500 Days
Behind the seeming glamour of a startup hedge fund exists a harsher reality. It's a perilous landscape, pocked with empty promises and endless roadblocks, littered with the carcasses of failed ventures. For 18 months, we followed three would-be hedgies with a dream. Could their fund survive to reach critical mass -- or would it require critical care?
By: Rich Blake , Andrew Barber
Issue: October/November 2006 , Page 88
Like many a trader's tale of toil and ambition, this one begins with a handshake.
It was August 2004, and Austin Lewis was searching for a home and some potential backing for his first hedge fund. A studious, soft-spoken Virginian, Lewis had spent much of the past year trading equity accounts for veteran trader Jeff Puglisi, a hedge-fund hotelier and at one point a possible benefactor. But between the start of 2003 and the end of 2004, Lewis had racked up mind-boggling cumulative returns trading micro-caps in his audited personal account -- 1,077 percent -- and the 28-year-old was determined to strike out on his own.
Lewis had joined with two colleagues in his quest to launch the fund: Rob McGrath, a trader who specialized in stealth execution of micro-caps, and Brian Wilkinson, a CFA with a knack for spotting value opportunities. The trio were weighing several offers, all of them potentially sweet deals that would put them in business overnight. But tempting as these deals might have been, each came with suspension bridgesized strings attached.
"I had found guys who could have handed me $50 million and I'd be in business," Lewis says. "But they were asking for 50 percent of my management company."
Then there were the many hidden agendas.
"Typically, these deals are set up such that they say you're the boss," Lewis says. "But when tough times hit, all of that changes, and you can very easily find yourself out of a job."
Surrendering spoils, being beholden to a boss -- it all seemed to defeat the purpose of setting out on his own. So Lewis and his cohorts embarked on a road less traveled. There would be no big backers to bankroll them. Instead, they would go it alone. They struck a deal with Jack Brimberg -- a genteel, bow-tie-festooned 77-year-old brokerage-firm owner known for his eclectic Rainbow Room luncheons, throwback gatherings for investors of all stripes (which were, in fact, started decades ago by Brimberg's legendary brother, Bob, the late "Scarsdale Fats").
Brimberg, who first met Lewis at one of his luncheons, had quickly discerned Lewis's stock-picking acumen and had agreed to give the boys a home in a dingy office in his 45 Rockefeller Plaza headquarters and help them raise money; Lewis's fund would do some trading through Brimberg's brokerage and pay some rent -- but he would retain 100 percent ownership of the fund. It was the opportunity for which Lewis had been waiting ever since he arrived in New York as a 26-year-old analyst/equity salesman, fresh from stints working at regional brokerages in Richmond, Virginia.
In this age of hyper-stringent employment contracts, Brimberg simply gave the boys his word. They reciprocated. And they shook on it.
And at that precise moment, Lewis, still 18 months from his thirtieth birthday, was officially in business -- the hedge-fund business.
Over the course of the next two years, Lewis and his band of brothers would come to learn that running a portfolio and running a business are two vastly different enterprises. They would witness, firsthand, the fallacy of the notion that any 28-year-old armed with a computer and a trading platform can launch a hedge fund. There have indeed been an explosion of such funds -- by one estimate there are now some 8,000 of them in existence, up from fewer than 1,000 a decade and a half ago. But behind the glamour, as they would soon discover, is the daily grind.
There were lawyers, auditors and accountants to be hired, prime brokers to be secured, bank accounts to sort out, custodians to enlist, computers to be procured . . . plus Bloomberg subscriptions, trading platforms, furniture, phones, conference tables and coffee makers -- and that would just be the first week alone. Lewis would burn through tens of thousands of dollars (of his own money) in startup costs while absolutely no revenue was coming in. Then, of course, he needed to raise capital.
Finally, by Christmas 2004, Lewis Asset Management had a fully equipped office (replete with a secondhand conference table picked up, ironically, from Jeff Puglisi's old office) and much of the legal framework in place for what would eventually become the Lewis Opportunity Fund. Lewis also had less than $1 million in client commitments and no hard dollars in hand.
The planned inception date: January 1, 2005.
The next 500 days: murky at best.
Super Bowl Sunday, l February 6, 2005, 11:30 p.m.
Another big dance is in the books. As some New England Patriots fans toast Sully, the Boston-bred bartender at Martell's, on the corner of 83rd Street and Third Avenue on Manhattan's Upper East Side, Austin Lewis and Rob McGrath are sitting at a back table, locked in a heart-to-heart. They're several months into their venture, and while they do have some solid pledges ("I'm just waiting for your first-quarter numbers" is a common refrain), they still have no actual assets.
