­aged mu­tual fund, Tavakoli says. Sky­Bridge con­cen­trates about a third of its as­sets in five funds that in­vest

“Can you be­lieve this?... You’ve got to use the skill set God has given you, and I have the abil­ity to con­nect with peo­ple. I was made to do this stuff.” “I want to be the Peter Lynch of the hedge-fund in­dus­try. I want to make hedge-fund in­vest­ing ap­proach­able to the av­er­age Amer­i­can in­vestor.” “What, are you kid­ding me? I’m a sales guy: I put my best client next to the pres­i­dent, and he was in heaven,”

An­thony Scara­mucci

Sky­Bridge cap­i­tal man­ag­ing part­ner

in mort­gage-backed se­cu­ri­ties, in­clud­ing tranches of sub­prime home loans orig­i­nated dur­ing the hous­ing boom.

While Sky­Bridge doesn’t use lever­age it­self, some of its fund man­agers do to bol­ster re­turns. And Sky­Bridge says in its quar­terly re­ports that its flag­ship fund is “ highly illiq­uid” be­cause, like many hedge funds, the firm re­serves the right not to re­deem its clients’ money upon re­quest.

Tavakoli says such a fund is too per­ilous for in­vestors who can’t af­ford to lose $25,000. “ They should run far away from this kind of strat­egy,” she says.

Scara­mucci and Nolte counter that by spread­ing bets among 41 man­agers, some of whom pur­sue strate­gies de­signed to go up when U.S. eq­ui­ties mar­kets drop, they’re de­liv­er­ing a hedge that many in­vestors want.

“Even if one or two man­agers lose their way, we are still well pro­tected,” Scara­mucci says. Nolte says the firm’s clients want Sky­Bridge to make big bets on their fa­vorite trades, such as mort­gages, and not sim­ply match mar­ket per­for­mance. “When we have a strong con­vic­tion on an idea, we will put more risk on,” Nolte says.

Scara­mucci uses his SALT con­fer­ence — and its A-list lineup of speak­ers — to bur­nish the Sky­Bridge brand. At the 2011 event, Scara­mucci threw a pri­vate din­ner for Bush, who pock­eted $175,000 for his off-the-record talk ear­lier in the evening.

Milken, Co­hen and other friends of Scara­mucci’s joined the former pres­i­dent for a four-course meal fea­tur­ing filet mignon and York­shire pud­ding slathered in black truf­fle gravy. Asked if he took the seat at Bush’s right hand, Scara­mucci guf­fawed.

“What, are you kid­ding me? I’m a sales guy: I put my best client next to the pres­i­dent, and he was in heaven,” he says.

‘Like a piñata’

At a na­tion­ally tele­vised town hall meet­ing in Man­hat­tan last Septem­ber, Scara­mucci chal­lenged Pres­i­dent Obama to lay off of Wall Street.

“We have felt like a piñata,” he com­plained. The fol­low­ing evening, Jon Ste­wart, the host of the news satire pro­gram “ The Daily Show,” lam­pooned Scara­mucci as a “Jersey Shore break­out star” who’s obliv­i­ous to the coun­try’s out­rage at bail­ing out big banks. Scara­mucci was so giddy to be the tar­get of Ste­wart’s wit that he sent the clip of the co­me­dian to his friends and clients.

“Hedge funds have long kept their heads down and let their per­for­mance and rep­u­ta­tions do the talk­ing for them, but this guy seems to be op­er­at­ing out­side of the model en­tirely,” says Charles Geisst, a fi­nan­cial his­to­rian and author of “Wall Street: A His­tory.”

Scara­mucci does have a sales­man’s smooth touch. On the first day of the SALT con­fer­ence, Scara­mucci is decked out in a gray, cus­tom-made Loro Piana suit, a pink shirt and pink striped neck­tie. He’s walk­ing down a crowded hall in the Bel­la­gio’s con­ven­tion cen­ter greet­ing at­ten­dees when a money man­ager ap­proaches and of­fers his hand.

“ This is off the charts, An­thony, off the charts,” he says. Scara­mucci grins and wraps his arm around his new friend with­out break­ing stride. “Look, why don’t you try and raise some money for your­self while you’re here?” Scara­mucci says.

Scara­mucci is equally at home talk­ing about com­plex trad­ing strate­gies. At a din­ner he hosted at the Four Sea­sons dur­ing SALT, Scara­mucci led a dis­cus­sion with econ­o­mist Nouriel Roubini on how Fed­eral Re­serve pol­icy and Europe’s debt woes were af­fect­ing cap­i­tal mar­kets.

“He comes across as Vin­nie Bar­barino, but it masks how smart and thought­ful he re­ally is,” says Brett Mess­ing, a Har­vard Law friend, re­fer­ring to a wise­crack­ing TV char­ac­ter played by John Tra­volta in the 1970s.

Scara­mucci grew up in Port Washington, a mid­dle-class town on the north shore of Long Is­land. His par­ents are sec­ond-gen­er­a­tion Ital­ians, and his fa­ther Alexan­der la­bored in the con­struc­tion in­dus­try for 42 years.

Scara­mucci grad­u­ated summa cum laude from Tufts Univer­sity with a bach­e­lor’s de­gree in eco­nomics. Three years later, he earned his Har­vard Law de­gree. He never did prac­tice law.

Drawn to the ac­tion and riches of Wall Street, he was ec­static when he landed a perch in Gold­man’s real es­tate in­vest­ment-bank­ing unit in Au­gust 1989.

