By Irwin Speizer
Photographs by Jonathan Sprague
When Jeff Osher was in college & developing a keen interest in the stock market, his father gave him a modest sum to invest. Osher scouted for an opportunity, ultimately settling on Xircom, a maker of modem technology. Seeking an edge, he badgered the company’s chief executive mercilessly, ultimately gaining an audience by finding a mutual interest in the leisure pastime of fantasy football.
Says Osher: “I’m convinced the only reason he took my calls was so we could swap stories on fantasy sports.”
Now running his own hedge fund, $321 million Harvest Small Cap Partners, which is part of his uncle’s JMP Group, Osher still relies on his knack for burrowing inside companies in search of nuggets of information that can inform his investments. While he no longer has to use fantasy sports as an entrée, he has found other ways to get past an executive’s voice mail.
Among his most effective methods of gathering information: Tapping his venture capitalist network for introductions and insights. Some 23 limited partners in Harvest Small Cap invest in emerging private companies that may one day go public, and these investors play a critical role in opening doors and providing context. These “relationships are very helpful in the way we view the world and very helpful serving as a sounding board when we think we may have identified an inefficiency in the way public markets view a trend, a company, a technology,” Osher says. “It is a perspective that a lot of other investors can’t recreate.”
Osher says his network of private equity investors and private company executives helps keep him one step removed from the public company officers who can be the source of insider trading information—a crucial concern given the recent indictment of Raj Rajaratnam, head of the technology-focused Galleon Group, on insider trading charges. “While there is always a risk of insider information being communicated (knowingly or unintentional), avoiding conversations or situations that can lead to that information leakage is the best solution,” Osher says. “And when you do get tainted, which all investors do from time to time, you must restrict yourself consistently to be sure you are never in harm’s way.”
About two-thirds of Osher’s focus is on tech companies, a large number of which are within a 45-minute drive of his downtown San Francisco office. That closeness has helped inform Osher’s investment strategy—and his strong returns. Pursuing long/short investments in companies with a market capitalization under $2.5 billion, Harvest Small Cap Partners averaged an annual net return of 22% from inception December 1, 2005, to July 31, 2009. In 2007 and 2008, Osher made a name by outperforming the Russell 2000. In 2007, the fund gained 28.75% vs. the Russell’s 1.57% fall. Last year, Harvest rose a remarkable 19.4% thanks to its short book, as the Russell slid 33.79%. (Harvest Small Cap was named Absolute Return Small Cap Equity Fund of the Year in 2008 and is nominated again in 2009.)
This year has put up more hurdles for Osher’s market-neutral approach, which typically calls for a gross exposure of 120% to 180% and a net exposure of roughly 10%. Unlike the trend chasers who rode this year’s stock surge to hefty profits, Osher has been left behind, posting a net return of 7.66% through September. By comparison, the Russell 2000 jumped 22.43% over the same time period.
Those who know the 32-year-old Osher describe him as a workaholic with an endless appetite for information. They also note that his conservative investment philosophy helps him limit exposure to potentially large losses but also keeps gains more modest. Osher closely limits position sizes and maintains clearly defined holding periods that typically run about four months.
“Jeff has always been extremely clear. Regardless of the up or down market, his goal is to make 15% year after year,” says Eric Garcia, a partner in San Francisco-based venture fund Lake Street Capital, who was an early investor. “I would much rather have Jeff’s approach, where I have more confidence of Jeff hammering out singles or doubles, than have him hitting a towering home run and then striking out eight or nine times.”
Osher was seeded by JMP Group and he keeps his office at JMP’s headquarters in the iconic TransAmerica building, the pyramid-shaped office tower in San Francisco. While the address might be impressive, the office interior is anything but. Casual and cluttered, the suite is populated by young men in chinos and open-collared shirts. Osher’s personal office is narrow, marked by a three-screen terminal on a desk piled with stacks of yellow legal paper scrawled with notes about various companies.
On the wall closest to his chair he has fastened a handwritten note with a nickel taped to it—the payoff on a bet with Alan Eichner, a fund investor, on where the stock market would be at the end of this year’s first quarter. Osher correctly called the market’s drop. He keeps the note and coin as a reminder of both his analytical ability and his conservative approach to risk. Although he was confident in his prediction, he was not willing to wager more than five cents.