They do, however, have Lewis's audited trading track record: 472 percent in 2003 and 106 percent in 2004, results founded on his affinity for hunting for stocks in the micro- to small-cap space, with between $10 million and $200 million in capitalization. "There's no such thing as a $50 million publicly traded company," Lewis is fond of saying -- and while, of course, there obviously is such a thing, what he means is that a company with a market cap of $50 million can't really exist, not for long; it's destined either to fall off the map or grow to be, at least, a bigger small company ($200 million to $1 billion). It is these types of businesses -- those with uniquely promising intellectual property and management teams -- on which Lewis has been feasting these past several years. One attention-grabbing number: The share price has at least doubled on roughly one-third of his picks.
But Lewis and McGrath are both aware of another eye-catching number: that 20 percent of all hedge funds shut down after one year, typically after failing to reach enough critical mass to sustain their infrastructure. "We knew that if we didn't reach around $20 million after the first year and a half, we might not make it," McGrath would later say. Meanwhile, the complicated legal task of drafting a fund prospectus had been bogged down in a thick muck of lawyerly delay and unending tedium. The official inception date of January 1 has, embarrassingly, come and gone. Now February is here, and still no formal launch; this is not how 2005 was supposed to start.
"Are we going to be able to pull this off?" McGrath says, setting down his last beer of the night. "We'll get there," Lewis sighs, motioning to Sully that it's time to settle up.
Monday l February 28, 1 p.m.
The Lewis Opportunity Fund, days away from launch, finally sees its first committed investor physically hand over a check. Mercifully, that investor is Michael Sharp, Brian Wilkinson's former mentor and a former managing director at Bank of America Securities who is well aware of Lewis's hot hand and keen eye. Sharp is passing through town and stops by the Brimberg office, a check for a quarter-mil in his hand. His drop-in neatly coincides with the fund's new-and-improved March 1 inception date. This time the date sticks; the attorneys have come through; the trading account is liquid.
Thursday l March 3, 9 a.m.
Trader Rob McGrath purchases 7,500 shares of DSTI, an alternative-energy company, at an average price of $7.91 a share. It's the Lewis Opportunity Fund's first trade. Eventually their goal is to have a portfolio comprising between 30 and 60 long positions and 15 to 25 shorts.
McGrath a 32-year-old Staten Island native who got started on Wall Street as a Bear Stearns broker trainee and reinvented himself as a Nasdaq market maker at Gruntal & Co. -- is Lewis's right-hand man. He symbolically writes out a ticket on an old, discarded Brimberg trading slip. He tucks it away. One day, he figures, he just might frame it.
Thursday l March 31
Performance to date: 1.64% Assets: $700,000
Thursday l May 5, 4 p.m.
Wilkinson has had quite an intriguing visit with the senior management of a relatively undiscovered video-technology company from Australia. The boys are meeting with three to four management teams a day, every day, as they prowl for just the right blend of business plans and management teams.
But while this particular company sports a sound technology platform/service offering and appears to be gaining traction, its balance sheet is a wreck -- the victim of a desperate and toxic convertible-debt financing. Later, Wilkinson will tell Lewis, "If these guys can clean house and restructure their debt, I think we should schedule another meeting with them."
Shortly thereafter, an equity salesman whom the boys have nicknamed Mr. Kool-Aid (because no matter what management is selling, he's always buying) has also stopped by, along with the CEO of a small-cap wind-power company. It's instantly clear to Lewis and Wilkinson that the technology is impressive but that the executive lacks even a shred of interpersonal skills. He strikes them, in fact, as a total buffoon who couldn't pull off a profitable bake sale. The meeting is a complete waste of time. (Says Lewis later, "You have to have solid management; when you invest in these small companies, management is all you have.")
Tuesday l May 31
Performance to date: +5.61% Assets: $1.6 million
Monday l August 1, 8 a.m.
After months of deliberation, Lewis is poised to make a major tactical decision: He's switching prime brokers. Existing provider Spear, Leeds & Kellogg simply isn't bringing much added value (with only a few million under management and hardly a rapid-fire trading strategy, Lewis isn't exactly buttering anyone's bread over at SLK). But more importantly, a third-party marketer has secured a promising arrangement with a major bank's prime-broker operation. While this group normally wouldn't accept hedge funds under $100 million, the marketer has a decades-long personal relationship with these brokers. He managed to secure the boys an exception.
It's not an easy choice. "You never want to switch prime brokers, especially right out of the gate," Lewis concedes. There are shorts to unwind, assets to transfer and a mile of paperwork to travel. By day's end, though, almost all of the positions have been transferred to the new prime broker. Almost all of them.
Tuesday l August 16, 6 a.m.
