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Fundamental insights

Kellogg finance expertise well represented among alumni leaders in fund management

By Gary Wisby

Professor Robert McDonald  
Finance Professor Robert McDonald, one of the Kellogg thought leaders inspiring alumni success  Photo © Nathan Mandell  
See related article: "In fifth decade, Investment Management Club still picks winners"

People like Sunil Hirani.

When Hirani '94 co-founded Creditex, now a leader in trading credit derivatives, in 1999, he vastly underestimated how big the market for its services would become. "Today we do as much volume in two or three days as we did in all of 2002," he says.

Credit derivatives — a type of security that investment professionals use to manage the risk of corporate defaults — have grown from zero in 1997 to a market of more than $23 trillion today. "A whole infrastructure is being built up out of thin air," Hirani says.

His No. 1 concern today is staying a step ahead of the competition and his clients. He and his team do this by trying to differentiate the company's services and "looking for gaps in services that our competitors are providing," he says. Creditex also relies on innovation "to execute better, faster, more economically, to make our clients more efficient," says Hirani, adding that he and his colleagues try to have fun while negotiating the heady world of investment.

He characterized today's market as "very, very competitive" and his clients as "aggressive and demanding about minimizing total transaction costs and improving overall service levels."

At Kellogg, Hirani says he learned the importance of branding, "creating and building a brand that has value." He also learned the power of the team. "It's the resource that's in shortest supply these days," he says, "and we try harder every day to be better at recruiting, retaining and cultivating."

For David Kabiller '87, founder of AQR Capital Management LLC, a Las Vegas analogy proves useful in describing what his firm needs to do. "No matter how long you play, at the end of the day the house wins, because it has a statistical edge," he says. "We're trying to be that casino."

On average, the company is right 52 percent of the time, Kabiller says. "A lot of companies are about stock picking. We do more than that; we're not a sound bite."

He says the company's mission is "to outperform markets, from arbitrage to market-neutral to futures-based strategies." The firm's statisticians, mathematicians, computer scientists and financial economists build forecasting models that strive to give the team an edge.

Kabiller, who is a Northwestern University trustee, says the company is active in a majority of markets around the world. He is one of four partners who founded AQR — it stands for Applied Quantitative Research — in 1998.

"My prime responsibility is to work on marketing and develop a business strategy," he says. "I'm recruiting to get the best and the brightest."

When Kabiller started his Kellogg studies, it was with the idea of going into hospital administration malpractice law. But after hearing alumni guest speakers describe what they had done in their careers, he decided financial management was the place for him.

"When I heard them talking about investment banking, it sounded like they had entrepreneurial freedom," he says.

  Sunil Hirani
  Sunil Hirani '94
  David Kabiller
  David Kabiller '87
  Edith Cooper
  Edith Cooper '86

As for his classes, Kabiller singled out several highlights, among them: Robert McDonald's corporate finance course; Stuart Greenbaum's financial institutions class; and William Breen's lectures on investing.

"It was pleasurable, a source of joy, not work, to take those classes," Kabiller says. "That and some great alumni who reflected on their careers was a pretty powerful combination."

The enthusiasm for finance that Kabiller discovered at Kellogg is shared by Edith Cooper '86.

In addition to being "as exciting and fascinating as they have ever been," the markets are becoming even more global, observes Cooper '86, managing director at Goldman Sachs.

"Global no longer means the U.S., Europe, Japan and Hong Kong," she says. "The economies in China, India, various Latin American countries offer interesting opportunities, as does the Middle East." One of the biggest challenges is also the biggest opportunity: keeping up with the changing dynamics of this marketplace, says Cooper, who is responsible for driving new initiatives with hedge funds at the firm.

"Goldman has a large footprint in so many markets that it is in a great position to add tremendous value to our clients," she says. "Value is no longer simply providing price discovery. We work with our clients to understand their objectives and offer ideas and access to liquidity to accomplish them."

Cooper earned her bachelor's degree in liberal arts from Harvard University. She attended the Kellogg School's Part-Time MBA Program in the evenings while working at First Chicago as part of the First Scholar Program. Kellogg gave her "the critical background for what I was doing at work, in terms of finance and the dynamics of how organizations work. Our business is about people, and the coursework at Kellogg gave me insight beyond practical knowledge."

One question people often ask Cooper is whether her business training made a significant difference in her finance career. She tells them yes, because the experience gave her the proper overarching frameworks and perspectives for her career. "I don't pull out my textbooks, but [that knowledge] became part of the way I think," she says.

Similarly, Kellogg provided Steven Lefkowitz '87 with the experience and technical training he needed to launch his finance career. Today the principal of Caxton-Iseman Capital Inc. uses that knowledge in the world of leveraged buyouts.

"Kellogg helped prepare me, through the interchange of a fantastic student body and high-quality tutelage of the professors, for the dynamic and fast-paced environment of private equity," he says.

Today, his firm almost always controls a majority of equity in its portfolio companies as it buys and builds them, he says. But finding good deals is a top goal, and the most difficult one.

"It's hard to find properly priced investment opportunities in this extremely competitive market," Lefkowitz says. "The biggest challenge is the flood of equity capital and overheated debt markets."

Searching for unique value is something familiar to Adam Usdan '87 too. The president of Trellus Management Co, an equity hedge fund that is mostly domestic and  "opportunistic and elastic in style," says his firm attempts to own stock that is outside the ordinary. "We try to find companies that will emerge as leaders in the future," he says. As evidence, he notes that more than 50 of their stocks have gone up five times in value during his tenure.

Questions uppermost in his mind today include: What is the best career path for a particular employee? In addition to profit participation, how do you incentivize and retain employees? As the business grows, how do you manage your time and people?

Usdan finds the market to be much faster-paced than when he founded Trellus Management 14 years ago.

"Information is distilled more immediately," he says. "You have to take on more risk to create return. It used to be you could make up returns by being quicker than the next person. Today there are too many smart kids out there."

What strategies does he find most effective? Ignore the "noise" and focus instead on the end-game of companies in the portfolio. Don't be rattled by near-term volatility.

The courses in finance, marketing and accounting that Usdan took at Kellogg made him a sharper analyst when looking at companies. "I was able to ask better questions and understand a business pretty quickly," he says.

Outside of class, his Kellogg experience exposed him to many companies as they recruited on campus. "I was able to get a sense of which ones were good and which ones were merely OK," Usdan says.

Today, the Kellogg School finance curriculum that helped shape these alumni careers remains innovative, with new offerings currently being launched. One of these, the Asset Management Practicum, lets students oversee a real portfolio.

Professor Robert Korajczyk leads the course, whose goal, he says, is "to provide Kellogg students with a unique educational experience that combines financial theory, exposure to cutting-edge practitioners and experience managing an actual portfolio."

Financial services firms hire about 20 percent of all Kellogg School graduates, Korajczyk says, one reason why the Asset Management Practicum is an important innovation. "This class is providing real action learning that allows our students to better understand the risk and reward that practitioners face everyday," says Korajczyk, who notes that other new finance offerings include Case Studies in Venture Investment and Management and Wall Street, Hedge Funds and Private Equity (LBO) Funds.

Undoubtedly, many of the students in these courses will soon join the ranks of the school's alumni innovators turning theory into practice and creating real-world value in the finance world.

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