From the June 2008 issue of Boomer Market Advisor • Subscribe!

A big hit in the alternative space

They're the envy of every advisor. Brothers Ron and Rick Lake have $400 million in assets under management and with only 75 clients (yes, 75): the perfect shop. With so few clients, we thought they'd have more time for a photo shoot. We were wrong. The principals of Greenwich, Conn.-based Lake Partners suggested we meet at nearby Stamford Center for the Arts, where Rick is president. Wanting more than the corporate "folded-hands on the mahogany table" shot, we readily agreed. But it meant moving quickly, and when we sat down to talk, it was immediately clear why.

In addition to the $400 million (custom hedge fund clients need a minimum of $10 million to invest), they advise other professional organizations on their alternative investment business.

"We have a handful of clients on that side, and we advise on $6 billion in assets," Rick nonchalantly says.

It's enough to keep them busy (Ron came to the shoot after a flight from London). But why would other billion dollar-plus outfits look to Lake Partners for alternative investment advice?

Simple - they've been there from the beginning.

"Back in the 1980s, Ron was featured in the Wall Street Journal about this new hedge fund-of-funds thing," Rick says. "When hedged mutual funds came along, we were early adopters there as well. Sometimes I wonder if we get so far ahead of the parade we have to wait for the parade to catch up."

Although both are Harvard grads, each brother took different routes to the alternative investment space. After graduating with a degree in public policy, older brother Ron went into politics and joined the staff of former Illinois Governor James (Big Jim) Thompson, the state's longest serving governor. After helping to modernize the state's $5 billion pension system, Ron realized he had a knack for numbers (to say the least), and he left to try his hand at investment consulting in non-traditional areas -- hedge funds, venture capital, leveraged buy-outs, real estate and global investing.

Rick took a more traditional route. After graduating in 1980, he went to work for Prudential Securities. He went out on his own in 1987, and in 1989 he teamed with Ron to form Lake Partners.

We should also mention they wrote the book on hedge fund strategies -- literally. No run-of-the-mill, 50-page paperback on the definition of a hedge fund, Evaluating and implanting hedge fund strategies: The experience of managers and investors is a 500-page text book in its third printing.

Yeah, these guys know about alternative investments. So much so that in 2003 the SEC called on Rick to sit in with a select group of industry experts for a roundtable discussion about hedge fund regulation.

One area of particular focus is in the hedged mutual fund space.

"Hedged mutual funds are kinder, gentler hedge funds," Ron explains. "In August 1997, Congress repealed the mutual fund short-short rule. This tax regulation once limited the amount of profits a mutual fund could derive from short selling to 30 percent. But Congress believed it would be in the public interest if mutual funds could trade (and hedge) more broadly and effectively, so it repealed the short-short rule." After the repeal, Ron says, mutual fund trading activities increased, and alternative strategies came into existence. But won't recent bad press about hedge fund performance tar hedged mutual funds as well?

"It hasn't seemed to happen yet," counters Rick. "I think it gets back to the regulated nature of mutual funds. Hedged mutual funds just operate in a restricted world, so they can't encounter some of the severe accidents or challenges you see in the hedge fund space. But more importantly, hedged mutual funds as a group have delivered reasonable performance in bull and bear climates, with many funds working to provide risk reduction on the recent downturn."

For Lake Partners, the term reasonable performance is an understatement. Their Long and Short Strategic Opportunities fund (LASSO for short) is coming up on its all important 10-year anniversary. While the S&P 500 delivered a 25.1 percent return for the reporting period, LASSO came in at 73.5 percent. How's that for finding alpha?

"It's been tested over the course of a number of market cycles," Rick says. "Any leaks have been plugged, so this really is a long-term strategy that works. And our daily volatility is about one-third of the S & P 500."

Rick explains that although it's a bit counter-intuitive, reducing draw downs and keeping volatility low actually helps increase an investor's long term compound rate of return.

"People think, 'Well, if you get my long term rate of return up I have to go for the gusto. Actually, if you keep the draw downs small, keep your volatility low and do the arithmetic, your compound returns go up. The tortoise truly beats the hare. "

Innovation in the space has exploded in recent years and shows little sign of slowing.

"On the long/short equity side you have global long/short equity in addition to the 130/30s," Ron says. "You have some highly hedged managers. You have short-only managers. We've even seen the development of a number of long/short bonds funds; even long /short credit. I never would have imagined these types of strategies. So, the level of creativity that's occurring in the marketplace is leading us to real diversification among the available strategies."

And where are the areas of opportunity in the alternative space in general, and with hedged mutual funds in particular?

"One of the areas we're looking at right now and continue to debate is in credit," Rick says. "As you move through the credit cycle, different industries and type of securities come under duress. And things under duress get cheap. And then the challenge is in what you buy along the way, and what long/short opportunities might be available along the way. Long/short credit is a fascinating area right now."

Don't dismiss these brothers as strictly analytical based on this discussion alone. However left-brained they might be in their professional life, they more than make up for in their personal life.

In addition to his work with the theater, Rick is an accomplished ballroom dancer, and won the bronze medal at the U.S. National Pro-Am Mambo Championships. Ron is a photographer with showings in places as far off as Madagascar.

"We work hard at everything we do," Rick says. "I actually run my ballroom life like a fund of funds. When you run a fund to fund, you're looking for a group of high output managers with low correlation. In the dance world, I look for the best pros in a variety of styles."

A business in the billions, books, travel, dance, theater, photography -- The question of when they find time to sleep brings us back to the reason for the rushed photo shoot.

"We don't. Every minute of every day is packed. "

*Questions, Comments, Thoughts? Let's hear it! Please use the form below.

Reprints Discuss this story
This is where the comments go.