“Your goal here is to not get fired,” Robert Ru­bin, a Gold­man part­ner who would serve as Trea­sury sec­re­tary from 1995 to 1999, told Scara­mucci’s train­ing class, Scara­mucci re­calls. By the end of his first year, Scara­mucci knew he didn’t have the an­a­lyt­i­cal skills or pa­tience to un­pack com­plex prop­erty deals.

When the prop­erty mar­ket con­tracted in 1991, real es­tate head Michael Fascitelli fired Scara­mucci as part of a cost-cut­ting move. It was a hum­bling mo­ment for the would-be Wall Street player.

Fascitelli liked Scara­mucci and helped him get a job in Gold­man’s eq­ui­ties group. In 1994, he trans­ferred to the pri­vate wealth man­age­ment unit, where he was re­spon­si­ble for build­ing a book of rich in­vest­ing clients.

“He was very hun­gry, and I thought he could shine in an area where he could use his peo­ple skills,” says Fascitelli, now chief ex­ec­u­tive of­fi­cer of Vor­nado Realty Trust.

By 1995, Scara­mucci, then 31, had

Fu­ture in doubt

They built Os­car up to $800 mil­lion in as­sets and brought in bil­lion­aire PC maker Michael Dell as a mi­nor­ity stake­holder in the firm. Af­ter the dot-com crash hurt Os­car’s per­for­mance in 2000 and 2001, they sold the firm to Neu­berger Ber­man, which was in turn ac­quired by Lehman Broth­ers in 2003.

Two years later, Scara­mucci struck out on his own again. He set up Sky­bridge as a “seed­ing” firm that in­vested in startup hedge funds sim­i­lar to the way ven­ture cap­i­tal­ists back tech en­trepreneur­s. He raised $300 mil­lion and in­vested in nine fledg­ling hedge funds.

When the re­ces­sion struck in 2008, Sky­bridge rapidly lost a fifth of its value and Scara­mucci criss-crossed the coun­try try­ing to per­suade clients not to with­draw from his fund.

By May 2009, Scara­mucci says, Sky­Bridge’s fu­ture was in doubt. At the time, fi­nan­cial firms were can­cel­ing con­fer­ences in Las Ve­gas out of con­cern it would look bad to party in Sin City as tax­pay­ers bailed out Wall Street.

Scara­mucci had no such qualms. He de­cided to hold his first hedge-fund ex­trav­a­ganza at En­core at Wynn, one of the prici­est ho­tels on the Strip. “I wanted to let peo­ple know we were still alive,” he says.

Scara­mucci needed more than a three-day party in Ve­gas to save his ail­ing firm. He rec­og­nized that the U.S. Trea­sury, which in­jected $45 bil­lion into Cit­i­group af­ter it al­most col­lapsed, was press­ing CEO Vikram Pan­dit to un­load pe­riph­eral busi­nesses.

Scara­mucci ar­ranged in late 2009 to meet Nolte, then CEO of the hedge-fund man­age­ment group in Citi’s al­ter­na­tive-in­vest­ing unit, which in­cluded funds of funds. Nolte, a but­toned-down money man­ager with the de­meanor of a col­lege pro­fes­sor, told Scara­mucci that he was grow­ing anx­ious as Citi pon­dered whether to shed his divi­sion.

“We were go­ing to wither and die un­til Citi de­cided what to do with us,” Nolte says.

In April 2010, Citi agreed to sell the busi­ness to Sky­bridge and Nolte, and his 23-mem­ber in­vest­ment team joined forces with Scara­mucci. Sky­bridge made a nom­i­nal up­front pay­ment and agreed to share a por­tion of its as­set man­age­ment fees with Citi for three years, ac­cord­ing to a per­son fa­mil­iar with the trans­ac­tion.

In re­turn, Scara­mucci got $1.6 bil­lion in as­sets, four in­sti­tu­tional in­vestors and more than 7,000 mass-af­flu­ent and high­net-worth clients. “An­thony pulled off some­thing that was to­tally against the odds,” Fascitelli says.

Scara­mucci has be­come the Wall Street player he as­pired to be when he landed at Gold­man. He en­ter­tains clients in his lux­ury suite at Citi Field, home of his beloved New York Mets. And he’s a top fundraiser for Mitt Rom­ney, the former Mas­sachusetts gov­er­nor who is seek­ing the Repub­li­can pres­i­den­tial nom­i­na­tion.

He’s hit his stride not through his record as a money man­ager, which even he ad­mits is lack­lus­ter. Rather, it’s his net­work­ing chops and friend­ships with Wall Street’s elite that have won him the spot­light.

“I would make him the trustee for my es­tate not be­cause he’s a bril­liant in­vestor but be­cause he would do the right thing for my fam­ily,” says Robert Matza, a former pres­i­dent of Neu­berger Ber­man and now pres­i­dent of Gold­en­tree As­set Man­age­ment. “I trust him.”

Sky­bridge has at­tracted $1 bil­lion in new in­flows since it ab­sorbed Citi’s funds-of-funds unit on July 1, 2010.

“Per­for­mance isn’t what beats a path to your door,” says Robert Ni­chols, founder of Wind­ward Cap­i­tal Man­age­ment, a firm with $250 mil­lion in as­sets. “It’s sales and mar­ket­ing.” The full ver­sion of this Bloomberg Mar­kets ar­ti­cle ap­pears in the Oc­to­ber is­sue. more than 300 clients and was pro­duc­ing $4.5 mil­lion in gross com­mis­sions and pock­et­ing more than $1 mil­lion a year in com­pen­sa­tion. The next year, he quit to co-found a hedge fund called Os­car Cap­i­tal Man­age­ment with fel­low Gold­man alum An­drew Boszhardt.

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