The Washington Post Sunday
Scaramucci’s drummed up a following, even as his investment model — funds of hedge funds — has taken a hit
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.
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.
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,”
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.