NY Times on Hedge Funds and Charters

December 6, 2009

Scholarly Investments

By NANCY HASS

THEIR company names were conspicuously absent from their nametags, but that is how these hedge fund managers and analysts — members of a field known for secrecy — preferred it. They filled the party space at the W Hotel on Lexington Avenue in late October, mostly men in their 30s. Balancing drinks on easels adorned with students’ colorful drawings, they juggled PDA’s and business cards, before sitting down to poker tables to raise money for New York City charter schools.

Working the room, the evening’s hosts, John Petry and Joel Greenblatt, who are partners in the hedge fund Gotham Capital, had an agenda: to identify new candidates to join their Success Charter Network, a cause they embrace with all the fervor of social reformers.

“He’s already in,” Mr. Petry said as he passed John Sabat, who manages a hedge fund for one of the industry’s big stars. (Like Voldemort in the Harry Potter novels, no one in the group would name him aloud.)

“I wasn’t hard to turn,” said Mr. Sabat, 36, whom Mr. Petry drafted last year to be a member of the board of Harlem Success Academy 4, on East 120th Street, the latest in its network of school in some of the city’s poorest neighborhoods. Boards agree to donate or raise $1.3 million to subsidize their school for the first three years. “You can’t talk to Petry without taking about charters,” Mr. Sabat added. “You get the religion fast.”

Mr. Petry, 38, and Mr. Greenblatt, 52, may spend their days poring over spreadsheets and overseeing trades, but their obsession — one shared with many other hedge funders — is creating charter schools, the tax-funded, independently run schools that they see as an entrepreneurial answer to the nation’s education woes. Charters have attracted benefactors from many fields. But it is impossible to ignore that in New York, hedge funds are at the movement’s epicenter.

“These guys get it,” said Eva S. Moskowitz, a former New York City Council member, whom Mr. Petry and Mr. Greenblatt hired in 2006 to run the Success Charter Network, for which they provide the financial muscle, including compensation for Ms. Moskowitz of $371,000 her first year. “They aren’t afraid of competition or upsetting the system. They thrive on that.”

Hedge fund managers may be better known for eight-figure incomes with which they scoop up the choicest Manhattan penthouses and Greenwich, Conn., waterfront estates. But they also dominate the boards of many of the city’s charters schools and support organizations. They include Whitney Tilson, who runs T2 Partners; David Einhorn of Greenlight Capital; Tony Davis of Anchorage Advisors; and Ravenel Boykin Curry IV of Eagle Capital Management.

The Tiger Foundation, started by the hedge fund billionaire Julian Robertson, provides a large chunk of financing for several dozen charters across the city. Mr. Robertson’s son, Spencer, founded his own school last year, PAVE Academy in the Brooklyn, while his daughter-in-law, Sarah Robertson, is chairwoman of the Girls Preparatory Charter School on the Lower East Side.

The Robin Hood Foundation, the high-profile Wall Street charity founded by Paul Tudor Jones II, a legendary hedge fund manager, considers charter schools “right there at the top of our list of priorities,” said Marianne Macrae, a spokeswoman.

Ms. Macrae said that the foundation has given more than $150 million to schools and management organizations, especially in New York, over the last decade.

“If you’re at a hedge fund, this is definitely the hot cause,” said Joe Williams, the executive director of Democrats for Education Reform, a nonprofit group that lobbies for charters and is financed by hedge fund heavies. “These are the kind of guys who a decade ago would have been spending their time angling to get on the junior board of the Met, the ballet.”

That hedge fund multimillionaires have embraced the charter movement may seem odd: their own children are unlikely ever to see the inside of a neighborhood school, and there are more traditional routes to social prominence through philanthropy, like support of hospitals and cultural institutions. But to those who know the sociology of Wall Street, it makes sense. Charter schools appeal to the maverick instincts of many who run hedge funds.

Younger on average than top executives at financial giants like Goldman Sachs and Morgan Stanley, hedge fund managers are often numbers-driven refugees of those banks, who chuck the suit and tie and work with a small staff, studying spreadsheets for investment opportunities.

“At heart we are still the kids who in eighth grade were in the backyard doing science experiments while the cool kids were at football practice,” said Mr. Curry, 43. “We’re the kind of people who could never survive in the slick political environment of an investment bank.”

The claim of Mr. Curry to nerdiness is undercut by the fact he is married to Celerie Kemble, a Palm Beach-raised decorator and socialite, and is partners in a planned Caribbean resort with Moby, Richard Meier and Charlie Rose.

Still, Mr. Curry has been “knee deep in educational issues” since his 20s, he said. He co-founded two Girls Prep schools and is head of the board of the newer one, in the Bronx. The schools are “exactly the kind of investment people in our industry spend our days trying to stumble on,” Mr. Curry said, “with incredible cash flow, even if in this case we don’t ourselves get any of it.”