Lewis is sleeping in his parents' beach home in North Carolina's Outer Banks when he hears his BlackBerry chirp. One of his holdings, a Pittsburgh-based health-care-industry staffing company, has e-mailed him a press release. Lewis had purchased a couple hundred thousand shares in the company in the wake of a string of key acquisitions that expanded its reach. Now, though, the release informs Lewis that the CEO is resigning for personal reasons. Oh, and some filings will be delayed.
. . . 8:15 a.m.
McGrath, who is coming in from Staten Island, is stuck on the 5 train. There's a sick passenger. When he finally makes it out of the subway, he will find 17 messages from Lewis on his BlackBerry.
. . . 9 a.m.
McGrath emergers from the subway and up onto the street. He and Lewis connect by cellphone, and in a scene straight out of Wall Street, Lewis, standing just off the beach, yells into the phone. He has seen this before -- when the chief executive quits, so does everyone else. "Sell it all" he bellows. "I don't care how you do it."
McGrath barely makes it into the office for the open and immediately begins to sell. He gets scalped all the way down but still manages to smash the order -- by the end of the day, he's out of the position completely, albeit at an average price about 60 percent lower than the $3 range at which he originally owned it. Lewis feels awful about the beating he took in the panic -- but weeks later, when the stock stops trading altogether, dropping below $1 on the pink sheets, he'll realize he dodged a bullet.
Tuesday l August 23
Today, that Australian tech company is set to implement a new financing plan as a result of Lewis's campaign to help it raise capital from several institutional investors via a PIPE deal. The cash infusion will be used to repay existing debt holders while simultaneously performing a sizable reverse split. The plan entails Brimberg & Co. and Burnham Hill coordinating the fundraising/ equity placement, and the Lewis Opportunity Fund participating as a strategic investor. By the end of August, the PIPE will be completed and the Aussie company, freshly recapitalized, will be given new life.
Friday l September 2, 10 a.m.
Jack Brimberg, who the boys have now affectionately nicknamed "Blue" after the elderly pledge in the movie Old School, turns 79 today. The boys wish him a happy birthday. "You're my boy, Blue," Lewis jokes. Brimberg doesn't get it. He hasn't seen the movie.
Wednesday l September 14, 11:30 a.m.
Although the boys switched prime brokers back in August, they've left behind a short position in Endwave (ENWV) in their SLK account, having failed to locate a borrow on the stock. Today, McGrath wonders aloud if they should just bag the position and close the account.
In July, when they shorted the California-based maker of modules for telecom networks, the stock was trading in the low 50s. They've kept that SLK account open solely so they could stay short ENWV, which Lewis believed was set to tumble -- in part because its share price was coming off a huge run-up, but also because of competition in its core product area. Despite McGrath's reluctance, Lewis insists they hold firm, no matter what it takes.
Wednesday l September 28, 2:30 p.m.
Bob Anderson, a parntern at a fund of funds called Bayberry West Partners, attends one of Brimberg's luncheons at the Rainbow Room. He's been following Lewis's performance since they met a few months earlier at a lunch, and now Brimberg's introduction has led to a $500,000 commitment from Anderson. As the septuagenarian Brimberg saunters into the room, Anderson in tow, Lewis and McGrath are ecstatic that their first fund-of-funds investor is on board. "I think I see Blue," McGrath cracks, doing his best Will Ferrell. "He looks glorious"
Friday l September 30
Performance to date: +19.07% Assets: $2.6 million
Monday l October 3, 8:45 a.m.
Flush with the capital influx from Anderson, Lewis gives his trader 32 orders on the open. Months of sifting through hundreds of ideas and meeting with scores of management teams has yielded a bumper crop of opportunities, predominantly in tech and biotech. Now it's time to put those ideas to work.
At 9:32, Lewis asks McGrath for a report on a bulletin-board trade. McGrath -- like a short-order cook in the middle of the busy breakfast rush who's being hassled by a waitress over an order of toast -- bites his tongue. He looks at the clock -- 9:33 a.m. The next time he glances over, it's 3:59 p.m. He's been buying and selling nonstop all day.
Thursday l October 13, 4:15 p.m.
Another turbulent day in the market has come to an end as the fourth quarter begins with an ugly slide: Over eight consecutive trading days, stocks have slid sharply. The Nasdaq is off 5 percent, the S&P down 4 percent. On the upside, Endwave -- the short from back in July that Lewis has insisted on holding -- is falling; a week later it goes to 10. Lewis will decide to cover it and close the SLK account.
On the downside, one of Lewis's positions -- Edgar Online (EDGR), a Web database that provides SEC filings -- has begun to falter. Ultimately, it tanks. Lewis, undaunted, will double down on EDGR, believing wholeheartedly that with gross margins of 85 percent and a slew of new product and distribution channels, it remains a strong play.
Monday l November 28, 10 a.m.
