TOP VIEW Madeleine Albright, Richard Breeden and Ron Insana are just three of the luminaries to join the hedge fund industry recently. While observers debate how their power and influence may translate into investor returns, they could all learn something from Otto Spork, a self-directed investor whose new hedge fund gained 117 percent in its first 12 months. Anyone who has considered starting a hedge fund must realize that alpha is becoming increasingly elusive in a market with 9,500 competitors, but high performance is possible if celebrity managers find financial masterminds to leverage a specialized niche.

Breeden has no previous experience as a large-scale investor, but today a hedge fund manager need not be a derivatives trading prodigy. Madeleine Albright started an emerging markets hedge fund in January through her investment company, Albright Capital Management, backed by $329 million in seed money from Dutch pension fund PGGM. In September, veteran CNBC anchor and Emmy-award nominee Ron Insana announced his plan to establish a fund of funds, apparently based on the relationships he developed with the leading lights in the hedge fund industry through his television career. Because of SEC restrictions against marketing while their hedge funds are raising capital, Breeden, Albright and Insana all declined interviews for this story.

Last October, two former U.S. treasury secretaries joined existing hedge fund firms: Larry Summers, who served in the Clinton administration, became a managing director at the $25 billion D.E. Shaw Group, while John Snow, who served in the current Bush White House, became chairman of $16.5 billion Cerberus Capital Management; former vice president Dan Quayle is chairman of Cerberus Global Investments, a division of the same firm.

While these names grab headlines and send financial columnists scurrying to their keyboards, only time will tell if these hedge fund newcomers will be able to post market-beating returns. While power, influence and contacts attract capital and open doors, successful hedge fund managers need far more than a reputation. They also require superb financial skills, especially in today’s crowded market for alternative investments.

"I wouldn’t be giving my money to Madeleine Albright unless I knew who was trading," says Randy Shain, a vice president with First Advantage in New York who has helped oversee investigations into the backgrounds of 2,500 hedge funds and 4,500 managers on behalf of prospective investors. "The real issue is that she has no qualifications. Obviously someone else is doing the trading; who is that someone else? That someone else has nothing to do with her history," he says. "You still need to check that person just as rigorously as you would someone else. The fact that she’s put her stamp on that person means nothing to me."

Triple-Digit Returns
In March, Warren Buffett called the fees hedge funds charge investors (typically a 2 percent annual management fee and 20 percent of any gains) "grotesque." Many investors have become as exasperated as Buffett, and have perhaps considered joining Breeden and Albright as hedge fund founders. One of them is Otto Spork.

Warren Buffett has called hedge fund fees (typically a 2 percent annual management fee and 20 percent of any gains) "grotesque."

In February 2006, Spork, a former dentist, launched Toronto-based
Sextant Strategic Opportunities Hedge Fund. In its first 12 months of activity, Sextant’s returns reached 117 percent. According to the Toronto Globe & Mail rankings, Spork’s was the best-performing fund in Canada for that period. Few have ever heard of Spork, and fewer still have ever heard of his investment strategy, and that’s precisely the point. At the end of 2006, nearly 9,500 hedge funds existed worldwide, nearly quadruple the number 10 years ago, according to industry data provider Hedge Fund Research. Today investors and managers alike are desperate for unique strategies that eschew the lethargy of the bandwagon effect.