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vestment category includes a small investment in the Cathay Fund (less than 1 percent of aggregate capital).

In 1990, Sussman founded London Global Securities, an independent securities lending firm, to service the internal convertible bond managers and to assist in trade financing, while generating revenue for the fund through third-party fee income from securities lending. In 1997, LGS was sold to Donaldson, Lufkin & Jenrette, although Paloma remains in the securities lending business primarily for its internal traders.

FEES

While Paloma has been criticized for its fee structure in a 1999 business publication,1 Sussman maintains that the fees are considerably lower than those of a fund of funds. Paloma charges a management fee of 1.5 percent of assets as long as the fund is profitable on a rolling 12-month basis. The underlying managers typically are paid 20 percent of net profits, subject to a hurdle and loss carryforward. Sussman does not share in the incentive compensation.

TRANSPARENCY

Paloma provides taxable clients and non-U.S. clients with monthly reports. U.S. tax-exempt clients receive quarterly reports. Sussman actively discusses the portfolio with clients, including percentage capital allocation to strategies, balance sheet leverage on the overall portfolio and by strategy, number of trading positions overall and by strategy, average static returns and hedge ratios on the convertible book (broken out by the United States, Canada, Japan, and Europe), and year-to-date profitability attribution by strategy.

Sussman is willing to sit down in Greenwich with any client and review the specifics of trading, the allocation process, and strategies.

PAST AND FUTURE

Sussman was a convertible bond trader at a brokerage firm in the late 1960s. He understood the return/risk characteristics that were appropriate for wealthy individuals. Whereas most wealthy investors used municipal bonds, Sussman felt that convertible arbitrage was superior.