P R A I S E F O R Hedge Hunters Hedge Fund Masters on the Rewards, the Risk, and the Reckoning BY KATHERINE BURTON BLOOM B E R G N EWS “Great descriptions of the backgrounds, philosophies, and practicesofthebestmanagers,toldinarapid,entertaining narrative—Ilearnedquitealot.” — DAVI D E INHORN Manager,GreenlightCapitalHedgeFund “Thisisapage-turner,withinsightsfromsomeofthelegends ofthehedgefundindustry.Andit’swritteninawonderfully engaging style by a veteran journalist with unprecedented accesstothesetitansofWallStreet.” — A N D R E W W. L O Harris&HarrisGroupProfessor Director,MITLaboratoryforFinancialEngineering MITSloanSchoolofManagement “Burton...break[s]newgroundbyprofilingthirteenup-and- comingmanagersselectedbytenacknowledged‘leadersand legends.’Wellwritten.” — PUBLISHERS WEEKLY This page is intentionally blank. Hedge Fund Investing Titles from Bloomberg Press Investing in Hedge Funds: Revised and Updated Edition by Joseph G. 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Hedge Fund Masters on the Rewards, the Risk, and the Reckoning KATHERINE BURTON Bloomberg News B LOOM B ERG P RESS N EW Y ORK ©2007byBloombergL.P.Allrightsreserved.ProtectedundertheBerneConvention.Printed intheUnitedStatesofAmerica.Nopartofthisbookmaybereproduced,storedinaretrieval system,ortransmitted,inanyformorbyanymeans,electronic,mechanical,photocopying,record- ing,orotherwise,withoutthepriorwrittenpermissionofthepublisherexceptinthecaseofbrief quotations embodied in critical articles and reviews. For information, please write: Permissions Department,BloombergPress,731LexingtonAvenue,NewYork,NY10022orsendane-mailto [email protected]. BLOOMBERG,BLOOMBERGLEGAL,BLOOMBERGMARKETESSENTIALS,BLOOM- BERG MARKETS,BLOOMBERGNEWS,BLOOMBERGPRESS,BLOOMBERGPROFES- SIONAL,BLOOMBERGRADIO,BLOOMBERGTELEVISION,BLOOMBERGTERMINAL, andBLOOMBERGTRADEBOOKaretrademarksandservicemarksofBloombergL.P. Allrightsreserved. ProvengeisaregisteredtrademarkofDendreonCorporation. Thispublicationcontainstheauthor’sopinionsandisdesignedtoprovideaccurateandauthori- tativeinformation.Itissoldwiththeunderstandingthattheauthor,publisher,andBloomberg L.P.arenotengagedinrenderinglegal,accounting,investment-planning,orotherprofessional advice.Thereadershouldseektheservicesofaqualifiedprofessionalforsuchadvice;theauthor, publisher,andBloombergL.P.cannotbeheldresponsibleforanylossincurredasaresultofspe- cificinvestmentsorplanningdecisionsmadebythereader. Firsteditionpublished2007 1 3 5 7 9 10 8 6 4 2 LibraryofCongressCataloging-in-PublicationData Burton,Katherine Hedgehunters:hedgefundmastersontherewards,therisk,andthereckoning/Katherine Burton. p.cm. Summary: “HedgeHuntersoffersararelookatthehedgefundindustry’stopperformersand introduces the most talented up-and-coming or undiscovered managers, handpicked by the mastersthemselves.Withcandoranddetail,themostsuccessfulhedgefundmanagersreveal theirpersonaljourneys,theirstrategiesforproducingoutstandingreturns,characteristicsthat makeagreatinvestor,andattributesmostimportanttothejob” --Providedbypublisher. Includesindex. ISBN978-1-57660-245-4(alk.paper) 1. Hedgefunds.2. Investmentadvisors.I. Title. HG4530.B87 2007 332.64'5--dc22 2007030945 AcquiredbySophiaEfthimiatou EditedbyMaryAnnMcGuigan To Colin Contents Preface ix Acknowledgments xiv C h a p t e r 1 I NTRO D UCTION Mark Yusko What It Takes to Be the Best 1 C h a p t e r 2 M ASTERS Michael Steinhardt A Passion for Performance 13 C h a p t e r 3 S TEINHAR D T ’ S P I C K John Armitage Reasoned and Unrattled 25 C h a p t e r 4 M ASTERS Marc Lasry An Intolerance for Losing 35 C h a p t e r 5 L ASR Y ’ S P I C K Craig Effron A Grip on Risk 47 C h a p t e r 6 M ASTERS Lee Ainslie A Stock Picker, Pure and Hardly Simple 59 C h a p t e r 7 A INSLIE’S PIC K Bernay Box The Big Time in Small Caps 73 C h a p t e r 8 M ASTERS Boone Pickens The Imperturbable Oilman 85 C h a p t e r 9 PIC K E N S ’ S P I C K S Brian Bradshaw, David Meaney, Michael Ross, and Alex Szewczyk A Place at the Table 95 C h a p t e r 1 0 M ASTERS Josh Friedman and Mitch Julis Doyens of Debt 101 C h a p t e r 1 1 F RIE D M A N ’ S A N D JULIS’S PIC K S Jeffrey Schachter and Burton