Matrix USA and Lighthouse Financial Group last month joined forces to create an institutional equity offering aimed at hedge funds and other institutional investors. The strategic partnership combines Matrix’s research desk, led by CEO Mike Blaustein, formerly a managing director at Lehman Brothers, with Lighthouse’s equities desk, lead by Rob Weinstein, formerly head of sales and trading for the institutional execution-only team at Bear Stearns.
FINalternatives recently spoke with the pair about the joint venture and how it aims to help investors get through the tough times that lay ahead.
FINalternatives: Who are your main clients?
Weinstein: A large percentage of our clients are hedge funds. We work with a lot of the sub-billion dollar funds that might not receive the focused coverage they need from some of the larger research firms. We also do business with a number of large hedge funds because of our ability to trade small-cap stocks in a unique venue. The lack of capital that the Street offers right now also gives us an opportunity to play in those stocks.
FINalternatives: Tell us about your respective desks and how combining them will benefit your clients?
Weinstein: There’s a lack of trust right now in the financial world and Matrix and Lighthouse are combining their resources to form a strong, niche operation. My desk specializes in trading mid and small-cap stocks, and Matrix is the only firm on the street that covers 150 “orphaned companies” by their analysts. These days, especially at a hedge fund, the buy-side trader wears a lot of hats, and to be able to provide pertinent information to that trader is going to be a win/win for everybody.
Blaustein: Matrix’s core asset is its research product. It organizes the Russell 3000 using an EVA lens and cuts it up equally in an unbiased, ruthlessly objective fashion. That has specific applications for the hedge fund world because it’s fantastic at finding relative value trades, pairs trades and outperformance trades.
FINalternatives: What kind of hedge fund activity are you seeing in the markets?
Weinstein: I’m seeing active trading, and there are a few funds coming in and buying, which I wasn’t seeing as much of a few weeks ago. Although the entire world feels that there is a global recession and everything is going to go lower, there are people out there with a contrarian view. They’re buying up value stocks because there’s definitely been a lot more that has been created over the last few weeks.
From a trading perspective, I’ve never seen a tape like this. The volatility is incredible and the swings are massive, even on a percentage basis. In 1987, the market took a big hit, but this isn’t a one-day, one-time situation. After 9/11, the market also took a big hit and it was felt at that time that there would be buying opportunities. There are going to be buying opportunities now, but this is deep. I’ve never experienced something as deep as this.
I worked at Bear and saw individuals who lost so much, and Mike’s got all kinds of friends at Lehman, so it has been a brutal and unfortunate time that we can both relate to personally. But it’s not just about Bear Stearns and Lehman, it is about the entire country. People got hit very, very hard and they’re not going to throw their money back into the market until they feel a sense of security, and that could take a long time.
Blaustein: I think we’re in the final stages of the deleveraging process. People who had to sell are almost done. I’ve seen specific convertible names trading at extremely distressed levels and now we’re getting to reasonable leverage levels. I’m seeing companies that were investment grade trading in the 80s and 90s now trading in the 60s. An example is the Home Depot long-dated paper, which is trading at 61 cents on the dollar. I look across the spectrum and see a lot of paper that, to me, is trading at silly levels. There are tremendous amounts of capital structure arbitrage opportunities out there.
FINalternatives: What do you think the hedge fund landscape will look like next year?
Weinstein: We’re heading towards the end of the year and people want to be around in 2009, so I don’t think you’re going to see much risk taking right now. A lot of folks have gotten burnt over the last few weeks, so I don’t think anybody’s swinging for the fences. A lot of investors are trying to preserve their capital, so I think the strongest hedge funds will survive. However, the hedge fund landscape in January 2009 will look a lot different than it did in January 2008.
Blaustein: Hedge funds are making sure they can survive to fight another day, whether it is deleveraging or taking money off the table and putting a higher percentage of their assets in cash. It’s going to take time, but the industry is going to come out stronger and healthier. It might take six months or 36 months, it’s unclear right now.
By Hung Tran