Elite Hedge Fund Manager Guides Student Management of Active Fund: Q&A with Robert Scannell, MBA, JD, CFA®

Robert Scannell, MBA, JD, CFA® will be co-teaching the Student Managed Investment Fund course at GGU in which students choose investments for an active fund. Scannell will bring his experience to the class, which includes starting and running the Tradewinds Investment Management, LP, an emerging-market hedge fund that peaked at $400 million and gained 22% per annum over 20 years.

Would you give us a brief overview of your education and career?

I earned an MBA from Penn State, a JD from Purdue, and later became a CFA® charterholder. I spent 10 years at Merrill Lynch in fixed income sales. I also established and ran a hedge fund for 20 years.

What do you bring to the students based on this experience?

Investment management is part art and part science and most business schools just teach the science — it’s really the same everywhere. They give you the tools. The art side of it is about how and when you employ the tools. My hope is to add perspective on the art side, having “been there and done that.”

There is no substitute for real-world experience and that is what the Student Managed Investment Fund course is all about. By managing an active fund they get real experience, and I will bring mine to the discussion.

Robert Scannell

Tell us about running the hedge fund.

Tradewinds was one of the first emerging market funds in the US, and it was wonderful. At the time I started the fund the Berlin Wall had come down, and socialist and communist governments wanted to move to a capitalist model. We traveled around the world and looked for unusual securities and situations. During that time, most emerging market countries exchanged debt they had defaulted on years earlier for new bonds, and if you understood that process it was extremely profitable. These sorts of trades helped us generate returns that were in the top 10% of global alternative asset managers (i.e.: hedge funds) from 1994-2015. Besides making money, we witnessed and participated in an economic renaissance around the world. The fund closed after twenty years because I was simply tired and the opportunities had diminished — alas, that is what happens to new markets.

We investigated investment opportunities at the country- and government-levels, talking to the finance ministers and central banks for macro information. Then we’d go to company-level analysis and that experience will play into the Student Managed Investment Fund class.

 “I teach students to always look for corroborating evidence. As Ronald Reagan said during nuclear negotiations with Russia, you want to “trust but verify.”

What did you learn over the course of your travels and how does that translate to students?

The biggest thing is that you learn over 30 years that the markets are a merry-go-round and that cycles repeat. You look for characteristic points in the cycle at which you want to do certain things. Where are we in the cycle of economic growth in the U.S.? The answer is that we are something like 8 years into a 5-year cycle. That is a joke of course, but the point is that the current economic expansion is one of the longest on record, and we are closer to the end than the beginning. This may color the investment decisions we make in the Student Managed Investment Fund course. We’ll probably want to err on the side of caution.

I also learned that people are the same all over. They are economically motivated in the same way, and they have the same flaws in a business context: it is not uncommon to run into lies, fraud, and exaggeration. You learn to be cynical and cautious about what people tell you.

You also learn that sometimes you have to throw out the investment research playbook. A good example is that at one point we had a big investment in Gazprom, the biggest company in Russia and one of the biggest energy companies in the world. Besides the fact that it was cheap, the biggest reason we owned was that we knew that everyone in the Duma owned it as well! And lo and behold it ended up moving much higher.

What is it like to have a fund, day-to-day, when you are in the domestic office?

A client from San Francisco once came into my office for a meeting. He called the next day and was troubled: “I didn’t hear anything going on in your office.” He had a mental image, probably from Hollywood, of computer screens and screaming traders. By contrast, our office was like a monastery. We just read research and tried to get smart. It is not what most people think. At least in our case, being a fund manager was more like being an analyst at the CIA.

Based on your real-world experience, how do you teach students to detect exaggeration when they are sitting at their office desks?

Well, one way is by accumulating experience and learning from your mistakes. Like we said earlier, there is no substitute for experience.

But more broadly, I teach students to always look for corroborating evidence. As Ronald Reagan said during nuclear negotiations with Russia, you want to “trust but verify.”

I also urge investors to get out there and see for yourself. If you are researching a company, walk the factory floor and speak to everyone you can. Speak to the company officers, the Directors, the customers and especially to competitors. I am a big believer in getting up close and personal. It is much harder to bluffed in person than it is on the phone.

What is your understanding of Russia’s macroeconomic and political vector since the 90s? Are we moving like the U.S. from robber barons or oligarchs to managed capitalism?

One vision is that Russia is simply a mutant capitalist country and a mutant democracy; they are sort of a failed experiment in evolution from communism to democracy. Another theory is that it’s a slow and ugly process, but they are gradually evolving. Sometimes it’s hard to tell. It’s interesting that they look at a lot of what goes on here in the U.S. and call it legalized, sanitized corruption. For example, the pharmaceutical industry spends billions on lobbyists and on political candidates and the result is our insane healthcare system. Is that a healthy capitalist economy in action or is it a form of institutionalized corruption?

“The biggest thing is that you learn over 30 years that the markets are a merry go round and that cycles repeat. You look for characteristic points in the cycle at which you want to do certain things.”

Do they eventually go from robber barons to a more respectable model? I hope so. Historically, there is a scrum for money and the winners eventually want to memorialize themselves, so they build foundations and museums and universities. An interesting case in point is Leland Stanford, who was reviled as a Robber Barron at the time he founded Stanford University. Hopefully, over time we’ll see a similar pattern in Russia, where oligarch money is recycled in positive ways for society.

Being that you and Dave Kaczorowski, who will co-teach the class, have so much real-world experience and are CFA® charterholders, how do you teach students to make their own decisions and reach their own investment decisions? Is it training wheels?

In the context of this class, we are not going to hand them a pile of money. We are going to be involved in every decision but want to give them as much responsibility as they can handle. We want to give them the tools, teach them, and then let go of training wheels. That is a perfect analogy.

We asked Robert Scannell the top three things he will bring to students…

  1. See the big picture and not get lost in minutiae.
  2. Take a real-world perspective: Many students at GGU are in the workforce, and they want to change their career. There are major changes happening in finance that will affect their future and we want to speak to some of those issues. For example, there is a powerful trend away from active portfolio management toward passive management (in the form of index funds). Also, the U.S. federal deficit and entitlement spending are both exploding, and this will eventually have huge implications for financial markets. These are tangential issues for the class but we’d like to try to weave them into the discussion.
  3. Infuse them with my enthusiasm for the investment game. It is like being a child on a treasure hunt every day.

More About Robert Scannell

Robert Scannell is the founder of Tradewinds Investment Management, LP, which from 1994 through 2015 managed numerous funds investing in emerging markets, distressed assets and healthcare. Tradewinds’ flagship fund ranked in the top 10% of funds globally over its 20-year history. Prior to founding Tradewinds, he spent 9 years in institutional fixed-income sales with Merrill Lynch Capital Markets. He holds a BA and MBA from Penn State University, a JD from Concord Law School at Purdue University and is a Chartered Financial Analyst. He also holds an MSc in Pharmaceutical Bioengineering from the University of Washington and has completed programs in drug discovery, drug development and clinical trial management at UC Berkeley, UCSF, and the University of Chicago, respectively.

CFA® (Chartered Financial Analyst) is a registered trademark owned by CFA Institute.

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