Hedge Fund Market Wizards

Chapter 12

Joe Vidich

Harvesting Losses

Typically, the managers I select for interviews are managers that I either know or locate through networking. Joe Vidich is one of the exceptions. I found him by searching a hedge fund database, looking for funds with exceptionally high return/risk performance. The Manalapan fund, which was launched in May 2001 and managed by Joe Vidich, stood out for its impressive performance statistics. I had never heard of either the fund or the manager.

For the 10-plus years since the fund’s inception, Vidich has averaged an annualized compounded net return of 18 percent (24 percent gross return) with a maximum drawdown of only 8 percent. This modest maximum drawdown is exceptional for an equity hedge fund during 2001 to 2011, a time period that included two massive bear markets. Vidich has tremendously outperformed his sector. During the corresponding time period, the HFR Equity Hedge index was up only 4 percent annualized with a maximum drawdown of nearly 29 percent—less than one-quarter of Manalapan’s return with nearly four times the drawdown. And the index understates the average maximum drawdown because of the smoothing effect of diversification. Reflecting the combination of strong returns and moderate losses, the Gain to Pain ratio of the Manalapan fund is a very high 2.4. (See Appendix A for an explanation of the Gain to Pain ratio.)

I originally met with Nick Davidge, the managing director who runs the business operations for Manalapan. At ...