When you think of hedge funds you think of New York, Boston and the leafy suburbs of Connecticut in between. But for Gratia Capital, an equity-based hedge fund started by Steve Pei in April 2012 with $25 million seed money from Q Investments of Texas, Los Angeles is home. And the multi-strategy, event-driven hedge fund with $500 million in assets under management is part of a growing hedge fund community in California.
As a longtime California resident, Pei spent two years at Bain Capital in New York and then moved back to the West Coast to serve as vice president of Canyon Capital Advisors in Los Angeles for nearly six years. He not only wanted to return to Los Angeles; Pei also wanted to start his own fund. There was a desire to be on the West Coast but stylistically I think I was always an independent thinker, so there was no desire to have to miss out on the hubbub of New York, he said.
And Pei is not alone as a buysider running his own hedge fund in an area known for the entertainment industry, extravagant real estate and high-tech research. If you look specifically at L.A., its not as frequented on the equities side, but on the credit side L.A. is actually very, very well represented. There are a lot of very large mega hedge funds that all came out of Drexel back in the day, Pei said, citing Canyon, Oaktree, Aries, DoubleLine and PIMCO as examples. Theres a very large credit commitment here and Canyon is a multi-strat fund, so it was kind of a natural landing spot for me.
Hedge funds based in southern California include Brandes Investment, Chapman Capital, Clean Energy Asset Management, Dalton Investments and others.
Still, Pei and his partner Matt Schutzman, who served as the then-startup funds first trader, had to recruit from the East Coast for his trading desk. They eventually selected Ed Nebens, a UBS and Credit Suisse/Warburg Pincus Asset Management veteran, to run their trading operations. The Westchester County, N.Y., native attended Horace Greeley High School, named for the legendary newspaper magnate who popularized the phrase for Americas move to the Gold Coast two centuries ago: Go West, young man. After serving at a slew of hedge funds and putting in hours that would make a milk farmer dizzy, the 45-year-old trader did just that when he started at Gratia Capital last August.
Nebens has seen his shares of industry mergers that have sent him from the buyside to the sellside and back again. He served for six years at Cantillon Capital Management until 2009, when the firm closed down its hedge funds at a peak of $10 billion AUM. After Cantillon, he tried the sellside for a year at UBS as an executive director of international equities. The Swiss banks rampant performance problems, however, spurred his to return to the buyside by working for one of his UBS clients, Indus, for its Europe Fund, which was later spun out to a new European fund.
I was obviously trading European live hours during the early mornings, and I was trading U.S. and a very heavy derivative book in the afternoon, Nebens recalled of those days.
And the hours were brutal. A typical morning saw Nebens, a married father of three young children back then, wake up at 1 a.m. so he could leave his Westport, Conn., home to make it to the offices on Wall Street by 2 a.m. to prepare for the markets to open in Europe. Think about that for a second: He worked for a hedge fund in Manhattan and lived in Connecticut, and not the other way around.
Although Nebens still wakes up at 4:30 a.m. these days, his family loves the new hours. Its still early, but Im home before the sun goes down and I get to see my kids sporting events and have dinner with the family every night. Its actually ideal, he said, adding, I think its added years to my life for sure.
O Solo Trader
As the sole head trader at Gratia Capital, there is plenty for Nebens to do in his trading day. Coming into the office, Nebens gets to work by evaluating the overseas markets with a focus on Europe for his morning note to his Gratia colleagues. I make sure that when they wake and log onto their iPhones, they have an update on our portfolio, whats going on in the markets, whats moving, whats not moving, and then sort out the research that comes out in our name, he said.
The bulk of the trading day will involve trading, broker relations, and evaluating IPOs of interest, new trading ideas and more. Im looking at various Excel sheets or modeling for projects I may have for Steve [Pei] or the team, and anything to do with technology, he said.
Although Gratia Capital only has 11 employees, it has the same responsibilities and demands as a fund five times the size. With his experience working on larger hedge funds and as an industry veteran, Nebens wants to give his colleagues a slice of his insights. The reports go to the funds analysts, marketing and operations people, he explained. Anything that has to deal with trading or where I can add value, given that Ive been at a few funds where theyve launched or gotten very big – Ive seen funds launch and grow, and see Ive seen funds close – I have some experience on all those processes.
The $500 million Gratia Capital fund has seen some impressive growth, and Nebens puts that down to the firms plan. I think our strategy is easy to explain and understand. Our team has deep experience and knowledge in the sectors that were involved in. Our performance has been impressive, he said. When prospects come to see us, they understand what were trying to do here, and it certainly has helped the process of raising assets.
According to Jodi Yang, who runs marketing for the fund, Gratia Capital has roughly 25 clients that hail from differing investment corners: wealthy individuals, pension funds, asset managers, single and multi-family offices, fund of funds,endowments, foundations and pension funds. Were definitely seeing that as we get more stable and tenured and we continue to put time on the clock, Yang said.
