One broiling summer day, the 30-something owner of a landscaping business was trimming hedges when he realized he wasn’t getting any younger. Now, six years after selling his landscaping business, Andy Lehman traded the heat for another kind of hedging.
On tax day this year — that is, April 15, not the one kicked back to July because of the coronavirus —the 38-year-old Greenville native launched a hedge fund, Highway 54 Investment Partnership.
“Landscaping is obviously not the business for me,” says Lehman, who started his first lawn-care business when he was 12, opened New Frontier Property Care in 2002 and launched an apparel company at age 29.
At 32, he started investing on his own — around the time he recorded a couple of albums and performed as a singer/songwriter, solo and with his band, The Night Moves.
“I can’t make a living making music,” he says, “so I just thought, ‘Well, what do people you know make the best living doing?’ Investing. So I just started learning about it. It just really captured me.”
Over a 3½-year period, he says, he beat the S&P 500 with a 12% return. He rolled the proceeds into his hedge fund, then found four other investors.
David Swain is one of those partners. He has known Lehman for 20 years, finding him to be a “hardworking and very entrepreneurial-minded young man.”
“I pummeled him with questions when he first considered starting Highway 54,” Swain says. “It quickly became clear to me that he not only knew what he was talking about, but he had set the stage well for success.”
Still, like everything else in the age of COVID-19, times are tough for investors, from stocks and bonds to mutual funds to hedge funds. For the latter, recent headwinds include computer-driven (i.e., algorithmic) trading and illiquidity, among others; Lehman requires a minimum one-year investment, although he encourages a three-year commitment. Another pressure: hedge funds’ high fees.
Most funds charge a “two and 20” fee — that is, 2% of assets under management and 20% of the profits — but Lehman says he earns only a percentage of earnings above the S&P’s gains.
“If Highway 54 is up 10% and the S&P 500 is up 11%, I don’t make a dime on management fees,” he says.
At the same time, as his prospectus says, “My own money will sit right alongside yours,” noting that he will invest up to $50,000 in the partnership. “We will win or lose together, dollar for dollar.”
While often considered risky, hedge funds offer diverse investment strategies that can generate more money than other instruments in this current environment of low interest rates — the Fed’s prime rate stood at 3.25% in mid-July; bonds and CDs yield little these days.
“First thing I would say, the ladies and gentlemen’s 60/40 portfolio is dead,” says John T. “Buddy” Mills, portfolio manager of FinTrust Income and Opportunity Fund, referring to a typical portfolio’s equities-to-bonds ratio. “It’s not only dead, it’s dangerous.”
With his fund, traded on NASDAQ as HIOIX, he seeks to solve the income problem in that 40% slice with substitutions in holdings that will outperform, say, utilities, real estate investment trusts and “the AT&Ts of the investment landscape, not the S&P 500.”
That balanced approach, along with a balanced temperament, Mills and Lehman say, make for a balanced, income-producing portfolio.
“Financial decisions are made by either greed or fear, right?” Mills says. “The whole value proposition of hedging is that you’re not going to get either one of those. I’m not catering to your greed, and I’m not catering to your fears. We are involved in the markets.”
Lehman takes that another step, reflecting on his rock ‘n’ roll days.
“I refer to this approach more as an art, as a musician, than as a wallet nerd, 100%,” he says. “The math is the easy part. Figuring out if a company had a durable competitive advantage is much more nuanced and can’t be solved with a calculator.”
Swain says that adds up: “I have every confidence that our investment results with Andy will exceed that of other financial advisors we have used over the years.”
Whence the name “Highway 54”?
Texas State Highway 54, running virtually straight for 55.2 miles, stretches from the sparsely populated desert city of Van Horn to the equally small Pine Springs, Texas, at the base of the Guadalupe Mountains, the highest peaks in the state.
Austere, lonely and breathtaking, the ribbon between the two towns, settled in the 1850s, opens to wide-open vistas that evoke an Old West vibe of pioneers and promise.
Andy Lehman named the fund he manages after the highway after taking cross-country road trips with a former college suitemate.
“We both think it’s unbelievable,” the fund’s managing partner says. “It’s a two-lane with just unbelievable views, and there aren’t a bunch of exits and distractions once you’re on it. So it’s a long-haul type of thing. You’re investing for the long haul, and it’s a beautiful drive.”
Sources: Andy Lehman, Wikipedia, Trover.com
A sample of funds’ holdings
Highway 54’s Andy Lehman and FinTrust Income & Opportunity Fund’s John T. “Buddy” Mills are bullish on these sectors, with their primary holdings including, among several:
- Consumer cyclical: Defined as “durable and non-durable consumer goods that are affected by changes in the business cycle,” from companies such as airlines, automakers, apparel and other discretionary products)
- Financial services: Holding companies (think Berkshire-Hathaway), banks, asset management, credit services and the like
- Health care
- Real estate
- Communications services
Sources: Highway 54 Investment Partnership, Morningstar
About hedge funds
The hedge fund industry nationwide is valued at more than $3.6 trillion, with the total number of assets under management soaring more than 2,300% from 1997 to 2018.
In 2002, some 2,000 hedge funds were in business. At the end of 2105, that figure exceeded 10,000, but by 2017, the number dropped to around 9,750.
Characteristics of a hedge fund that differentiates the product from, say, a mutual fund:
- Most are open only to “accredited investors” — that is, those with annual income exceeding $200,000 or a net worth north of $1 million, excluding primary residence. (This doesn’t apply in the case of Highway 54’s partnership or FinTrust’s hedge fund; the former is open for investment only once a year, the latter trades on NASDAQ.)
- More latitude in investment strategies than other funds. Hedge funds can invest in anything from real estate to stocks, derivatives to local companies. Mutual funds essentially trade only in stocks and bonds.
- Some hedge funds use leverage — that is, borrowed money. (Highway 54 and FinTrust don’t.)
- Hedge funds generally charge higher fees. Most charge a “two and 20,” which includes a 2% fee for asset management and a 20% cut on any generated gains. (Highway 54 charges no fees unless the fund makes money.)