Lewis, convinced that his portfolio is now well-positioned to soar over the coming two to three months, has decided to begin dialing for dollars. He calls each and every one of his clients and urges them all to invest more money into the fund. One of these clients, Joe Zicherman, an investor based in Manhattan, says sure, go ahead and put him down for $300,000. Lewis, taking no chances, gets up from his seat and walks the 10 blocks to personally pick up the check.
Wednesday l November 30
Performance to date: +22.36%
Assets: $3.3 million
Friday l December 30, 3:55 p.m.
Lewis was right. As the last trading session of the year winds down, he, McGrath and Wilkinson are beginning, at long last, to breathe easy. They can take a knee and run out the clock on 2005. The S&P 500 will close up 3 percent on the year. The Lewis Fund, bolstered by the brazen October bet on a rebound -- not to mention the Aussie tech stock's 180 percent move to the upside -- finishes 2005 up 33.25 percent. Assets under management now total $4.5 million.
Tuesday l January 31, 2006
Performance to date: +48.93%
Assets: $5.6 million
Wednesday l March 1
Talk about your happy birthdays. The fund, officially one year old, is up 65.5 percent since inception. The 60 positions in the Lewis portfolio, mainly tech and health-care names, are performing like trained seals. Even the double-down on Edgar -- which has rebounded to $4 -- has paid off. Maybe starting a hedge fund isn-t so tough after all.
Thursday l March 30
Performance to date: +87.56%
Assets: $11.3 million
Monday l April 17
First-quarter results are in, and they couldn't be better -- the fund is up more than 40 percent for the quarter, compared to around 14 percent for the Russell Microcap Index. Meanwhile -- thanks to strong word of mouth and the legwork of Lewis's third-party marketer -- assets are nearing $15 million. They're on track to reach the $20 million mark that they were shooting for by August 30, and plans are afoot for an offshore launch on June 1. Already a multibillion-dollar fund of funds has indicated it could seed Lewis with $1 million. The Dow, up 3 percent for the year, is heading toward an all-time high. Life is good.
Wednesday l May 10, 1:10 p.m.
The Fed's policymakers have just met in Washington, D.C., and all hands are on deck awaiting their word. Lewis, like many investors, was hoping the Fed would put an end to its rate-hike campaign. But when the statement hits the wires, it's more of the same, suggesting that inflation concerns may lead to more rate hikes. "F-----g Bernanke," McGrath grumbles as the market gets spooked and a sell-off ensues. For the next five weeks, small-cap stocks will get crushed; the Russell 2000 small-cap index will lose 13 percent and Lewis's fund will drop 6 percent, finishing May down a disappointing 4.7 percent on the month. Life is tough.
Wednesday l May 31
Performance to date: +84.85%
Assets: $14.4 million
Friday l June 2, 3:45 p.m.
Mr. Kool-aid is in riding down the 45 Rock elevators with some senior managers he's just brought in to see Lewis and Wilkinson. "How do you think it went?" one of the executives asks the salesman-turned-freelance-investor-relations-man. "I don't know," Kool-Aid says, unable to restrain himself. "I don't know why I bother with these guys. They haven't dropped one f-----g ticket with me yet."
Friday l June 30
Despite the brutal May, the boys remain optimistic -- and committed to their strategies. They're still up more than 90 percent since inception and up 48.6 percent for the first half of the year, compared to 8.2 percent for the Russell 2000. Their assets have risen to some $17 million, and word on the Street is that several potential new investors have an eye on them. Life is . . . well, life is hard to predict.
Tuesday l July 31
Performance to date: +91.87%
Assets: $17.9 million
Epilogue: Friday l August 4, 7:50 a.m.
It's morning in early August, and Rob McGrath is quickly losing his patience. Neither blowtorch summer weather nor the prior month's brutal market lashing could rattle him -- but the bloodcurdling wail of Cyndi Lauper is more than the gruff Staten Islander can stand. Even with the office windows closed, Lauper, who is performing two dozen stories below in Rockefeller Center as part of the Today show's summer concert series, is killing him.
"You suck" he yells out the window, then slams it shut. Now he feels better. Lewis and Wilkinson are cracking up. It's good that they can laugh -- for the past several weeks their portfolio has taken it on the chin, down 3.1 percent for July. But a funny thing happened over the long, hot summer: On August 1, the trio reached their original 18-month target asset level of $20 million, thanks to the launch of their offshore vehicle and the signing of that large fund-of-funds client, which indeed netted close to $1 million.
Lewis, gearing up for that annual excursion to his family's beach home on the Outer Banks, shrugs the shrug of a man who knows he's in it for the long haul -- and who now knows what that long haul truly feels like. "I'm pleased we reached our near-term goal," he says guardedly, "but we still have a long way to go."
There are always, after all, the next 500 days.