When asked if his mission is to double the client base in a year, Nebens keeps his ambitions in check: I think our number-one priority is we feel like if we do right by our clients, put out good numbers and focus on steady growth, everything else kind of takes care of itself.
The Lone Traders Gear
As the sole trader, Nebens has the busiest desk in terms of hardware. Of the six screens he stares at, he says that most are occupied by Bloomberg. Earlier this year, he oversaw the implementation of a new order management system from Eze Castle to replace the older Neovest OMS. We had a bakeoff between two or three different OMS providers, and were satisfied with what Eze Castle has to offer, he said. It works well with our middle office and with our prime brokers with order entry capabilities.
On the heels of the Eze Castle upgrade, Nebens is now looking at new middle-office solutions. We want to make it so when someone does their due diligence on us, we really have best-in-class options everywhere, he said.
Right now, the Eze Castle OMS is being used by Nebens and Pei as well as the funds operations manager and a couple of the analysts, according to Nebens. And he said that he has no interest in a mobile or tablet version of the solution even though Eze Castle offers one. We havent looked too deeply at it yet. I think were all in the office a lot so we dont have the need. Obviously we have disaster-recovery options in place so we can work on a laptop or on a home PC, so I have the ability to trade outside of the office if need be, he said.
The Eze Castle OMS is fed by a data feed from Bloomberg. Nebens told Traders that he uses external news services such as Briefing.com and StreetAccount, and he is testing others. Were looking at the social-media momentum sort of ideas coming from The Street. There are a couple of services that weve tested and tried but nothing weve purchased yet. Its interesting to see how Twitter or Yahoo Finance or any sort of tweeting mechanisms or social media can influence stocks on a day-to-day basis, he said.
Despite being intrigued by social media and its potential role in investing and data mining, Nebens isnt ready to pull the trigger just yet. I dont think I have 100 percent confidence on the sources of social media, what their real motivation is. Its still sort of the Wild West, he pointed out. I dont know how much the SEC looks at it, how much they regulate it or how many guys are in their grandmas basements tweeting stuff out or if they are real investors.
That said, he does see it as information with potential: Its always helpful to take in as much information as your bandwidth will allow and use that as part of your information to make decisions on trading. Obviously, I have 20 or 30 orders on my pad and have to decide when to pull the trigger. Sometimes these small little pieces of news are helpful.
I think where it can immediately add value is it can sort of be a smoke signal, Nebens continued. If someone tweets some news about a company, its an opportunity to pause the order, look at the company and do your own due diligence, as opposed to ignoring it and just keep plugging away selling and buying and shorting as a possibility of news out there. Nebens added that Twitter could provide a chance to find and absorb news, and once the source and the news is considered, it can be a buying or selling opportunity. If its worthwhile, it can change direction on an order or stopping or going faster or slower, he said.
To Broker A Deal In L.A.
Thanks to Nebens 23 years in the financial arena, he still falls back on his relationships with various broker-dealers with which he executes his trades.
We have the ability to move with some of the more mid-cap names, but certainly we deal with Merrill Lynch, Morgan Stanley, Goldman Sachs, J.P. Morgan, Credit Suisse and Deutsche Bank, he said. We also deal with the Wells Fargos, the Stifels, the Cantors and the BTIGs, as we have a pretty large real estate book and sometimes REITs can be a specialist sort of stock and scenario, he said.
Gratia Capital hasnt had trouble finding reputable brokers on the West Coast, either. The bulk of Gratias brokerage coverage is based in San Francisco, with a few offices in Los Angeles. Then there are guys that Ive got long-term relationships with, if its a head of a desk or if its a syndicate that Ive known for many years, theyre typically in New York, Nebens said. I try to get to New York twice a year to do the rounds, see syndicates and heads of trading desks and make sure they know who we are. Because the bottom line is, its still a relationship business.
How does Nebens handle life as the sole trader after working at much larger firms with a wider global footprint? His varied careers brought him here, he said. Nebens started at trading desks that grew through waves of mergers and acquisitions in the go-go 1990s and early 00s. When I started at Bankers Trust, there were two of us and then after a merger with Deutsche Bank, there were 13 of us. I started at Julius Baer where there was just two of us, and then we merged with Credit Suisse and there were 10 of us, he said.
When Steve hired me, he was looking for someone with experience, with East Coast connections, someone who had the ability to trade credit and equities and derivatives, and do broker relations and understand a balance sheet, Nebens said, recalling his previous job as head of trading at Three Bridges Capital.
Working on a smaller desk, even at Cantillon where we were a $10 billion fund, I was the only trader in New York, he recalled of his former life. We had one trader in London, so it afforded me the ability to learn many things, such as aspects of funds, and add value to a fund of this size. I could bring in some of the things to a huge fund that may be done by a compliance officer, a COO or someone who just does broker relations. Here I can do all those things.
I prefer a smaller environment.
