William Goetzmann is the Edwin J. Beinecke professor of finance and management studies at the School of Management, where he teaches a popular course entitled “Investment Management.” His research focuses on investments ranging from hedge funds to real estate to paintings.
In an interview with the News, Goetzmann discusses how Yalies can get involved, how Yale has affected the hedge-fund industry and hedge funds’ impact on the world of finance.
Q: Do hedge funds hire recent graduates?
A: Traditionally the quantitative hedge funds have hired students with strong technical skills and not necessarily from economics backgrounds. Often they hire students studying mathematics, physics and astronomy. They can come from undergraduate programs or masters programs or PhD programs. The hedge-fund industry is maturing towards a service-oriented industry that requires MBAs to help build the business structure and engage in client contact and service. It started out with hedge funds hiring very technically oriented people and then maturing and hiring more people with management skills. I don’t know where it’s going in the future, but they’ll probably be hiring in both sectors.
Q: What types of talent do hedge funds attract?
A: You know the thing that makes a great match between Yale and hedge funds is that hedge funds make their money by being smart. So you’re always going to see hedge funds looking to the best and brightest for human capital. They don’t have to hire a lot of people — they just have to hire really smart people. They have to hire people that are creative, that are willing to think outside of the standard structures, that are willing to imagine different kinds of strategies that didn’t exist before.
I think the match that we see with the very best undergraduate program — like Yale — and hedge funds is a natural one. Yale students need intellectual challenges. They may not be the best fit for a job that requires “coloring within the lines.” They are likely to find the challenges of hedge funds to be stimulating. It’s an exciting way of life, so I think that that’s something that’s kind of special to Yale.
Q: Are hedge funds cutting jobs in light of recent movements in the financial markets?
A: That’s a difficult question to answer because hedge funds don’t typically disclose much about their employment activity because they don’t have to. Hedge funds are not giant employers. The ratio of people to capital in a hedge fund is very small. Even the really top shop is going to have a much smaller employment base than most other kinds of businesses. As a result, it’s not the jobs that necessarily suffer when there are capital outflows.
Q: How have hedge funds contributed to growth of endowments, both at Yale and elsewhere, in the past few years?
A: Well, there’s been a trend over the last decade with major endowments toward alpha-strategies, toward hedge funds and toward alternative investments in general. Very good hedge funds have been able to generate positive excess returns, and the top endowments have been able to access those really good managers. On average, hedge-fund returns have not been as high in the last five years as they were historically.
Q: How are funds coping with the current economic environment?
A: Hedge funds don’t tell the public much about what strategies they use, so that’s very hard to say on a short-term basis. A lot of hedge funds probably don’t react to macroeconomic conditions at all. The strategies that they pursue tend to be at the frontiers of the capital markets, so that they’re interested, for example, [in] the mispricing of individual securities, as opposed to where is the market going, so that is going to mean that they are less exposed to macroeconomic fluctuations or changes of earnings on average.
Q: Do you have any examples of creative methods managers use to generate returns?
A: Andrew Redleaf [’78] runs a firm called Whitebox. When the options backdating scandal occurred, his firm figured out that it had implications for debt covenants for all those companies and was able to profit by taking a position in the debt of those firms. That’s just a nimble, smart strategy that relies on a close reading of debt markets.
Q: Are hedge funds a passing fad?
A: There have probably always been arbitrageurs in the capital markets. It’s what makes them work. The hedge-fund phenomenon is really a phenomenon of hedge funds being outside big financial companies. Proprietary trading has always taken place at Goldman Sachs.