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the managers communicating or sharing information. He wants to keep them separate. Managers have the choice of being located in the Greenwich headquarters or wherever else they want. As a result, about six are in Greenwich. One division is in Melbourne, Australia, and another is in Seattle. "Risk management is here [in Greenwich]; trading centers are everywhere. It is only relevant that the trader be based where he or she can be most productive," says Sussman.

Sussman acknowledges that at some point diversification has limits (i.e., overlaps may exist in portfolios between the managers). If overhead isn't high, the additional manager is worth it. If overhead is high, the additional manager is not worth the expense.

Today, Sussman is very interested in statistical arbitrage and feels this is the area where growth will occur. Statistical arbitrage uses highlevel mathematics to trade large baskets of related securities. The three new allocations will be to statistical arbitrage managers. He feels that if these strategies work, it will expand overall capacity of the firm by several hundred million dollars.

Sussman says the statistical arbitrageurs can reap some of the profit made by the market makers and specialists. "They have 10,000 orders in the system and monitor them all and can be the bid-ask spread in any one of them. If they don't like how it's going, the manager can pull out." By replicating the role of the specialist, these arbitrageurs can earn extraordinarily good profits, with little leverage and volatility.

Among Sussman's successes has been his relationship with David Shaw of D. E. Shaw Investments. Back in the late 1980s, when Shaw had just a dream but no track record, Sussman was the first to give him the research and development funds to create a business and was his primary backer. Sussman benefited for many years. In 1998, however, when Paloma was down about 20 percent for the year, much of that loss was a result of the investment with Shaw. Sussman still maintains an account with Shaw, but Shaw has refocused out of fixed-income arbitrage and into convertible arbitrage and statistical arbitrage. Andrew Lo from M.I.T. (where he heads the Laboratory for Financial Engineering), who joined Paloma in 2000, is now trading a statistical arbitrage strategy. Sussman believes this may be the next big advance in computerized trading techniques.

Interestingly, Sussman has been the first investor of a number of the other superstar managers interviewed in the book. In addition to allo-