On Wall Street, Jeffrey A. Sexton, 43, is something of a legend—the guy whose skepticism about dotcom investment advice helped lead to the downfall of Henry Blodget, the Merrill Lynch Internet-investment wunderkind.

In Louisville, Kentucky, Sexton is the new guy on the block, with the November opening of Arsenal Investment Advisors LLC, a boutique investment firm with two hedge funds for individual and institutional investors.

He’s not new to Louisville, though. Sexton, who also is an attorney, practiced securities law at Greenebaum Doll & McDonald PLLC and other Louisville-based firms before joining Merrill Lynch in 1997.

Last year, Sexton left Roxbury Capital Management LLC, a Minnetonka, Minnesota-based investment firm, where he led its Quantitative Strategies Group for two years.

Competing for Institutional Investors

Arsenal has about $10 million under management, and its clients are high-net-worth individuals from Kentucky, California, New York, and Florida with $1 million or more to invest.

But his sights are set on large Louisville-based foundations such as the James Graham Brown Foundation, which he says send assets to East and West Coast investment firms.

“The Speed Art Museum’s foundation just sent $70 million to a fund of funds in Connecticut,” Sexton said. “I see a huge void to be filled in this community—and not just for high-net-worth individuals but foundations.”

Allan Latts, chairman of the Speed Art Museum’s finance committee, said location played no role in the museum’s choice of Wilton, Connecticut-based Commonfund to manage its endowment funds. “Nothing against Louisville, but as a nonprofit entity, we believe we are best served by hiring the best possible expert” in managing such groups’ endowments.

The nonprofit Commonfund serves all types of nonprofit organizations.

‘Chicago School’ Philosophy

Hedge funds try to minimize risk by hedging long positions in equities with counter investments. Arsenal runs two hedge funds: one long-short fund that holds long positions in 200 stocks and short positions in 200, and a straight long fund in equities.

Arsenal’s investment philosophy, often called “quantitative analysis,” or “quants,” is derived from what’s called the “Chicago School.” Chicago School quants embrace pure numbers, stressing the predictive value of mathematical models over analysis of companies’ management, products, or their advantages in the marketplace.

Sexton claims his model outperformed broader equity markets by 765 basis points during 2009, or 7.65 percentage points.

Home-Team Advantage?

Louisville’s investment horizon has broadened in the last decade to include hedge funds, said Marty McClelland, a partner at Mainstream Investment Advisers LLC. It is a 13-year-old New Albany-based hedge fund with $345 million under management.

But the popular perception of hedge funds as “high risk,” exotic investments often confuses individual investors, McClelland said.