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man's decision to get out of fixed-income arbitrage at the end of 1998 and focus more on convertible arbitrage and statistical arbitrage, leverage has declined a great deal.

Today, Sussman feels high leverage is no longer needed. "1999 was Paloma's best year, up 30 percent following our worst year. . . . High leverage wasn't needed." Sussman describes how the LTCM situation resulted in most of the proprietary trading desks, except Goldman Sachs's, closing down. This lessened competition and provided more opportunities for those still trading. He sees this as a generational issue since banks and insurance companies are unlikely to go back into proprietary arbitrage business anytime soon. Recent mergers between Credit Suisse First Boston and Donaldson, Lufkin & Jenrette as well as J. P. Morgan and Chase take out further players.

Today, Sussman prefers highly liquid securities and convertible bond trades that produce high cash flows. He avoids Reg D convertibles (i.e., an event-driven strategy that invests in micro- and small-capitalization public companies that are raising money in private capital markets), which he feels could be like a game of musical chairs if the stock market turns bearish. Until now, he says, the bull market has bailed out these securities. These companies, using very expensive financing, are usually in financial distress or at least weak.

In 2000, Paloma Partners had another strong year, up 27 percent, closely following its record year in 1999. Sussman commented, "We are positioned to take advantage of the opportunity occurring in part because of lack of capital in the arbitrage world. This is a result of mergers of many banks who had previously been competitors and the withdrawal of capital because of 1998."

OTHER BUSINESS

Sussman is also the chairman of the New China Management Corporation, an investment manager for the Cathay Investment Fund, which was established for the purpose of undertaking direct investment in China. Within Cathay, there are six publicly listed companies (on the New York Stock Exchange, as well as the China, Hong Kong, and Singapore exchanges). There are also seven private unlisted companies in Cathay, including an infrastructure project, food production company, and Internet companies. So, it is part private equity. Paloma's other in-