The art of making money

Jim Hedges is generous with his time -- if you're patient. Conference calls and interruptions from deal-making business partners have stretched a scheduled two-hour photo shoot well into hour number four. But with the view from his trendy Tribeca loft, and the quality of art hanging on its walls, no one seems to mind. When Hedges explains with whom he's been speaking, it's easy to understand that extreme multitasking comes with the territory.

"In the past two hours I've spoken with a highly successful commodities trader, a known guy, who wants capital to expand his business," he says. "Before that I got on a call with a shipping industry executive who has an asset he wants us to back. The asset is a fleet of ships."

Hedges, 39, president of LJH Global Investments, officially opened his doors in 1993, but his experience goes back much further. How's this for a r?(C)sum?(C)? The product of an investment family business, he's attended fund manager meetings since the age of 16. In college, Hedges worked for Billy Dunavant of Dunavant Enterprises, a lion in the commodities industry. In between college and graduate school (at Thunderbird), he worked as a runner on the floor of the Chicago Board of Trade. Hedges lived in Paris and served as director of European sales for J.D. Honigberg International, a Chicago-based global trading firm. And did we mention he worked for Arthur Laffer (yes, that Art Laffer) before finally getting around to opening his own firm?

A better-suited namesake is hard to find, and his involvement in almost every aspect of the hedge fund and alternative investment industry has led to overwhelming returns for his clients, and overwhelming success for himself.

"I've been super lucky," he modestly states. "I had this real love and interest in working with high-net-worth families to manage their wealth and use the best tools out there, which at the time were hedge funds and private equity funds. The best tools always evolve. Given its history steeped in innovation, some of the greatest investors have spent their career in hedge fund formats."

It's this innovation and a go anywhere, do anything attitude that Hedges now applies to his high-end alternative investment advisory firm. When not jetting between his offices in New York, London and Naples, Fla., he can be found meeting with clients in cities as diverse as Palm Beach and Athens, Greece. But despite the perceived glamour, it's the quality of his deals that sets his firm apart -- deals that come from unlikely sources.

"When I say I 'look anywhere,' I mean, literally, we look anywhere," Hedges explains.

"We look at funds, preferred equity and mezzanine debt. We look at distressed assets. We look at making direct investment in companies and venture equity investments. As an example, our clients invested approximately $15 million to buy 137 Burger King franchise stores out of bankruptcy. It was one-time cash flow, $70,000 per store. We sold the company for $155 million of gross proceeds."

That's not all. In the past four years, LJH has provided real estate mezzanine debt financing to developers, which gives its clients 15 percent current income and allows them to share in the equity upside. The firm created a financial services company to provide financing to the automotive industry, which was a $120 million partnership with Merrill Lynch. And for eight years, they financed the largest time-share developer in Mexico.

"We go where we find value, current income, cash flow and downside protection that's appropriate for our clients," Hedges says. "We believe a good tenet of business is giving rich people more money back. It sounds a bit trite. However, irrespective of how wealthy a family happens to be, if you give them a recurring, consistent cash flow with quarterly dividends and preferred equity payments, they love it. It's like having their cake and eating it, too."

The firm is unique in that he's not driven by formulaic, cookie-cutter exit strategies. Rather, Hedges says, it depends on the macro environment for the sector and when value can be realized. And like another successful Midwestern investor, he has a bias in favor of buy-and-hold.

"As long as a business or industry continues to meet our directives, we want to own it," he says. "I won't say that we're not looking for other opportunities, but we are a long-term holder of businesses."

Hedges' typical investment minimum is $500,000 to $1 million. In addition to a small number of wealthy families, he works with other institutions that service high-net-worth families - many of them registered investment advisors. "Our clients include RIAs who want access to [alternative investment] opportunities," Hedges explains. "The deals we bring to the table are proprietary and they involve our unique relationships. They partner with us and bring some of their clients into our deals or vice versa."

Yet although Hedges typically sticks with high-net-worth investors, he's been heavily involved in what he calls the "retailization" of alternative investment industry, and he continues to keep an eye on its down-market push. Hedges created one of the first fund-of-funds products that sold in $25,000 increments and products that sold for as little as 5,000 euros in European private banks. Baby boomers in particular, he says, can benefit from lower minimums and products geared to the mass affluent.

"Boomers shouldn't have a one-way ticket to the stock market," he says. "I think fixed income is attractive and unattractive at different times. I think baby boomers should always be thinking in terms of their other asset classes, apart from their house and their vacation home."

That being said, he thinks fund-of-funds tend to be the primary entry point for baby boomers into the alternative space, products he now believes are fee and expense laden - and the reason he's no longer in the fund-of-funds business.

"They're highly diversified, meaning they tend to have marginal returns," he says. "They've had dismal performance over the past three to five years. I think we're now in a situation where people want more successful alternative investments. This will probably mean bellying up to the front of the line, moving past the fund-of funds-and going straight to the hedge fund manager, private equity manager or even making the direct investment allocation."

But what happens if boomer clients don't have the $5 million minimum required for a direct hedge fund investment? Where else do they go?

"I believe registered investment advisors will increasingly figure out ways to provide these products. I think they'll make the math work."

He also believes interest in private equity deals will continue to increase, especially as more executives take issue with the current shareholder democracy movement and often-contradictory investor demands.

As for recent regulatory action taken by the SEC with hedge fund registration, Hedges is less than enthused, describing it as overzealous and rife with example-making sanctions. When it's pointed out that, according to Alan Greenspan, hedge funds almost brought down the U.S. economy, and perhaps they're justified with their caution, Hedges isn't buying it.

"That has nothing to do with the regulations that have been put in place to 'solve that problem,'" he says. "Increased regulations only mean something if you've got the proper support to enforce it. From an enforcement perspective, the SEC is one of the most understaffed organizations in the country. They're looking for a needle in a haystack.

Ultimately, if someone's going to engage in fraud, it's very hard to protect against on the front end. The regulation has only increased the cost for investors because ultimately the cost is passed on to them."

What more can be said about Hedges and his love of the alternative investment industry? He's started hedge funds, private equity funds and new companies in the space. He's committed to industry education and professional standards. He continues to develop innovative products and strategies. And he's focused almost exclusively on delivering great returns for clients.

"It's an industry that changes quickly, and one gains nothing by staying static," he says.

"You've got to constantly evolve in the alternative investment sector, because today's opportunities will not be the opportunities of two years or four years from now."