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‘Invest in your career,’ says AQR founder David Kabiller

Kellogg graduate also tells students to hedge bets when considering hedge funds

By Ed Finkel

10/5/2007 -  Hedge funds carry great opportunities but also great risks, and those considering investing their money — or their labor — must consider carefully how diversified these investment instruments are and how wisely they’re run, said David Kabiller ’87.

He should know: Kabiller left Goldman Sachs to found AQR Capital Management in 1998.

“Success can be very fragile,” he told about 100 Kellogg School students during a lecture Oct. 3 at the Donald P. Jacobs Center. Many hedge funds try to stay small and cultivate a boutique-like atmosphere, with two or three employees, a single investing strategy, and assets of roughly $75 million. “Can that be sustainable in the future, when you have so much competition?” he asked.

The success stories of the past several years have poached so much talent away from traditional Wall Street firms that the competition has become thick, Kabiller said. “We’re at an inflection point” in that regard.

It’s also difficult to have the same success rates with a $5 billion or $10 billion portfolio that one had with $1 billion, Kabiller noted. “The more money you manage, the harder it is to produce output. There’s a limitation to how big and how scaleable hedge funds can get.”

Although some funds have succeeded wildly, Kabiller cautioned those who assume that they’ll hit it big too. He said he sees some of the same “irrational exuberance” that former Federal Reserve chairman Alan Greenspan foretold in the high-tech boom a decade ago.

“We’re in a world that’s a little bit irrational now,” Kabiller said. “I don’t think it’s sustainable. I would be very cautious of where you do go.”

The Kellogg graduate advised those considering a career in institutional investing to begin, as he did, with a more traditional firm where one can receive training in the field — which hedge funds typically do not have the capacity to provide.

Switching from division to division at Goldman Sachs helped him build a broad knowledge base, Kabiller said, while friends who took lateral transfers to other firms for short-term raises are often “miserable” because they only have one skill set.

Even if you are not happy with your job, Kabiller said, retain your professionalism. “Don’t whine about it; excel at it,” he said. “You’ve got to be the real deal. You’ve got to invest in your career. When the bad times happen, you’ll survive.”

Kabiller and his colleagues at AQR have been trying to build the “optimal alpha” firm that combines some of the stability of traditional firms with the opportunities of hedge funds, he said. They had a rocky beginning, losing nearly 38 percent during their first year, but ultimately turned that around to succeed, he said.

Hedge fund managers with whom Kabiller interacts on Wall Street all know Kellogg well and would like to recruit graduates, he said. “We’re all plotting, ‘How do we get you out there?’ Make sure you leverage the alumni network.”

The lecture was sponsored by the Kellogg School’s Career Management Center.