Kings of Wall Street

DAVID CRAIG WEDNESDAY, 3RD SEPTEMBER 2008

David Craig on Jack Nash and Leon Levy, a remarkable pair of trailblazing New York hedge fund managers As the two senior partners of Oppen- heimer & Company, Jack Nash and Leon Levy were well-known members of the Wall Street brokerage and investment banking community in the 1960s and 1970s. Jack was considered to be a tough character, dedicated to running Oppenheimer with a ruthless effectiveness that had taken the firm to the top of the mutual-fund management industry, as well as being a successful pioneer in the leveraged buy-out business. While he could be forceful and very direct, he was always completely straightforward, utterly decisive, respected for his fairness, though intolerant of low standards in others. Jack had been a Jewish pre-war refugee, whose family worked their way from eastern Germany, through the Lisbon route, then by boat to New York when he was 12 years old. He remained a fighter and a survivor. He died on 29 July this year, at the age of 79, outliving his long time investing partner Leon Levy, with whom he forged an enduring relationship that gave life to one of the first, and truly great, hedge funds Odyssey Partners. Leon was American born, an eccentric, scholarly man with a great aptitude for coming up with ways of making big returns on well-researched ideas. Despite coming from a family of academics, Leon chose to go to Wall Street to make a career in investment. His father Jerome Levy had sold his textile business in 1929, anticipating the significant collapse in business that was to follow, and went on to develop an approach to predicting markets and trends based around an understanding of the specific role of corporate profits in the overall economy. This led to the launch of Industry Forecast, a periodical read by influential people in the world of business, finance and government. With funding from Leon, Jeromes eldest son Jay and grandson David helped develop the Levy Economics Institute, a think-tank they established at New Yorks Bard College, where they carried on Jeromes work, engaging an impressive list of formative thinkers, and also continued to publish the Forecast. In contrast to most economists, their approach could be highly practical. Leons gift for making money combined with his brothers ability to read the tea-leaves made for some brilliantly well-timed forays into markets. Jack would supervise the execution of each strategy and like many other star traders, managed the complex risk exposures in such a way that the pay-offs were invariably asymmetrically skewed to the upside. In the early 1980s, their close English friend Michael Stoddart, the trailblazing head of Electra Investment Trust, an early leader in private equity in the UK, helped Jack and Leon to sell their interests in Oppenheimer for $160 million to the London-based Mercantile House group run by John Barkshire. This greatly increased their available resources to engage in their already well developed investing activities as the two general partners of Odyssey Partners, the now legendary hedge fund that they had formed together.

