The Mysterious Manager With the Triple-Digit Returns AND HE ENDOWED A CHAIR AT HARVARD IN HIS 20s
By David Whitford

(FORTUNE Magazine) – "Is there anything I don't know about this interview?" Buddy Fletcher asked, right off the bat. "Do you have a particular angle or ax to grind?"

I'm just curious, that's all. Alphonse Fletcher Jr. (everybody calls him Buddy) is a black star in the overwhelmingly white world of hedge funds. He made enough money on Wall Street before his 30th birthday to start giving lots of it away, including more than $3 million to Harvard, his alma mater, for an endowed chair. His company, Fletcher Asset Management, manages $250 million from a lushly restored 1879 townhouse on New York's Upper East Side, adorned with period furniture, a dozen paintings on loan from the Whitney Museum, and two exceptionally well-trained dogs (Homer, a golden retriever, and Brutus, a miniature pinscher). And if that's not enough to whet a guy's interest, try this: Fletcher, who's now all of 33, claims that he produced several years of hard-to-believe triple-digit returns during the early '90s, when he was managing strictly for his own account. (An independent audit confirms those results.) Given all that, who wouldn't be curious?

Fletcher's professional story begins at Kidder Peabody, where he made his reputation as a trader specializing in complex "income arbitrage." In one variation of this scheme, Fletcher would arrange securities transfers between U.S. and offshore investors involving foreign stocks about to declare dividends. (The U.S. investor would minimize foreign taxes, the offshore investor would collect some income, and Fletcher would get a piece of it. His profit per share, though modest, was greatly magnified by leverage.) In 1990 he made $25 million this way for Kidder. Unhappy at being denied what he felt was his full bonus at a time when Kidder was cracking down on bonuses, he sued Kidder the next year and was eventually awarded $1.3 million by an arbitration panel. (A companion suit alleging racial discrimination was dropped.) In 1991 he launched his own firm, and in 1995 he opened it up to outside investors.

Managing other people's money made Fletcher a bit more cautious. (Besides, he says, the profit windows for income arbitrage were narrowing as too many others picked up on the strategy.) So now he relies less on income arbitrage, with its need for so much leverage, and more on another strategy he helped devise, known as "Reg D" trading. Basically, Fletcher makes private investments in public companies that can't raise the capital they need by conventional means. In exchange, he gets an option to buy discounted shares in the future. "Our overall return goal is lower," he explains, "but we think we have an even more robust strategy than we originally had." The goal is still pretty ambitious: He aims for a 25% return, regardless of market conditions.

Unfortunately, that goal may not be modest enough. While his flagship Fletcher fund rose a respectable 25.4% in 1998, it hasn't beaten the S&P 500 since 1996, and so far this year it's up just 2.2%. Fletcher insists he isn't worried about the trend--and in any case, he points out that he has never suffered a losing quarter. Even last August, when the S&P 500 dropped 14%, the Russell 2000 plunged 19%, and Long-Term Capital headed into its death spiral, the Fletcher fund finished the month right where it started.

Deals like Fletcher's recent $75 million Reg D investment in Baan Co., the Dutch software maker, may help. (The investment could increase to $225 million over the next six years if Fletcher chooses to exercise his options.) In general, these options "can be quite valuable to his investors," says a client, Jack Meyer, who oversees Harvard's $13 billion endowment, "but they don't appear expensive to the companies that he's dealing with because they only pay off if things are going really well."

And if things go badly? Last fall Fletcher invested nearly 25% of the fund's assets in SmarTalk, a company that sells prepaid phone cards--and that declared bankruptcy a few months later. Fletcher says his fund's position was carefully hedged, and the damage was slight. "Just a hiccup," he says.

Some hiccup. Or maybe it's a reality check for the curious.

--David Whitford