Behind the seeming glamour of a startup hedge fund exists a harsher reality. It's a perilous landscape, pocked with empty promises and endless roadblocks, littered with the carcasses of failed ventures. For 18 months, we followed three would-be hedgies with a dream. Could their fund survive to reach critical mass -- or would it require critical care?
By: Rich Blake , Andrew Barber
Issue: October/November 2006 , Page 88
Like many a trader's tale of toil and ambition, this one begins with a handshake.
It was August 2004, and Austin Lewis was searching for a home and some potential backing for his first hedge fund. A studious, soft-spoken Virginian, Lewis had spent much of the past year trading equity accounts for veteran trader Jeff Puglisi, a hedge-fund hotelier and at one point a possible benefactor. But between the start of 2003 and the end of 2004, Lewis had racked up mind-boggling cumulative returns trading micro-caps in his audited personal account -- 1,077 percent -- and the 28-year-old was determined to strike out on his own.
Lewis had joined with two colleagues in his quest to launch the fund: Rob McGrath, a trader who specialized in stealth execution of micro-caps, and Brian Wilkinson, a CFA with a knack for spotting value opportunities. The trio were weighing several offers, all of them potentially sweet deals that would put them in business overnight. But tempting as these deals might have been, each came with suspension bridgesized strings attached.
"I had found guys who could have handed me $50 million and I'd be in business," Lewis says. "But they were asking for 50 percent of my management company."
Then there were the many hidden agendas.
"Typically, these deals are set up such that they say you're the boss," Lewis says. "But when tough times hit, all of that changes, and you can very easily find yourself out of a job."
Surrendering spoils, being beholden to a boss -- it all seemed to defeat the purpose of setting out on his own. So Lewis and his cohorts embarked on a road less traveled. There would be no big backers to bankroll them. Instead, they would go it alone. They struck a deal with Jack Brimberg -- a genteel, bow-tie-festooned 77-year-old brokerage-firm owner known for his eclectic Rainbow Room luncheons, throwback gatherings for investors of all stripes (which were, in fact, started decades ago by Brimberg's legendary brother, Bob, the late "Scarsdale Fats").
Brimberg, who first met Lewis at one of his luncheons, had quickly discerned Lewis's stock-picking acumen and had agreed to give the boys a home in a dingy office in his 45 Rockefeller Plaza headquarters and help them raise money; Lewis's fund would do some trading through Brimberg's brokerage and pay some rent -- but he would retain 100 percent ownership of the fund. It was the opportunity for which Lewis had been waiting ever since he arrived in New York as a 26-year-old analyst/equity salesman, fresh from stints working at regional brokerages in Richmond, Virginia.
In this age of hyper-stringent employment contracts, Brimberg simply gave the boys his word. They reciprocated. And they shook on it.
And at that precise moment, Lewis, still 18 months from his thirtieth birthday, was officially in business -- the hedge-fund business.
Over the course of the next two years, Lewis and his band of brothers would come to learn that running a portfolio and running a business are two vastly different enterprises. They would witness, firsthand, the fallacy of the notion that any 28-year-old armed with a computer and a trading platform can launch a hedge fund. There have indeed been an explosion of such funds -- by one estimate there are now some 8,000 of them in existence, up from fewer than 1,000 a decade and a half ago. But behind the glamour, as they would soon discover, is the daily grind.
There were lawyers, auditors and accountants to be hired, prime brokers to be secured, bank accounts to sort out, custodians to enlist, computers to be procured . . . plus Bloomberg subscriptions, trading platforms, furniture, phones, conference tables and coffee makers -- and that would just be the first week alone. Lewis would burn through tens of thousands of dollars (of his own money) in startup costs while absolutely no revenue was coming in. Then, of course, he needed to raise capital.
Finally, by Christmas 2004, Lewis Asset Management had a fully equipped office (replete with a secondhand conference table picked up, ironically, from Jeff Puglisi's old office) and much of the legal framework in place for what would eventually become the Lewis Opportunity Fund. Lewis also had less than $1 million in client commitments and no hard dollars in hand.
The planned inception date: January 1, 2005.
The next 500 days: murky at best.
Super Bowl Sunday, l February 6, 2005, 11:30 p.m.
Another big dance is in the books. As some New England Patriots fans toast Sully, the Boston-bred bartender at Martell's, on the corner of 83rd Street and Third Avenue on Manhattan's Upper East Side, Austin Lewis and Rob McGrath are sitting at a back table, locked in a heart-to-heart. They're several months into their venture, and while they do have some solid pledges ("I'm just waiting for your first-quarter numbers" is a common refrain), they still have no actual assets.