On several occasions in an early September conversation, Osher pointed out that he is referred to in his family as the little brother. Although he is the oldest of five children, he is the shortest at five feet, nine inches tall. He is also the only one not to follow his father, the renowned eye doctor Robert Osher, into medicine.
Dr. Robert Osher designed implant lenses and developed widely used techniques for cataract surgery. His methods formed the basis for the Cincinnati Eye Institute, which counts hundreds of eye doctors throughout the Midwest in its network. Growing up in Cincinnati, Jeff Osher suffered severe allergies that required painful weekly injections of medicine. He recalls getting sweaty palms every Tuesday in his allergist’s office awaiting his turn at the needle, and he determined that he wanted no part of medicine.
Osher enjoyed debate in high school and from that experience decided to become a lawyer. He enrolled at Amherst College as a political science major. A capable athlete, he won a spot on the tennis team, but a knee injury required surgery and sidelined him before his first match. He came home after his freshman year, transferring to Miami University of Ohio, and in 1997 landed a summer internship in the legal department of American Financial Group, a Cincinnati insurance company. There he discovered that what interested him wasn’t the law but the way AFG invested premiums to generate profits.
As the summer wore on, Osher spent less time with the firm’s lawyers and more time hanging around the investment team, peppering them with questions about how they did what they did. Osher’s father encouraged his son’s interest by fronting him $5,000. A finance professor with a Bloomberg machine in his office allowed Osher access, and he began spending his free time trolling for investment opportunities. He ended up betting his entire stake on Xircom, then watched as the stock dropped to $10 from $13.
It was during this time that he made contact with the company’s CEO in an effort to gain enough insight to know what to do next. Those communications were enough to confirm Osher’s hypothesis: That Xircom had a solid relationship with Intel; that its main product, modems for credit-card transaction processing, were in demand, and that the company was well positioned for expansion. Osher stuck with the stock. Eventually, the company was purchased by Intel. Osher doubled his money and gained a valuable lesson in making and using contacts.
Among those Osher came to rely on for advice and guidance was his uncle, Joseph Jolson, who had been a top research analyst for Peter Lynch at Fidelity Management in the early 1980s and who was at that time a senior research analyst at Montgomery Securities, the boutique investment bank in San Francisco sold to Bank of America in 1997. Jolson had spent a decade on Institutional Investor magazine’s All-America Research Team (from 1986 to 1995), and he would prove to be a valuable mentor—and boss. Osher interned with Montgomery in 1998, working with his uncle in equity research.
Another important influence was his father’s financial advisor, Fred Dowd of Casper, Wyo., who ran an investment management firm popular with ophthalmologists. After Osher graduated in 1999, he joined Fred. L. Dowd Co. as a stock analyst and moved to Casper.
When working for Dowd, who managed about $400 million, Osher started his own investment club that included about $500,000 of his father’s money and investments from other friends and family members. Osher was developing a specialty in small caps, particularly tech companies, and that is where he placed all of his new investment club money. He doubled the investment in nine months, and then the dot-com bust hit. By October 2002, Osher had not only lost all those gains but about half of the original principal. Osher says he was too naïve to understand the concentrated risk he was taking.
“It is not until you suffer through some pretty brutal scars that you fully appreciate risk,” Osher says now. “I made a decision that this wasn’t the kind of investment profile I was comfortable with.”
Osher bounced back in 2003, picking stocks well enough to bring the investment club fund’s total return to about 5% from inception. In mid-2003, Osher closed the fund and returned assets.
While Osher apprenticed under Dowd, his uncle struck out on his own. Jolson left Montgomery to form JMP Group in 1999 as an investment advisor and consultant. He later formed a long/short hedge fund, Harvest Opportunity Partners, with about $10 million. When Jolson wanted to expand Harvest Opportunity by taking in outside investors, he hired Osher in August 2002 as a small-cap analyst. Jolson aggressively sought new investors and over the next two years increased assets to $550 million.
