The Manhattan fund's founder speaks to Anthony Malakian about the challenges of starting out in the industry, his relentless search for talent, and the role technology plays in Lincoln's daily activities.
Bunkered down on the 10th floor of a Park Avenue office, Stephen Temes has built Lincoln Capital from a one-man shop into 14-man strong operation. Photos by Amy Fletcher
After the September 11 attacks, Stephen Temes decided to quit the trading business. He had gone to too many funerals and had spent too many 16-hour days sitting at his desk looking at a computer screen. Temes, who prefers to be called Steve, didn’t exactly enjoy shorting a market that was suffering. He understood that it was business, but he needed a break.
So, Temes, who was then a successful trader for Wachovia, chartered a plane—he was afraid of flying commercially—down to Wachovia’s headquarters in Charlotte, North Carolina, to broker a deal with the powers that be. He told them that they could keep the index options business he had created at Oppenheimer years earlier, and which he brought with him to First Union National Bank, which merged into Wachovia. Wachovia could keep the business and everybody there, but he wanted out and was simply looking for a release from his contract. He liked the folks at Wachovia and it was an amicable split—he even later worked as a consultant for the bank—he just needed some time off.
From there, Temes kicked around a bit, spent some time in the Caribbean and cleared his head. But after a while, he grew tired of doing nothing. He started to get bored and antsy, and started thinking—it was the spark that ignited what was to become Lincoln Capital.
From the Ground Up
In its early years, Lincoln Capital might have just as easily been called Stephen Temes Trading. Even now, eight years later with a staff of 14 and offices in New York and Miami, it might still go by the Stephen Temes moniker, although that doesn’t have the same cachet as the nod to Honest Abe.
Temes started Lincoln with his own money. Having worked on big trading desks, he knew how important it was to come across as genuine as possible. To help grow his business he called in some favors: He had helped a lot of clerks over the years while working for those bigger firms and had no problem saying, “I helped you make some money, now you help me.” From the beginning he ran it as his own small business—an acutely fierce business.
“I’m a very aggressive trader—I’m an in-and-out guy,” Temes says. “I call myself an event-driven or catalyst-driven trader because I never buy a stock just because it’s cheap; that’s not what I do. There has to be some reason to be in it.”
Temes kept Lincoln small—that is to say, a team of one—for a while before he decided it was time to grow. A friend of his who was working at a New York-based hedge fund and looking for a change wanted to buy in as a partner rather than jump ship to a similar position at another firm. Temes felt the time was right and the partnership route was the way to go. This philosophy hasn’t changed; everyone who works at Lincoln has some skin in the game and is a partner.
And the name of the game is trading. About three-quarters of Lincoln’s staff are traders and it’s an eclectic group that employs different strategies, but they all have a similar mindset.
“The whole idea of this was to get a room full of really smart guys who think like me—some of them are longer-thinking, some of them are shorter-thinking, some of them know material, some of them know small-cap,” Temes explains. “Whatever the mix, I know that if I can get these guys into the fund, I can make a ton of money off their ideas; if I can have everybody working and gelling together, then everybody will make money with each other.”
Code My Mind
Just because Lincoln is small and its lone “technologist” is a trader who writes code, doesn’t mean that Temes doesn’t appreciate technology. He’s in business to make money, and for a fund like Lincoln, it’s not necessary to spend more capital on a larger IT staff. Temes wants to attract the best and the brightest traders; he’ll allow the specialists in technology to provide the nuts and bolts.
One of his firm’s greatest technological challenges is evolving with the growing number of algorithms currently in the market. Temes uses algos handed down from brokers—such a volume-weighted average price (VWAP) strategies, algorithms that use “participate with a percentage of volume” strategies, or those where he is always on the bid side but takes offers when they come up, although he has to be perpetually on guard against competitors gaming his algorithms.
“You have to really keep ahead of the curve,” he says. “When you start to see your orders being gamed or when things change in algorithms, you’ve got to quickly make changes. There are programs that are out there that look for my order and know to shoot against it.”
Even though Lincoln’s technology might appear fairly vanilla, aggressive trading is what Temes specializes in, even though he understands that technology allows him to trade with controlled, focused aggression. He sees technology as a medium to manage risk and—most importantly—remove the emotion from trading. More specifically, Temes wants to be able to take his thoughts and put them into technology, sans the heart.
“Taking emotion out of the game is very important to me,” he says. “That’s why I’m a big fan of technology. I now have some programmers working on a project where an engine can analyze my strategy in terms of how I look at a stock and how I decide to buy things, and translate that into code. My first idea was to select 5,000 stocks and for the program to spit out the ones that meet this criteria.”
Temes says he’s next going to look to turn it into a black box solution, which is fully automated and sprays out trades based on his trading criteria, or at the very least a gray box solution that allows for more manual automation, where the user can adjust the parameters.
At first glance, it may sound like Temes is a cowboy—a cold-blooded trader looking to make a quick buck. It’s true that his job is to make money, because, as he says, “If we’re not making money, we’re not in business.” But when you ask Temes what keeps him awake at night, the quick response is risk management.
“Without risk management, people can’t have a business,” he says. “It never fails—if I get brave and break my own personal risk profile, I’m going to lose because I can’t stay with something if I’m wrong.”
Temes was born in California but grew up in Louisville, Kentucky. After high school he attended Tulane University, where he graduated with a degree in business. Immediately following his graduation, Temes put rubber to the road and left for New York. He was chasing a dream. “Obviously, I wanted to work on Wall Street but I didn’t know what that meant at all,” he says.