They do, however, have Lewis's audited trading track record: 472 percent in 2003 and 106 percent in 2004, results founded on his affinity for hunting for stocks in the micro- to small-cap space, with between $10 million and $200 million in capitalization. "There's no such thing as a $50 million publicly traded company," Lewis is fond of saying -- and while, of course, there obviously is such a thing, what he means is that a company with a market cap of $50 million can't really exist, not for long; it's destined either to fall off the map or grow to be, at least, a bigger small company ($200 million to $1 billion). It is these types of businesses -- those with uniquely promising intellectual property and management teams -- on which Lewis has been feasting these past several years. One attention-grabbing number: The share price has at least doubled on roughly one-third of his picks.
But Lewis and McGrath are both aware of another eye-catching number: that 20 percent of all hedge funds shut down after one year, typically after failing to reach enough critical mass to sustain their infrastructure. "We knew that if we didn't reach around $20 million after the first year and a half, we might not make it," McGrath would later say. Meanwhile, the complicated legal task of drafting a fund prospectus had been bogged down in a thick muck of lawyerly delay and unending tedium. The official inception date of January 1 has, embarrassingly, come and gone. Now February is here, and still no formal launch; this is not how 2005 was supposed to start.
"Are we going to be able to pull this off?" McGrath says, setting down his last beer of the night. "We'll get there," Lewis sighs, motioning to Sully that it's time to settle up.
Monday l February 28, 1 p.m.
The Lewis Opportunity Fund, days away from launch, finally sees its first committed investor physically hand over a check. Mercifully, that investor is Michael Sharp, Brian Wilkinson's former mentor and a former managing director at Bank of America Securities who is well aware of Lewis's hot hand and keen eye. Sharp is passing through town and stops by the Brimberg office, a check for a quarter-mil in his hand. His drop-in neatly coincides with the fund's new-and-improved March 1 inception date. This time the date sticks; the attorneys have come through; the trading account is liquid.
Thursday l March 3, 9 a.m.
Trader Rob McGrath purchases 7,500 shares of DSTI, an alternative-energy company, at an average price of $7.91 a share. It's the Lewis Opportunity Fund's first trade. Eventually their goal is to have a portfolio comprising between 30 and 60 long positions and 15 to 25 shorts.
McGrath a 32-year-old Staten Island native who got started on Wall Street as a Bear Stearns broker trainee and reinvented himself as a Nasdaq market maker at Gruntal & Co. -- is Lewis's right-hand man. He symbolically writes out a ticket on an old, discarded Brimberg trading slip. He tucks it away. One day, he figures, he just might frame it.
Thursday l March 31
Performance to date: 1.64% Assets: $700,000
Thursday l May 5, 4 p.m.
Wilkinson has had quite an intriguing visit with the senior management of a relatively undiscovered video-technology company from Australia. The boys are meeting with three to four management teams a day, every day, as they prowl for just the right blend of business plans and management teams.
But while this particular company sports a sound technology platform/service offering and appears to be gaining traction, its balance sheet is a wreck -- the victim of a desperate and toxic convertible-debt financing. Later, Wilkinson will tell Lewis, "If these guys can clean house and restructure their debt, I think we should schedule another meeting with them."
Shortly thereafter, an equity salesman whom the boys have nicknamed Mr. Kool-Aid (because no matter what management is selling, he's always buying) has also stopped by, along with the CEO of a small-cap wind-power company. It's instantly clear to Lewis and Wilkinson that the technology is impressive but that the executive lacks even a shred of interpersonal skills. He strikes them, in fact, as a total buffoon who couldn't pull off a profitable bake sale. The meeting is a complete waste of time. (Says Lewis later, "You have to have solid management; when you invest in these small companies, management is all you have.")
Tuesday l May 31
Performance to date: +5.61% Assets: $1.6 million
Monday l August 1, 8 a.m.
After months of deliberation, Lewis is poised to make a major tactical decision: He's switching prime brokers. Existing provider Spear, Leeds & Kellogg simply isn't bringing much added value (with only a few million under management and hardly a rapid-fire trading strategy, Lewis isn't exactly buttering anyone's bread over at SLK). But more importantly, a third-party marketer has secured a promising arrangement with a major bank's prime-broker operation. While this group normally wouldn't accept hedge funds under $100 million, the marketer has a decades-long personal relationship with these brokers. He managed to secure the boys an exception.
It's not an easy choice. "You never want to switch prime brokers, especially right out of the gate," Lewis concedes. There are shorts to unwind, assets to transfer and a mile of paperwork to travel. By day's end, though, almost all of the positions have been transferred to the new prime broker. Almost all of them.
Tuesday l August 16, 6 a.m.
