Contrarian Investing Done Right

A fair number of Wall Streeters labor away in Minnesota, which is rich in intellectual capital.

Dealbook has a special section out today with a Minnesota-based manager that is far from the maddening crowds. It is a must read.

Andy Redleaf, who sat next to Steve Cohen early in his career, has some gems in the article. Although he claims to wrong as much as anyone, he predicted the panic in the credit markets at the end of 2006 and also is dismissive of innovations like equity style boxes:

The group tries to arbitrage the inefficiencies created by artificial categories (“small cap value”) and organizing principles (stock trader or bond trader?) that dictate how markets tend to operate. Its strategies are rooted in quantitative models. Dealbook

Models are not evil, but certainly can be dangerous, and have their limitations, as the recent bout of turbulence pointed out. They are, at best, a starting point to roll up the sleeves. Redleaf has some choice words over investment committee’s, too. They often stifle independent thought and creativity, and analysts with contrarian views are often ridiculed. Redleaf’s take is as follows:

“The model is a tool to help us think, not a substitute for thought,” Mr. Redleaf once wrote. Whitebox is best understood by Mr. Redleaf’s letters to investors, which quote everyone from Claude Shannon, the father of information theory, to Don Corleone of “The Godfather” and try to explain everything from a particularly complex trade to the role of committees (generally useless, with the committees that produced the Declaration of Independence and the Constitution being notable exceptions).

His shop seems like a fun place to work, with staffers paddling around barefoot discussing the merits of beef jerky. They might need to dress warmer soon, as Minnesota has its downside.

And with the credit abuses now exposed, Redleaf is now focused on the next disaster, which has certainly been the focus of pundits everywhere.

“We are certainly not having a credit crisis,” Mr. Redleaf wrote in his latest letter, which investors received last week. “But we could be looking at a currency crisis, defined as a collapse in the value of the dollar sufficiently sudden and severe to disrupt international transactions on a grand scale.”

A must read article about an eclectic manager.

A Hedge Fund That Saw What Was Coming
Dealbook

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