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Fallout: The Financial Crisis

Fund tries making best of bad times

Amy Scott Dec 5, 2008
Fallout: The Financial Crisis

Fund tries making best of bad times

Amy Scott Dec 5, 2008


Kai Ryssdal: There was a pretty famous investing book a number of years ago called “A Random Walk Down Wall Street.” Today, and occasionally over the next couple of months, Marketplace is going to be taking a slightly more structured approach to that stretch of pavement. We’re going to meet some of the men and women at the banks, brokerages and investment houses that are at the center of the fallout from the financial crisis, and so get a sense of the culture of Wall Street.

Hedge funds have been blamed for a lot of what’s happened in the past year or so. Despite their losses, they haven’t gotten a lot of sympathy, because they’re pretty opaque and they’re off-limits to most of us. Marketplace’s Amy Scott paid a visit to one fund that’s hoping to take the lemons this economy’s offering and make lemonade.

Amy Scott: It’s just after noon on a recent day at Paige Capital Management. Chris Paige is making one of the day’s most important decisions.

Chris Paige: What do you feel like? Craig wants something warming. Is there an Italian place that’s quick? Are you hungry?

Where to order lunch.

Paige: Oh yeah, we eat all our meals here, because we’re here all the time. That’s one perk of the job, I’ll give it that.

In the hedge fund world, Paige Capital is a baby. Just one year old. And it’s a lot cozier than you might imagine. Sisters Michele and Jessica Paige founded the firm. Chris, the general counsel, is married to Michele. They manage less than $100 million, mostly invested by rich families.

On this day the founders are celebrating. A major pension fund has expressed interest in investing. While most funds have been bleeding money, Jessica Paige says Paige Capital is up for the year.

Jessica Paige: We’re really excited about that. I mean, if you can do well in this market, it’s the true test, isn’t it?

They’ve pulled that off partly by using a classic hedge fund strategy. That is, by betting that stock prices will go down. It’s called short-selling.
There are other ways to make money in a down market. Michele Paige says her firm is poised to invest in the bonds and bank loans of companies that are bankrupt or getting close. It’s known as distressed debt.

Jessica Paige: We think this is the golden age of distressed debt investing coming up.

Paige expects a wave of bankruptcies in the coming months. She plans to buy some of that distressed debt, help fix up the companies, and then sell the debt at a profit. Paige knows how it sounds to profit from others’ loss. Distressed investors are also known as vultures.

Michele Paige: To a certain extent there’s a ghoulish factor to it. You’re basically the undertaker of the financial world. You know, we’ll do some liquidations where we just take them under. But by and large our job, and we try to do, is go into situations where the patient is dying, but we can turn it around and fix him up and make him a healthy patient.

Lunch arrives and everyone gathers in the conference room. While her team eats pork chops and salad, Michele Paige conducts business on the speaker phone.

Michele Paige: So if I had a friend at another fund who also wanted to buy some they would be able to have enough supply for both of us?

CFO Marc Chennault downs some pasta before heading back to work. He knows Michele from Harvard business school. Chennault left a job at a major Wall Street firm in the spring to join her hedge fund. His timing turned out to be impeccable.

Marc Chennault: It’s funny looking back, I always thought that I didn’t have the risk appetite to work at a small shop like this. It turns out since I’ve been here, I’ve been so much happier. There’s no safety anymore in being at a big financial institution.

These days hedge funds don’t look much safer. Burned investors are pulling money out. The funds can no longer rely on easy debt to juice their returns. Paige plans to steer clear of leverage. The rich hedge fund compensation scheme is also under attack.
Managers tend to earn two percent of the total assets, plus 20 percent of any profits.
Paige Capital charges a bit less. Even in this environment Michele Paige says investors who aren’t afraid to work at it can make money.

Michele Paige: I think a lot of people went into finance because a, it was sexy, and b, it was easy. It’s not going to be sexy anymore. It’s going to be more regulated. And it certainly isn’t going to be easy.

Paige Capital’s prospects look good on paper. There are nine Ivy League degrees in this group of six. They’ll need the stomach to ride out the recent market volatility. When stocks rallied on the Citigroup bailout last week, Paige’s bets against the market cost them about a quarter of a million dollars. They quickly made it back when the market headed south again.

In New York, I’m Amy Scott for Marketplace.

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