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Profile: Errol Rudman

Published by The New York Sun on 2005-03-01

The intensity with which Errol Rudman focuses on a reporter's face when a question is being asked suggests a man accustomed to tuning out everything else in order to get to the core of an issue. And that, perhaps more than anything else, may explain the success of his Rudman Capital Management, which he launched 35 years as a hedge fund called Rudman Associates.

It's one of the longest running hedge funds in America. There are some 6,000 of them, out of a global total of nearly 10,000, with $1 trillion in assets under their management. What's notable is that Mr. Rudman has averaged an excellent annual compound rate of return over the last several years.

That's impressive, considering how many dips, turns, crashes and downturns there've been in the market since 1970, when Mr. Rudman left Smith Barney & Company, where he was a transportation analyst. He is, in other words, a man who one might call successful.

So what does it take to be a successful hedge fund manager?

"It's a brutal business," Mr. Rudman said. "And the life cycle in this business is very short. It takes relentless pursuit of information; you've got to be good at diagnosing that information, coming to a conclusion about it, and then applying your judgment to your decisions. You ask: What does it take? It takes an inquisitive mind; it takes enough self-confidence; you need to absorb a lot of information; you have to be able to ask some very critical questions about the health and durability of companies; you need to understand the basic skills of corporate finance and accounting."

He paused, took a forkful of tender Nantucket bay scallops, and said:
"Perhaps more to the point, you need a coupling of the theoretical and practical. If I've succeeded in this business, it's because I've been able to adjust to different market conditions. I've tried to diversify risks."

And luck, the reporter asked, doesn't luck play a role in any hedge-fund manager's life?

"There's a bit of that," Mr. Rudman said. "Of course there's some luck involved in the hedge-fund business."

A hedge fund -- as defined by Investorwords.com -- is usually used by wealthy individuals and institutions. It is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds. Such an exemption lets them accomplish aggressive investing goals; it isn't unheard of for a hedge fund to turn in yields of 200% annually. They are restricted by law to no more than 100 investors per fund. As a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits, usually 20%.

Large amounts of money are managed by hedge funds; the biggest handle billions, while the Rudman Capital Fund manages assets of around $400 million.

And how did Mr. Rudman get to be where he is?

"I'm a Brooklyn boy, born on Flatbush Avenue," he said. His father died when he was 13 years old, and Mr. Rudman was raised by his older brother Kenneth. He put himself through Oberlin College and the University of Chicago, where he obtained a MBA.

The route to a career in finance wasn't quite directly out of graduate school. There was an interlude in the military and the possibility of joining government service that Mr. Rudman declined.

So, hello Wall Street.

Actually, it's not the Wall Street neighborhood where Mr. Rudman works but the Citicorp Building on Lexington Ave. where his offices are lodged. His small staff is accustomed to a 7 o'clock arrival each weekday. By the time the New York markets open at 9:30 a.m., Mr. Rudman has driven his way through a half-dozen newspapers, plus magazines, trade journals, and assorted reports on the Internet. Citing James Joyce's technique of creating characters with discernible differences in perspective, Mr. Rudman said, "Seeing different points of view -- that's important for a hedge fund manager. I always ask myself, 'What's the rationale for a certain kind of behavior on the part of a company's management?'"

Management, in all likelihood, will also have been contacted by Mr. Rudman during the course of his workday.

"I'm very tough about not accepting superficial answers," he said. "My insistence on getting to the core of a business flows from a need to understand how company executives make their decisions. What is their mentality? How do they measure themselves? Do they care sufficiently about price fluctuations? I think about the disparity between what the market says the price of a stock should be and what I think it should be."

It is, in short, all a gamble -- but an informed one -- about where to put his fund's money. At the moment, Mr. Rudman's capital is invested in 50 stocks on long, and 15 on short.

Yesterday, he seemed particularly pleased. The Yellow Freight Company, in which he's put 4% of his fund's assets, acquired U.S. Freight for $630 million. The merger, Mr. Rudman said, meant that the new entity will be able to increase its revenues by 43%. Its stock, now at $59, was at $32 when Mr. Rudman bought into the company.

"I base my analysis on factors that are going to result in an acceleration of cash flow or a slowing of cash flow generation," he said. "I look for what I call catalytic changes: a new product, a change in government regulations, mergers and acquisitions activity, or a change in the competitive environment in an industry that may generate increased momentum in cash flow. Short-term trading is not important to what we do at Rudman Capital."

Another favorite is Mohawk, the world's second largest manufacturer of residential and commercial carpeting. His analysis was that the industry would be able to evolve to a point where the company -- whose management had been timid about passing on additional fuel and freight costs to consumers -- could be more aggressive about pricing. Shaw's stock is now at $89, or 10 times EBIDTA (earnings before interest, depreciation, taxes and amortization); Mr. Rudman bought it at $43.

Does he ever make mistakes?

Mr. Rudman looked at the reporter with some chagrin.

"Everyone makes mistakes," he said. "The important thing is to recover and recoup. After all, you're not only managing other people's money in a hedge fund, you're managing your own as well."

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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