Harry Rady Online – San Diego, CA

Ernest Rady, the father of Harry Rady of Rady Asset Management, continues a trend begun in the late 1990s of charitable giving, according to Bob Kelly, president of The San Diego Foundation.

The $60 million donation by Ernest Rady creates a new reality for San Diego County as far charitable support is concerned.  “We have jumped into the big leagues of charitable giving,” said Kelly.

According to Donald Fellows of Marts and Lundy, a New Jersey-headquartered fundraising consulting firm to nonprofits, San Diego is finally showing signs of growing up as far as the city’s philanthropic community is concerned.

“It was sort of like San Diego hadn’t grown up yet from a philanthropic standpoint,” said Fellows. “That has clearly changed.”

The father of Harry Rady of Rady Asset Management is a well known businessman and philanthropist in San Diego County. Ernest Rady donated $60 million to San Diego’s Children’s Hospital and Health Center in June of 2006. This gift ranked among the ten largest donations in San Diego history.

San Diego is hopeful that this donation will be the spark to light a new wave of large donations into the San Diego region.

Rady has given generously in the past. The University of California in San Diego was the recipient of Rady’s largesse in 2004 in the amount of 30 million dollars, and created the Rady School of Management.

Rady Children's Hospital

Rady Children’s Hospital and Health Center located in San Diego, California, acts as a safety net medical center for the region.  Children with little or no medical insurance are not turned away from Rady Children’s Hospital and more than half of the children they serve are in this category.

Rady Children’s Hospital is the teaching hospital for UCSD School of Medicine as well as for the Navy. The hospital also acts as the region’s major clinical research facility. Pediatric subspecialties are available at the hospital including Hematology/Oncology, Cardiology, Cardiovascular Surgery and many others.

Harry Rady, of Rady Asset Management is active in support of philanthropic activities at Children’s Hospital, including being on the Investment Committee of the Children’s Hospital and Health Center.

The following article was written by Harry Rady and originally appeared in the 19-25  March, 2009 issue of HFMWeek.com.

Let’s face it, the last six months have been miserable for investors, and even good investment managers haven’t slept well recently. But, investors have learned much over the past year, and many now realize there is often an unnoticed, inherent conflict of interest between investor and money manager.

“What has become all too common is for managers to perform in line with an index or to experience wild swings. This is an incomplete strategy”

When times are good and the market is moving up at a steady pace, investors tend to become complacent and ignore many potential risks. When the market, however, turns down and things get tough, investors get scared and start to ask the questions they should have asked long before making their investment decisions.

To at least ensure greater protection moving forward, investors need to start asking a very key question: “Do you (the investment manager and/or employees) have the majority of your net worth invested in the fund where you want me to put my money?” The answer, of course should be “yes”. Investors want and need to be in the same entity that the manager is using to calculate his/her composite returns.

Most managers who have had solid performance – and believe in their future risk-adjusted return prospects – will have most of their own money in the fund that the investor is considering. This shows a commitment to the investment strategy and also makes sure the manager feels the “pinch” along with investors when times are tough. It also demonstrates a greater focus on risk management, as opposed to always swinging for the fences.

Another potential benefit of this “alignment of interests” strategy is the incentive for the manager to focus on the tax consequences of trading and turnover ratios. For investors, it is after-0tax returns that really matter.

Another key metric for investors, which will give them a clear understanding of whether the manager has the shareholders best interests in mind is the upside/downside “capture” ratio. This ratio lets investors know how much real risk the manager is taking to generate returns. The higher the upside capture – the greater their returns; the lower the downside capture -  the lower the losses and risk.

Ideally, investors want to look for a combination of low downside capture along with high upside capture. The ratio gives the investor a powerful historical understanding of a fund’s risk/reward profile. Investors should look at at these metrics in the context of prior periods to see how they performed in different market environments.

What has become all to common is for managers to perform in line with an index or to experience wild swings. When markets are good, they outperform; when the markets turn negative they substantially under-perform.  This is an incomplete strategy. The focus should be on asymmetric risk/reward ratios in every type of investment. The best opportunities exist when securities are ignored or investors are too pessimistic about their potential. Some of the most viable investment opportunities exist when funds are able to purchase securities ignored by most investors.

The idea of following the herd and chasing returns always catches up with managers and their investors. If anything, we’re seeing that it pays to be a contrarian. A contrarian approach leads to attractive upside/downside capture ratios, which again, is an effective way to demonstrate risk adjusted returns.

Finally, it is also important for a manager to have a long term track record. This lets an investor know that the have experienced different market cycles and are not just getting lucky at a particular time in the cycle. In addition, the investment strategy must be transparent, easy to understand and repeatable. Most investors should not invest in highly levered, esoteric strategies unless they are truly disposable assets.

A core portfolio needs to offer the potential for consistent returns and must have the flexibility to be both long and short during volatile periods, giving managers the flexibility to protect the portfolio, while still capturing the upside.

Protecting the portfolio, of course, is key. Unfortunately, many investors have been learning that lesson the hard way. Moving forward, it’s abundantly clear that the unnoticed conflict between the money manager and the investor can no longer exist. And by the way, ask the manager if he’s getting a good night’s sleep.

Harry Rady is CEO and portfolio manager of Rady Asset Management, a long/short equity fund based in San Diego, CA.

Founded in 1954, Rady Children’s Hospital and Health Center states its mission being “to restore, sustain and enhance the health and developmental potential of children” achieving this “through excellence in care, education, research and advocacy.”

Rady Children Hospital & Health Center is the regional pediatric medical center serving San Diego, and Imperial & south Riverside counties. Each year the Children’s Hospital cares for approximately 100,000 children who are provided medical care (both at the main campus or at one of its 28 satellite facilities).

Harry Rady is active in residential real estate development and trustee sales, asset and investment management, and he currently heads Rady Asset Management, a financial services conglomerate.

Rady is a very active philanthropist. He is on the Children’s Hospital and Health Center’s Investment Committee, and also one of the directors of the California Board of Child Help USA. Additionally, Harry Rady is on the Dean’s Advisory Council for the Rady School of Management at the University of California San Diego, where he is also a member of their Executive Mentor Program.