Lewis is sleeping in his parents' beach home in North Carolina's Outer Banks when he hears his BlackBerry chirp. One of his holdings, a Pittsburgh-based health-care-industry staffing company, has e-mailed him a press release. Lewis had purchased a couple hundred thousand shares in the company in the wake of a string of key acquisitions that expanded its reach. Now, though, the release informs Lewis that the CEO is resigning for personal reasons. Oh, and some filings will be delayed.
. . . 8:15 a.m.
McGrath, who is coming in from Staten Island, is stuck on the 5 train. There's a sick passenger. When he finally makes it out of the subway, he will find 17 messages from Lewis on his BlackBerry.
. . . 9 a.m.
McGrath emergers from the subway and up onto the street. He and Lewis connect by cellphone, and in a scene straight out of Wall Street, Lewis, standing just off the beach, yells into the phone. He has seen this before -- when the chief executive quits, so does everyone else. "Sell it all" he bellows. "I don't care how you do it."
McGrath barely makes it into the office for the open and immediately begins to sell. He gets scalped all the way down but still manages to smash the order -- by the end of the day, he's out of the position completely, albeit at an average price about 60 percent lower than the $3 range at which he originally owned it. Lewis feels awful about the beating he took in the panic -- but weeks later, when the stock stops trading altogether, dropping below $1 on the pink sheets, he'll realize he dodged a bullet.
Tuesday l August 23
Today, that Australian tech company is set to implement a new financing plan as a result of Lewis's campaign to help it raise capital from several institutional investors via a PIPE deal. The cash infusion will be used to repay existing debt holders while simultaneously performing a sizable reverse split. The plan entails Brimberg & Co. and Burnham Hill coordinating the fundraising/ equity placement, and the Lewis Opportunity Fund participating as a strategic investor. By the end of August, the PIPE will be completed and the Aussie company, freshly recapitalized, will be given new life.
Friday l September 2, 10 a.m.
Jack Brimberg, who the boys have now affectionately nicknamed "Blue" after the elderly pledge in the movie Old School, turns 79 today. The boys wish him a happy birthday. "You're my boy, Blue," Lewis jokes. Brimberg doesn't get it. He hasn't seen the movie.
Wednesday l September 14, 11:30 a.m.
Although the boys switched prime brokers back in August, they've left behind a short position in Endwave (ENWV) in their SLK account, having failed to locate a borrow on the stock. Today, McGrath wonders aloud if they should just bag the position and close the account.
In July, when they shorted the California-based maker of modules for telecom networks, the stock was trading in the low 50s. They've kept that SLK account open solely so they could stay short ENWV, which Lewis believed was set to tumble -- in part because its share price was coming off a huge run-up, but also because of competition in its core product area. Despite McGrath's reluctance, Lewis insists they hold firm, no matter what it takes.
Wednesday l September 28, 2:30 p.m.
Bob Anderson, a parntern at a fund of funds called Bayberry West Partners, attends one of Brimberg's luncheons at the Rainbow Room. He's been following Lewis's performance since they met a few months earlier at a lunch, and now Brimberg's introduction has led to a $500,000 commitment from Anderson. As the septuagenarian Brimberg saunters into the room, Anderson in tow, Lewis and McGrath are ecstatic that their first fund-of-funds investor is on board. "I think I see Blue," McGrath cracks, doing his best Will Ferrell. "He looks glorious"
Friday l September 30
Performance to date: +19.07% Assets: $2.6 million
Monday l October 3, 8:45 a.m.
Flush with the capital influx from Anderson, Lewis gives his trader 32 orders on the open. Months of sifting through hundreds of ideas and meeting with scores of management teams has yielded a bumper crop of opportunities, predominantly in tech and biotech. Now it's time to put those ideas to work.
At 9:32, Lewis asks McGrath for a report on a bulletin-board trade. McGrath -- like a short-order cook in the middle of the busy breakfast rush who's being hassled by a waitress over an order of toast -- bites his tongue. He looks at the clock -- 9:33 a.m. The next time he glances over, it's 3:59 p.m. He's been buying and selling nonstop all day.
Thursday l October 13, 4:15 p.m.
Another turbulent day in the market has come to an end as the fourth quarter begins with an ugly slide: Over eight consecutive trading days, stocks have slid sharply. The Nasdaq is off 5 percent, the S&P down 4 percent. On the upside, Endwave -- the short from back in July that Lewis has insisted on holding -- is falling; a week later it goes to 10. Lewis will decide to cover it and close the SLK account.
On the downside, one of Lewis's positions -- Edgar Online (EDGR), a Web database that provides SEC filings -- has begun to falter. Ultimately, it tanks. Lewis, undaunted, will double down on EDGR, believing wholeheartedly that with gross margins of 85 percent and a slew of new product and distribution channels, it remains a strong play.
Monday l November 28, 10 a.m.
