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internal multistrategy investment pool that is managed by the investors' representative, Sussman, not the manager.

Quantitative and qualitative factors are used. Paloma does credit analysis on securities and counter parties but is quantitatively driven for actual selection.

Are there maximum limits a manager can be allocated? There are no formal written rules, but generally Paloma does not allocate more than 5 percent of its capital to a manager.

A substantial majority of Sussman's liquid net worth is in his funds. Over 10 percent of the overall Paloma portfolio assets are insider capital.

GROWING EMPHASIS ON STATISTICAL ARBITRAGE

When Sussman started Paloma, the business was a fund of funds and allocated 100 percent to convertible arbitrage. Allocations were made to two managers—Paul Singer's Elliott Associates and Princeton/Newport Partners. The focus of both was convertible arbitrage. At that time, Elliott was a relatively conservative convertible bond arbitrageur and Princeton/Newport Partners was more leveraged, using more aggressive instruments. By late 1985, Paloma was allocating to about 16 managers. Sussman started to prune them and bring management in-house.

Over the years, Sussman added other market neutral strategies based on where he saw the opportunities. In the mid-1980s, merger arbitrage became a large percentage of the portfolio. By 1987, the profits in merger arbitrage strategies were dwindling and Sussman closed out this exposure by the end of September 1987. Two weeks later, the crash occurred.

Today, Paloma's three largest strategies are convertible arbitrage (42 percent) in the United States, Canada, Europe, and Asia; merger/event arbitrage (28 percent); and statistical arbitrage (24 percent). The remainder is made up of volatility arbitrage (2 percent), securities lending (2 percent), G-10 fixed income (1 percent), and miscellaneous (1 percent).

Diversification is critical. More than one manager is trading each of these strategies. For example, there are 13 managers in statistical arbitrage and five in Japanese convertibles. Sussman makes it a point that each manager uses a different strategy—thus providing diversification. Whereas other firms will have morning meetings, Sussman doesn't want