The reference is to the fact that New York State contributes 75 to 90 percent of the amount per student that public schools receive. State law mandates that each charter have its own board, and the need to recruit trustees, including many from Wall Street, has turned “a group of unlikely people into an army of foot soldiers for the movement,” said Joel I. Klein, the city’s schools chancellor, who along with Mayor Michael R. Bloomberg is a strong charter-school advocate.

The mayor has asked the State Legislature to nearly double the number of charters allowed in the city, to 200, over the next four years. Although the New York charity world trembled last year as financial firms bled — the Robin Hood Foundation’s annual gala raised a disappointing $56.6 million in 2008, 21 percent less than the previous year — Wall Street, and its expected bonuses, are back in a big way. (Robin Hood raised more than $72 million at its auction this spring.)

Across the country, charters are a focus of debate, often bitter, over their hiring of nonunion teachers, experimental curricula and potential siphoning off of motivated students. In New York, space issues have exacerbated the conflict. The city allows some charters to share space with under-used public schools; the new desks, computers and small teacher-student ratios paid for by private donors draw envious stares. There have been protests in some neighborhoods.

“I think it’s all good and well that these people are finally stepping up to support education,” said Michael Mulgrew, president of the United Federation of Teachers, referring to wealthy hedge funders. “But I would wish they would do it in a more foundational way, a way that would help all the children instead of just a small group.”

Charter schools often have a longer school year, Saturday classes, uniforms and a passion for measuring results. Most of them are in the city’s poorest neighborhoods and admit children by lottery. Approximately 30,000, or 2.5 percent of the city’s public school students, attend charters, although in Harlem and parts of Brooklyn the figure is closer to 20 percent.

The schools present the kind of opportunity that “electrifies” hedge fund managers, said Mr. Tilson, 43, who is on the board of the Knowledge Is Power Program, which manages charter schools around the country. A founding member of Teach for America in the late 1980s (before earning an M.B.A.), Mr. Tilson also blogs about charters at edreform.blogspot.com. “It’s the most important cause in the nation, obviously, and with the state providing so much of the money, outside contributions are insanely well leveraged,” he said.

Charter schools’ reliance on metrics and tests to measure progress is another attraction for hedge funders. Mr. Petry, who cultivates a schlumpy aura that is more headmaster than Master of the Universe — he carries an eight-year-old Blackberry the size of a Stephen King paperback stuffed in a nylon backpack and favors fleece pullovers — said he reads spreadsheets of education statistics as much as those for new investments he’s chasing. “I can’t understand how anyone could look at the raw numbers and not see what’s at stake,” he said during an interview in a restaurant near the Upper West Side apartment where he lives with his wife, a former teacher, and three young children.

Whether charters do a better job of educating children, even with the extra help from private donors, is much debated. A study released in September by researchers headed by Caroline M. Hoxby, an economist at Stanford who is a fellow at the Hoover Institution, concluded that on average New York City charters outperform local schools. But another study by a different group of Stanford researchers last summer suggested that nationally the numbers are muddier.

The idea that eventually their schools might be “scalable,” that is, provide a model that could be rolled out in many communities, also excites the hedge fund crowd. “The underlying drive is to build something that can spread, can be recreated in different cities; otherwise it’s not as meaningful to us,” Mr. Petry said.

He said the most important thing he learned tutoring illiterate adults after graduating from the University of Pennsylvania was that “helping the world one person at a time just isn’t for me.”

In addition to raising money, charter school boards, which also include educators and community activists, evaluate test scores and curriculum approaches, oversee budgets and develop teacher hiring protocol, said James Merriman, chief executive officer of the New York City Center for Charter Schools, a nonprofit group that offers planning and grants to those thinking of starting a school.

“It takes a lot more time and energy that being on the junior committee of an art museum,” he said.

The workload didn’t scare off Robert Reffkin, 30, a vice president in the private equity department of Goldman Sachs who is chairman of the board of the Success Charter Network’s newest school, scheduled to open in the Bronx this summer pending state approval. It took only a week for Mr. Reffkin, who jokes that in charter circles working for an investment bank makes him a rebel, to recruit a half-dozen of his friends from banks and hedge funds, all between 25 to 32, to join his board. All have pledged $50,000 a year for three years.

Mr. Reffkin, who was raised poor by a single mother in Oakland, Calif., and says he aspires to run for city office one day, considers charter schools “the civil rights struggle of my generation.”

Persuading pals to join his school’s 13-member board was “much, much easier than it would have been convincing them to give half as much to, say, a mainstream cultural institution,” he said. In October, his board rounded up 400 contributors for a $125-a-head fund-raiser for the school at the nightclub 1 Oak, with music by DJ Cassidy and D-Nice, an event intended to recruit other young financiers to the cause.

“In the past, we’ve had one or two big hedge fund guys footing most of the bill for each school,” Mr. Reffkin said. “But now enough of my peers in this industry who may not have the money to carry the whole thing understand what’s at stake and what the return can be.”