With no family living in the city, he slept on the floor of a friend’s studio apartment. Temes spun his wheels for a while but wasn’t getting anywhere because he didn’t understand the business of Wall Street. Eventually, though, it clicked that he wasn’t being aggressive enough. For a kid who ditched the South for the bright lights of the big city, that was a bit jarring, but he knew he had to up his game. So Temes called his mother and said he needed a little start-up capital. He took those funds and invested them at men’s clothing store Brooks Brothers, where he bought a gray suit, two shirts, two ties and two pairs of shoes.
Next, he grabbed a phone book and ripped out the pages for brokerage firms—remember, this was before the ubiquity of search engines—and began cold-calling. Amazingly, the strategy worked: By the B’s he got a bite—Butcher and Singer. He’d done it. He’d gotten a job on Wall Street.
Movin’ On Up
After a short stint at Butcher and Singer, Temes moved to Oppenheimer, which is where he finally broke through. But there was a moment when he considered leaving Wall Street a defeated man. “Really, I had no idea what I was doing, selling, saying, whatever. It was very difficult and I was about to give up,” he says.
But he held strong and his break came in the form of a random phone call from a contact at a Louisville insurance company. “The caller said, ‘I’ve been set up to run a small options portfolio; can you put me in touch with the options department?’ I said, ‘You’re talking to the options department,’” Temes recalls.
He began to learn the options business and parlayed that experience into what would be his greatest pre-Lincoln accomplishment—starting Oppenheimer’s index options program. Temes eventually rose to the level of partner at the firm when it was bought by Canadian bank CIBC, which was the beginning of the end for that phase of his career.
“It became very difficult,” Temes says. “Banks, especially Canadian banks, have a dim view about people like me with my kind of pay structure, where the chairman of the bank is paid less than me. So basically, they changed everything and I left.”
He took his Rolodex to First Union National Bank—which eventually merged with Wachovia—where he worked until his Lincoln days began.
Temes has been known to get antsy—it’s what led him from Butcher to Oppenheimer, from CIBC to First Union, from Wachovia to hiatus, and from the Caribbean to Lincoln. Still, you don’t get the feeling that Temes is anywhere near ready to hand Lincoln over to an outside investor.
He learned after the market crash of 2008, where numerous funds went to the wall, that his firm benefited from being small. If the market flat-lines, Lincoln can get liquidly flat in a short amount of time, he says. And the regulatory environment that arose from the turmoil can only help a firm like Lincoln.
“It’s an advantage for me that prop-trading desks are coming to an end,” he says. “It’s good for someone like me because I have experienced guys who have already made a lot of money and want to march to the beat of their own drum within an established institution.”
You might think that a hedge fund manager who has often employed short-selling strategies might be wary of—or even militantly against—a regulatory overhaul, but Temes sees the need for a more prescriptive regulatory framework. He says it’s necessary, as evidenced by the fact that there was an over-the-counter (OTC) options market that nobody knew about. Temes adds that he’s still often left scratching his head at some of the regulatory proposals, but he has faith that the extremes of regulation will always be defeated. Additionally, while he’s an “in-and-out” trader, he says that those high-frequency proposals being bandied about do not affect what he does.
And no matter the whim of regulation, Temes has no plans of leaving the game again anytime soon. Granted, there is some practicality to that: “I probably couldn’t do much else; this is all I know how to do,” he says.
But the love is still there, too. When Temes tells me that he still gets a rush from making money and that he still gets a rush from trading, I skeptically ask: “Still?”
I should’ve expected the response: “Oh yeah; every day!”
STEPHEN TEMES FUNDAMENTAL DATA
Young Entreprenuer: At Tulane, Temes established a couple T-shirt businesses. He reinvested those profits and began trading options on the Chicago Mercantile Exchange, where he had an account. To pass the time, he would watch the market with a few of his friends and trade. It’s an infinitely more productive endeavor than playing ultimate frisbee.
The Tulane Pipeline: Temes says several employees at Lincoln are Tulane grads. Just last year he hired four Green Waves.
The reason that Temes stays close to his alma mater is because word-of-mouth matters a lot when he looks to grow his staff. While he acknowledges that he could put an ad out on Bloomberg and get 10,000 responses, with many qualified applicants, word-of-mouth and recommendations from people he trusts will help ensure that a new hire will hit the ground running.
“I’m very picky about who I hire,” Temes says. “Look, we’re a group. It’s all for one, one for all. We’re all partners. It only works for me if I get the best people.”
Death Knell for Hold-and-Wait Trading: Temes believes that 2008 was the final nail in the coffin for hold-and-wait trading. He says there are too many things changing in the world and there are too many risks to hold positions. He points to his firm’s ability to stay agile as a reason for its weathering of the financial crisis.
Comfort Matters: Sometimes vendors work too hard to make a sleek-looking product that serves as a panacea. Temes says that for what he does—and this is true of many small and mid-sized hedge funds—being comfortable with the technology and not being seduced by a new design is important.
If one was to look at Temes’ desk today and compare it to what it looked like eight years ago, not much has changed. Even his computer’s desktop hasn’t changed. “If I need to look at something I know exactly where to look. If I sit somewhere else and it’s garbled, I’m lost; it’s over for me,” he says.
Anthony and James delve into how the systematic internalizer regime is shaping up, and then examine the regtech sector.Subscribe to Weekly Wrap emails