Lewis, convinced that his portfolio is now well-positioned to soar over the coming two to three months, has decided to begin dialing for dollars. He calls each and every one of his clients and urges them all to invest more money into the fund. One of these clients, Joe Zicherman, an investor based in Manhattan, says sure, go ahead and put him down for $300,000. Lewis, taking no chances, gets up from his seat and walks the 10 blocks to personally pick up the check.
Wednesday l November 30
Performance to date: +22.36%
Assets: $3.3 million
Friday l December 30, 3:55 p.m.
Lewis was right. As the last trading session of the year winds down, he, McGrath and Wilkinson are beginning, at long last, to breathe easy. They can take a knee and run out the clock on 2005. The S&P 500 will close up 3 percent on the year. The Lewis Fund, bolstered by the brazen October bet on a rebound -- not to mention the Aussie tech stock's 180 percent move to the upside -- finishes 2005 up 33.25 percent. Assets under management now total $4.5 million.
Tuesday l January 31, 2006
Performance to date: +48.93%
Assets: $5.6 million
Wednesday l March 1
Talk about your happy birthdays. The fund, officially one year old, is up 65.5 percent since inception. The 60 positions in the Lewis portfolio, mainly tech and health-care names, are performing like trained seals. Even the double-down on Edgar -- which has rebounded to $4 -- has paid off. Maybe starting a hedge fund isn-t so tough after all.
Thursday l March 30
Performance to date: +87.56%
Assets: $11.3 million
Monday l April 17
First-quarter results are in, and they couldn't be better -- the fund is up more than 40 percent for the quarter, compared to around 14 percent for the Russell Microcap Index. Meanwhile -- thanks to strong word of mouth and the legwork of Lewis's third-party marketer -- assets are nearing $15 million. They're on track to reach the $20 million mark that they were shooting for by August 30, and plans are afoot for an offshore launch on June 1. Already a multibillion-dollar fund of funds has indicated it could seed Lewis with $1 million. The Dow, up 3 percent for the year, is heading toward an all-time high. Life is good.
Wednesday l May 10, 1:10 p.m.
The Fed's policymakers have just met in Washington, D.C., and all hands are on deck awaiting their word. Lewis, like many investors, was hoping the Fed would put an end to its rate-hike campaign. But when the statement hits the wires, it's more of the same, suggesting that inflation concerns may lead to more rate hikes. "F-----g Bernanke," McGrath grumbles as the market gets spooked and a sell-off ensues. For the next five weeks, small-cap stocks will get crushed; the Russell 2000 small-cap index will lose 13 percent and Lewis's fund will drop 6 percent, finishing May down a disappointing 4.7 percent on the month. Life is tough.
Wednesday l May 31
Performance to date: +84.85%
Assets: $14.4 million
Friday l June 2, 3:45 p.m.
Mr. Kool-aid is in riding down the 45 Rock elevators with some senior managers he's just brought in to see Lewis and Wilkinson. "How do you think it went?" one of the executives asks the salesman-turned-freelance-investor-relations-man. "I don't know," Kool-Aid says, unable to restrain himself. "I don't know why I bother with these guys. They haven't dropped one f-----g ticket with me yet."
Friday l June 30
Despite the brutal May, the boys remain optimistic -- and committed to their strategies. They're still up more than 90 percent since inception and up 48.6 percent for the first half of the year, compared to 8.2 percent for the Russell 2000. Their assets have risen to some $17 million, and word on the Street is that several potential new investors have an eye on them. Life is . . . well, life is hard to predict.
Tuesday l July 31
Performance to date: +91.87%
Assets: $17.9 million
Epilogue: Friday l August 4, 7:50 a.m.
It's morning in early August, and Rob McGrath is quickly losing his patience. Neither blowtorch summer weather nor the prior month's brutal market lashing could rattle him -- but the bloodcurdling wail of Cyndi Lauper is more than the gruff Staten Islander can stand. Even with the office windows closed, Lauper, who is performing two dozen stories below in Rockefeller Center as part of the Today show's summer concert series, is killing him.
"You suck" he yells out the window, then slams it shut. Now he feels better. Lewis and Wilkinson are cracking up. It's good that they can laugh -- for the past several weeks their portfolio has taken it on the chin, down 3.1 percent for July. But a funny thing happened over the long, hot summer: On August 1, the trio reached their original 18-month target asset level of $20 million, thanks to the launch of their offshore vehicle and the signing of that large fund-of-funds client, which indeed netted close to $1 million.
Lewis, gearing up for that annual excursion to his family's beach home on the Outer Banks, shrugs the shrug of a man who knows he's in it for the long haul -- and who now knows what that long haul truly feels like. "I'm pleased we reached our near-term goal," he says guardedly, "but we still have a long way to go."
There are always, after all, the next 500 days.