One of the key techniques Osher learned under Jolson was how to short stocks. Jolson ran a market-neutral pairing strategy, so that every long had to be matched with a short. Jolson could serve as a mentor and guide, but ultimately Osher had to discover for himself what worked and what didn’t. “If I had a good long idea, I was forced to come up with a short idea that I could pair with it. The framework of a market-neutral fund taught me invaluable lessons around how to short stocks, what causes existing investors to sell their shares, when to avoid crowded shorts. Like most core skills, learning to effectively short stocks was a process of many mistakes and experiences.”
By 2004, Osher began pressing for his own fund, but Jolson wasn’t quite ready to give his nephew full control. Instead, Jolson set up a new vehicle with three co-portfolio managers: Osher, Jolson and Kurt King, a JMP analyst. Harvest Small Cap Partners launched in August 2005 with $8 million. Any investment decision had to be approved by two of the partners, an arrangement that proved cumbersome. The fund turned in flat performance for most of 2005.
At the end of that year, Jolson and King ceded their roles in the fund. Jolson continued to manage his original fund, while King started Harvest Technology Partners.
Jolson encouraged Osher to find new sources of information that could help uncover hidden small-cap opportunities. Jolson had a few venture capital contacts, and Osher used those to start opening doors. He was persistent in his courtship, and used information as his coin—giving out as much as he took in. He not only built an informational network but also attracted funding from many of those same sources.
As Osher’s network expanded beyond venture capitalists, he developed an informational advantage. Jolson says what makes Osher successful as a hedge fund manager is his ability to cultivate sources, then to know how to use this intelligence to pick stocks.
“He does a really good job at digging up information from proprietary sources,” Jolson says. “Once you get that information, you have to interpret it as to what the impact will be on stocks. Sometimes that is just as hard as getting the information itself. I have trained a lot of successful fund managers. You can’t teach the intuitive part of it. You either have it or you don’t. He clearly has it.”
Once he was in charge of Harvest Small Cap, Osher set out with the dual goal of bringing in new money and posting solid returns. He spent considerable time composing his investment letters, where he laid out his philosophy of investment and risk management. His signature is the series of quotes that lead off his letters. One recent letter quoted the chairman of Cisco, the chairman of the Federal Reserve and the opening of the Twilight Zone television series, which taken together point to the confusing and contradictory economic signals during the first half of 2009.
Osher carefully monitors position sizing and time horizons, looking for clearly identifiable but not widely recognized catalysts that are expected to move a stock within a relatively short time frame. A fully expressed long position would account for 5% to 8% of the portfolio’s capital, while a full short position would run between 1% and 3% of assets.
Osher’s goal is to net 15% a year but initially it appeared that he might have trouble meeting thatgoal. From January to March 2006, his first full quarter running the fund, Osher lost 2.7%. But he remained confident that his methods would play out. In April 2006, the fund rose 3.64% and the next month it netted another 3.11%. For the year, Harvest Small Cap gained 22.67%, while the Russell 2000 index was up 18.36%. Osher’s fund did similarly well in 2007 and 2008. He lost money on his long positions in 2008, which were down 26.93%, but his shorts yielded a whopping 46.33%. Last October, during the market’s free fall, Osher’s gross exposure sank to 105%. Harvest delivered those returns while maintaining a fairly low risk profile. His Sharpe ratio was 1.79 from inception to July 31, 2009, while his Sortino ratio, another measure of risk-adjusted return, was 3.98.
The results and risk profile attracted investors. Harvest Small Cap hit $100 million by the end of 2006 and $150 million by the end of 2007. In June 2008, the fund reached $200 million and Osher closed it to new investment. He says he had watched too many managers grow too fast only to find themselves unable to effectively manage strategies with bigger piles of cash. He says he needed to make sure his methods were scalable, particularly as the assets grew and required more investment ideas.
“At the time we closed, we had the most demand from investors we had ever had,” Osher says. “With two marketing trips, I could have been a billion dollar fund. To be 30 years old and run a billion dollars—why not? The problem with many successful hedge funds is that asset growth frays operations and the underlying strategy. At some level, my fund will fray. It is inevitable. I didn’t know where that is. I didn’t want to find out the hard way. So I closed the fund to new contributions.”