Leon and Jack had already started investing in the 1950s and by the end of the century, when these two ageing men wound up their partnership, they had a track record compounding at an annualised rate exceeding 25 per cent over almost a half century a remarkable achievement. Odyssey itself compounded at 22.5 per cent annually over its 15-year lifespan. Michael Stoddart first introduced me to these two kings of Wall Street in 1986 and a year later they asked my own firm to manage part of their international portfolio, based in part on our own success returning 45 per cent in 1987, the year of the Black Monday crash. Their expectations of us were high; in fact, too high. Time would reveal that we just could not keep up with the Odyssey performance record. After five years, Jack felt it was time to pull Odysseys money back in-house. He sympathetically told me he had gradually arrived at the all too obvious conclusion that we now operate at a different speeds meaning that Odyssey was on a long winning streak, where our 17 per cent-plus annual returns just could not keep up with their own remarkable results. Odyssey was one of the first multi-strategy hedge funds, mandated to scour both long and short-term investment and trading markets in search of rich pickings. One example of the way Jack and Leon demonstrated their effectiveness together was in the period between 1990 and 1991 when Odyssey made over $500 million out of one very low-risk trade, multiplying their investment stake many times, thereby contributing to the funds overall return of over 50 per cent in 1991. The trade they identified and executed appears, at least to me, to be of relevance to current circumstances in markets. Jay and David Levy had arrived at the conclusion that inflation pressures were becoming benign and business conditions were such that the Federal Reserve could, over a period of time, halve interest rates from the prevailing level of 6.5 per cent. This was a view no one else considered to be even a remote possibility, as the general focus was on the past, with prevailing concerns driving future expectations. As with current markets, inflation was the dominant force, driving prices of interest rate sensitive securities at that time. However, inflation was soon to show signs of starting to abate and rates duly fell to a level closer to 3 per cent in just over 15 months. As David and Jay told me, the trade that was put on by the two money masters probably consumed no more than a few per cent of Odysseys capital. It involved the purchase of long-dated call options on the three-month Eurodollar futures contract expiring late in the following year, priced to reflect the markets indifference to the possibility of a major fall in short term rates something the Levys saw as near certainty. The few cents cost to Odyssey for each contract multiplied in value at least 25 times over the following 18 months yielding a high return on their total capital and a quite extraordinary return on capital at risk. Leon is reported to have lent the Levy Institute half a million dollars to ride alongside the Odyssey position in 1991, adding an outsized $10 million profit to a rich endowment that helps to keep the faculty running to this day. If they had still been running Odyssey in July of last year as the subprime saga started to unfold in earnest, they might have captured a similar opportunity as markets moved from an expectation of monetary tightening to a period where rate cuts in the US and the UK seemed a more likely policy response to the all-too-real threat of a global slump. Together with the well publicised short ABX subprime contract which another remarkable New York-based fund manager, John Paulson, exploited to yield his investors multi-fold returns on their capital last year, the long-dated calls on Short Sterling and Eurodollar provided a simple but highly effective way of exploitin g, or simply hedging, the early chapter of the 2007-2009 credit crunch. It could be more than coincidence that John Paulson himself worked for a brief term at Odyssey and will have learned there about how to go for the kill on the big ideas that have special reward characteristics. Led by Jack, Odyssey was networked with many other independent investment firms and ideas came from everywhere. Yet Jack was no slouch when it came to producing his own money-making positions. Sitting as an advisory board member to a wealthy international investor, he introduced a small position in

a private equity situation, which turned an initial $1 million position into a very meaningful $175 million in super-fast time. That magnitude of return is impossible to predict in adv ance, but many of Odysseys coups that delivered their individual remarkable outcomes were exercises in precision. The ChicagoMilwaukee Railroad Company was valued at $25 million before Odyssey proposed a reorganisation which ultimately stripped out its undervalued real estate holdings, realising close to $400 million, all of which was later returned to shareholders, making the work-out one of the most profitable of the age. The two managing partners had discernibly different views and perspectives. In the case of the same big investment client, they both served as advisory board members, but never attended a meeting together. It was said that their interaction could imply that they were often at odds with each other and that suggests there was a tension between them. But their skills and personalities were clearly complementary. There was an acknowledged interdependency and mutual respect that over-rode their differences. Leon was a historian with a special interest in ancient Greece, in particular in Alexander the Great. He accumulated a very fine and important collection of antiquities that are now in New Yorks Metropolitan Museum. He married this interest with his fascination for compounding by justifying the purchase of a Grecian pot he had just acquired for several hundred thousand dollars, based on its current value versus the price charged by Darius the potter 2,350 years previously, adjusted by a compounding factor. Leon died in his mid-seventies. His very significant philanthropic activities must have slowed his progress as a builder of personal wealth. Jacks fortune was estimated as being close to a billion dollars in 2004. As two of the most influential investors of their time, they could have made much more by allowing Odyssey to grow into a colossus simply by taking new subscriptions into the fund from the many would-be providers of capital, but that was not their way. They would want to be remembered not so much for how big Odyssey might have become, but for the quality and scale of the annual percentage returns they made for their fortunate investors. David Craig was a pioneer of the British hedge fund industry. He now manages investments at Sand Aire, a multi-family office in London The Spectator, 22 Old Queen Street, London, SW1H 9HP. All Articles and Content Copyright 2010 by The Spectator (1828) Ltd. All Rights Reserved