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Our giant in hedge funds Luck put SOM’s Thomas Schneeweis on his path to the top of the alternative inve

– Leslie Wolfe

photo by Ben Barnhart THE CENTER FOR INTERNATIONAL SECURITIES and Derivatives Management (CISDM), housed within the Isenberg School of Management, is widely acknowl-edged to be the preeminent academic institution for the study of alternative investments. But just what are “alternative investments” and why are over 30 major financial institutions sponsoring CISDM’s research? And how in the world did Thomas Schneeweis, who studied music as an undergrad, ever become its director? The most common alternative investments are derivatives, which include options and futures contracts. Simply put, options give the investor the chance to buy or sell a financial instrument (such as a stock), while futures involve contracts to buy or sell some commodity at a date in the future. Many of us use alternative investments without realizing it. When you purchase your heating oil in the summer for delivery in the fall, you’re entering into a futures contract of sorts. In effect you are “hedging” against a rise in the price of oil. If you were to buy more of these heating oil contracts than you needed and then resold them at a profit to your neighbors when the price of oil rose, you would have established a rudimentary futures market. If you expand your neighborhood to include every financial institution and investor in the world, and add to oil all items of value – from gold to the mortgage on your house – you can begin to picture the tremendous sums of money at stake in this vast financial market. The wins and losses on this gaming table not only make or break corporations, they also influence world economies. The business of CISDM is to keep its finger on the pulse of these financial markets and to demonstrate through its research how the risks in the markets can be most efficiently and profitably managed. This explains why financial institutions are eager to fund CISDM’s research. But what of Tom Schneeweis? How did he come to join the faculty in 1977 and rise to prominence as an expert on using alternative investments to manage risk? He answers with one word – “luck” – and given his background that’s an assertion difficult to refute. Professor Schneeweis started his improbable rise to CISDM’s directorship by studying voice and piano at St. John’s University in Minnesota in the ’60s. He later moved on to graduate studies in history at the University of Wisconsin. A career in finance was far from his mind when fate intervened. As he was completing his master’s degree, the Madison campus was in open revolt against the establishment. “In 1970, all of the grad students in the history program were more or less told to leave,” Schneeweis says. “So I needed a job.” Recruiters from an investment firm asked him two questions. The first: “What happens to bond prices when interest rates go up?” Schneeweis guessed correctly that bond prices fell. The next question was tougher: “Do you drink Scotch?” When he answered in the affirmative, he was told that he was perfect for a career in finance. Thus began a short yet lucrative career selling bonds in the Midwest; but one day came an epiphany. While listening to the lunchtime conversation of his middle-aged colleagues, the topic of which was the color of their wives’ refrigerators, he realized that he couldn’t – or didn’t want to – picture himself at that table in 20 years’ time. At 24, he’d amassed more money than he’d ever before seen, and thus had the resources to strike out on his own, but what to do next? As it happened, his father, a director of industrial relations at 3M, the technology manufacturing company (and creator of Post-it Notes), was having a lunch of his own – with the dean of the University of Iowa’s business school. The two friends were discussing their children, and when the dean learned that young Schneeweis was casting about for something to do, he mentioned a graduate fellowship that was going begging. So it came to pass that Schneeweis had the opportunity of a four-year free ride in the business school’s Ph.D. program, but then there was the question of what to study. The answer was “finance” – he’d been told he was perfect for the field, after all. Still, the degree requirements were very broad, and he managed to avoid actual finance courses. Courses in English, math and science interested him more. Along with 11 students in theoretical and applied physics, he took a seminar led by the astrophysicist James Van Allen. During a discussion of Fourier analysis, Van Allen turned to Schneeweis and asked, “Do you understand this?” Schneeweis allowed as how he did, so Van Allen turned to the rest of the class and said, “If he understands it, you should.” “Right then and there,” Schneeweis says, “I learned the concept of ‘benchmarking.’” When he left Iowa in 1977, financial markets were roiled by dramatically fluctuating currencies and the rise in interest rates to historical highs. Looking for ways to hedge their currency and interest rate risks, investors were making more and more use of futures and options, and the Chicago Board of Trade began to recruit academics who could educate people about these instruments. Schneeweis jumped at this opportunity to join with leading professionals studying alternative investments. His enlistment by the Chicago Board of Trade coincided with his employment at UMass, where another CBOT team member, Joanne Hill, soon joined him. With Hill (today a managing director at Goldman Sachs, and a strong supporter of UMass for the past two decades), Schneeweis wrote seminal articles on alternative investments and hedge funds. (Hedge funds take positions in alternative investments and sometimes engage in highly speculative strategies.) “We were lucky,” Schneeweis says. “We just happened to be present at the start of tremendous growth in the futures and options market, and we were able to describe an entirely new way of managing risk in the marketplace.” Not only was the timing of Schneeweis’ study of alternative investments felicitous, it also coincided with the interests of his colleagues at UMass. Combine Schneeweis’ expertise with that of Sanjay Nawalkha in fixed income derivatives, Nikunj Kapadia’s research into options and derivatives, Ben Branch’s interest in bankruptcy and distressed securities, and Nelson Lacey’s work in real estate and insurance, and you have the world of alternative investments fairly well covered. When the faculty sought to create CISDM, initial funding for the venture came from Mike Phillip and Anshu Jain, both UMass M.B.A. graduates with successful careers in the investment field. Schneeweis, who is today the Michael and Cheryl Phillip Professor of Finance, says, “We were lucky to have Mike and Anshu show up. And we were lucky not to ruin them.” Schneeweis explains that not ruining students means keeping their excitement alive, in stoking their desire to develop their own unique ways of attacking problems. “If you’re involved with something that excites you, and things fall into place, you can give yourself the chance to be lucky.” Schneeweis contends he could have been happy in almost any endeavor – history, biology, law – anything in which he could feel excitement about problems, about puzzles to be solved. Falling into finance and his job was a series of lucky breaks, and his earlier education was providential. “History is about stories, right? When you’re writing a research paper you have to present it in a reasonable and interesting fashion, like a good story.” He credits his musical studies with teaching him about mood, flow, tempo and volume – essential elements of effective presentations. Making those presentations, whether to a group of corporate sponsors or at an international symposium, doesn’t faze him – after all, he’s performed for audiences in concert halls. If retirement should ever beckon, Schneeweis is fortunate to have many activities to fall back on. He’ll play the piano, study history, and maybe – should the chance arise – write some historical novels. He’ll have many resources to draw on. Perhaps he should start with his memoirs.

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