Osher also made a decision to stick with smaller investors instead of courting large, institutional players to help avoid a major disruption if a few big investors were to redeem at once. Although institutions were not lining up to give him money at the start, by the summer of 2008 he was generating interest from larger entities. Today, Harvest Small Cap has one investor with a $45 million commitment, but the average limited partner has committed $3 million to $4 million.
When hedge funds got hit with the big investor redemption run of late 2008, Osher figured he should have a cushion in case he was affected as well. In January 2009, he reopened the fund, raising the lockup period for new investors to two years from the previous one-year period. The longer lockup didn’t dampen interest, and he took in another $72 million before closing the fund again in February. Meanwhile, the big redemption run never materialized: Investors withdrew out $6.8 million in all of 2008 and $27 million thus far this year.
While Osher is cautious in talking about specific positions, he offered a few examples to highlight the investment style that investors have found so attractive. In June 2006, Osher invested in the initial public offering of Synchronoss Technologies, a Bridgewater, N.J., company that provides software to help manage electronic transactions. Other analysts at the time viewed Synchronoss as vulnerable because it depended on a few large customers (particularly cell phone companies) for most of its revenue. Conventional wisdom held that a customer like Cingular could develop its own software and drop Synchronoss.
Osher mined his stable of venture capitalists, who steered him to two private firms operating in the same general software and telecommunications fields. They told Osher that the cellular operators doing business with Synchronoss simply did not have the engineering capability to recreate what Synchronoss offered. Instead of being vulnerable, Synchronoss appeared to have a clear path to growth.
Osher bought Synchronoss when it hit the market as an IPO in June 2006 at $6.95 per share. The stock gained more than 30% in next quarter, but Osher stuck with it sensing Wall Street still had not recognized the full growth potential. The stock was trading in the mid-$30 range when Osher closed out his position in 2007.
Another contrarian play that paid off was Netflix, a long bet made in early 2008 when its shares were trading in the low $30 range. At the time, much of Wall Street viewed Netflix as being in trouble because of its decision to lower prices in its battle with Blockbuster for market share. While others were shorting Netflix, Osher stuck with his long position, based in part on his analysis that Netflix’ management was savvy enough to prevail. Also, Osher had learned from his tech network that Netflix was poised for expansion as a result of technology that would allow Netflix to embed its online video software into new consumer electronic devices. It took longer than he expected, but Netflix ultimately came around. Osher exited the stock in the first quarter of 2009 at $42 to $48 per share.
Osher’s style of probing for undiscovered catalysts that can influence the performance of a specific company haven’t fared as well during the recent market rally, when stocks rode a broad upward trend. Osher has resisted the temptation to hop aboard, insisting that much of the rise has come from companies that don’t merit the support. To join the wave, Osher says, would require him to buy companies that he believes are rising for no other reason than that the general market is on the upswing.
“I have a saying that I fall back on: Don’t do anything that you can’t explain to your investors in a letter,” Osher says. “There is no way I can tell them I bought a company we thought was worth five and bought it at eight because it looked good on a chart, and it was going up. I can’t do that. There are times when you realize your core skill set is not going to get you paid, for whatever reason.”
Osher’s quick advance has clearly been aided by his family connections and money. But ultimately his success has depended on his own skill as an intelligence gatherer and stock picker. It is those traits that have won him the loyalty of his investors, who say he has proved himself. “He is extremely smart and very, very hardworking and conscientious,” says Joe Horowitz, general partner at Jafco Ventures, a venture fund in Palo Alto, Calif. “Beyond that, some people have a feel and grasp for what are the variables that are going to influence a stock. He has that.”
As the fund grows, the big challenge for Osher will be to prove that he is as good at managing a business and growing staff as he is at picking stocks. On the investment side, he relies on two analysts (Dan Mazur, who arrived in 2004, and Emerson Whitley, who Osher hired in June 2008) and a head trader (William Scott, who joined in April 2008).
Osher is now patiently waiting for a little less investor exuberance toward equities and a market environment that will be more amenable to his methodical analysis to pick winners and losers. He continues to spend his days searching for investment opportunities.
Says Osher: “I’m a big believer that consistent good luck and timing comes to smart people who work really hard.”
