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News > Companies
Sussman: Paloma is sound
October 23, 1998: 11:50 a.m. ET

Hedge fund chief insists on financial stability, says opportunities still abound
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NEW YORK (CNNfn) - With the recent bailout of hedge fund giant Long-Term Capital Management, many investors are wondering about this seldom discussed and little understood type of investment, its impact on world markets and its place in the overall financial landscape.
     CNNfn spoke with the chairman and CEO of Paloma Partners Management, a prominent hedge fund based in Greenwich, Conn. In an unprecedented move, Paloma Partners issued a press release Thursday to quell investors' fears and assure the financial stability of his fund.
     Here is a transcript of his "Business Day" interview Friday:
     JOHN METAXAS, CNNfn ANCHOR: You actually issued a press release yesterday talking about your fund, saying that the losses this year in several of your funds have been between 2 and 25 percent. How normal is that for you to issue a press release and why did you do it?
     DONALD SUSSMAN, CHAIRMAN & CEO, PALOMA PARTNERS MANAGEMENT: It's unprecedented for us. We've never actually had much to do with speaking to the press about our funds. There have been rumors about our funds which we thought we would address by just telling the truth, which is that our funds are extremely sound. We're in very financially sound condition. We're sitting on $300 million in cash, and, in fact, have been seizing opportunities in the marketplace, of which there are many.
     METAXAS: Is that cash, though, because you fear redemptions at the end of the year when many hedge fund investors are eligible to take money out?
     SUSSMAN: No. The cash has been raised because we think a shift in our strategies was appropriate. We had -- we see opportunities particularly in convertible bond hedging around the world that are unprecedented, caused by the recent turmoil in the capital markets, and we wanted to reposition ourselves to take advantage of those spreads.
     DEBORAH MARCHINI, CNNfn ANCHOR: What has happened specifically to your hedge fund since September, when the troubles at Long-Term Capital Management really began to hit home with investors?
     SUSSMAN: The part of our business that was involved in fixed income arbitrage, which is taking advantage of spreads in government bond markets around the world, was impacted negatively by them. They really took away the liquidity from the markets because of the massive size of their positions.
     MARCHINI: How severe were your losses?
     SUSSMAN: We don't comment on specific results of specific funds. They were within the range of what we expected in this kind of turbulent time.
     MARCHINI: Do you think that the Federal Reserve was right to orchestrate a private sector bailout of Long-Term Capital Management, and would you and other funds have been much worse off had they not?
     SUSSMAN: It isn't clear what would have happened had they not done that. I think they did it not because it was a hedge fund. I think what most people need to realize is that banks all over the world were trading in these very same markets for their own accounts and that if those markets had been severely crippled, the banks themselves would have had their capital very severely impaired. So I don't think it was a concern by the Fed about Long-Term. I think it was concern by the Fed about financial institutions in general.
     METAXAS: One of the rumors circulating about your funds is that you have exposure to the D.E. Shaw hedge fund and that was the fund that caused the big hit to BankAmerica's earnings. What exactly is your exposure?
     SUSSMAN: We have no exposure to D.E. Shaw Securities, which is the company that the Bank of America was invested in. We do have an investment in D.E. Shaw Investments, another fund run by the D.E. Shaw organization. It's a modest amount of our total capital and it's in very stable financial shape.
     MARCHINI: All right.
     METAXAS: Different hedge funds have different strategies. Yours is what is called "market neutral." Explain what that is and how you could have had losses with a market neutral strategy.
     SUSSMAN: "Market neutral" is basically non-directional. It means not making investments that require the market to go up or down for its success. What we do have is a large number of spread transactions in many markets around the world. And what happened that was unprecedented is that all these markets simultaneously widened, particularly because of the taking of liquidity out of the marketplace by the banks and Long-Term Capital.
     MARCHINI: Let's talk about liquidity, yours and the system's. First, yours. Have you gone back to your investors asking for funds at anytime during the last six months?
     SUSSMAN: No, we have no reason to. We're very amply liquid in our own portfolios. In fact, we're running the highest level of cash we've ever had, both on an absolute and literal basis over the times of our investment portfolios.
     MARCHINI: The Federal Reserve's two interest rate cuts -- what, if anything, have they done to restore liquidity to the piece of the market in which you do business, and is something else needed?
     SUSSMAN: I think, actually, more important than the interest rate cut was a statement by the head of the New York Fed last Tuesday saying that he thought that banks were overreacting to the new risk-averse environment. It didn't get as much press as I thought it deserved. It was, I think, a very crucial statement in this time of the markets. It basically said to financial institutions, stop withdrawing credit from the marketplace. And in fact, we saw quite a substantial increase in liquidity in bond markets around the world over the ensuing days.
     MARCHINI: All right.
     METAXAS: Many hedge funds have lost money with this bond arbitrage. You said there are opportunities in the market now. Where are they?
     SUSSMAN: Very -- in any type of spread relationship transaction, they're all over the world. Some are enormous.
     MARCHINI: But you're pulling back from the part of the business that most depends on liquidity.
     SUSSMAN: Most depends on leverage. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.