Weinstein Leaving Little to Chance 113 C h a p t e r 1 2 M ASTERS Dwight Anderson The Phoenix Phenomenon 125 C h a p t e r 1 3 A N D ERSON’S PIC K Roberto Mignone Fruits of Firsthand Knowledge 135 C h a p t e r 1 4 A N D ERSON’S PIC K Bruce Ritter Mastering a Changing Market 147 C h a p t e r 1 5 M ASTERS Julian Robertson Encores 155 C h a p t e r 1 6 M ASTERS Jim Chanos Out on the Short-Selling Limb 163 C h a p t e r 1 7 M ASTERS Richard Perry A Manager’s Manager 177 C h a p t e r 1 8 M ASTERS Daniel Loeb Newfound Restraint 189 Index 201 Preface In the mid-90s,whenIbegancoveringhedgefundsforBloomberg News,andduringmuchofthedecadethatfollowed,thepeoplewho ranthesefundsoccupiedaquirky,little-knowncornerofthefinan- cialservicesindustry.Onceinawhile,anamelikeGeorgeSoros, renownedas“themanwhobroketheBankofEngland”forforcing the British pound out of the European monetary system, or John Meriwether,whonearlystartedafinancialcrisiswith$4billionin lossesatLong-TermCapitalManagement,wouldmakeitswayinto themainstreampress.Butmostofthetime,noonepaidanyheedto theseeccentricsortswhomanagedmoneyinawaythatfewothers dared. Unlike the managers of mutual funds and other traditional portfolios—which invest only in securities expected to rise in price—thepeoplerunninghedgefundswouldalsotrytoprofitby wageringonsecuritieswhosevaluetheyexpectedwouldfall.The goalwastomakemoneyunderanymarketconditions.Theysome- timesborrowedcashtomakethesebets,andtheychargedoutsized fees—initially,1percentofassetsundermanagement(now,more often2percent)and20percentofanygainstheymade. Hedgefundmanagerswereconsideredcowboys,colorfulper- sonalitieswhodidn’tfitwithintheconfinesofalargeorganiza- tion.Theywantedtoruntheirownshowbytheirownrules.The conventional wisdom back then was that size was anathema to performance. Funds routinely returned capital to their inves- tors.Bythelate1990s,onlytwomanagers,TigerManagement’s Julian Robertson and Soros Fund Management’s George Soros, hadventuredacrossthe$20billionthreshold.Neithermanager lastedlongatthatloftyheight. Alothaschangedsincethen.Whatwasonceahandfulofren- egadeinvestmentprofessionals—oneearlypractitionertoldmethat ix P REFACE ifhehadn’tbecomeahedgefundmanager,hewouldhaveended upasabookie—hasmorphedintoabuttoned-downindustryofsub- stantialsize.Today,in2007,thereareroughlytwenty-fourhundred single-managerhedgefundfirmsworldwide,overseeing$1.7trillion. Thetwolargestfundgroupsareaffiliatedwithmajorfinancialin- stitutions—JPMorganChase&CompanyandtheGoldmanSachs Group—andatthebeginningof2007,thesevenlargestfirmsac- countedforalmost$200billionofindustryassets. Asnewentrantshavecrowdedthefield,performancehassuf- fered.Theaverageannualreturnforahedgefundbetweenthestart of2000andJuly2007waslessthan9percent,adramaticdecline from18percentinthepreviousdecade.Findingwaystomakemoney inthemarketsishardernow,especiallybecausethebiggerthefirm, thelessimpacteachindividualtradehasonoverallperformance. Thehottopicasthisbookgoestopressisthedebtcrisisand theresultingflighttoqualitythathascausedsomesignificant—and inafewcases,mortal—lossesatseveralhedgefundfirms.After yearsoftightcreditspreadsandrisingstockmarkets,somefunds havesufferedwhatEdwardVasser,chiefinvestmentofficeratWolf AssetManagementInternational,callsa“crisisofcomplacency.” Sofar,mostofthedamagehasbeencontainedtofundsthattrade debtusingalotofborrowedmoneyandtoquantitativefundsthat use computer models to make their buy and sell decisions. The managersprofiledinthisbookarenot“quants,”andnomorethan one or two of them use much leverage. Overall, most funds are makingitthroughthesetumultuoustimes,perhapsalittlebruised, butstillstanding. Thisbackdropofamaturingindustryseemstherighttimetoask someverybasicquestions:Whatmakesagreathedgefundmanager? Whataccountsfortheabilitytothriveunderconditionsthatmake meresurvivalanachievement?Findingthatoutwouldgoalong waytowarduncoveringwhichofthehundredsofnewentrantsare destinedtobemanagementstars—andmaybeprovidesomeessen- tialtipsfortheyoungmenandwomenwho’dsettleforalesserplace amongthisselectgroupofinvestors. Tofindtheanswers,Isoughtouttheindustry’sleadersandleg- ends—hedgefundmasterswhohaveallsuccessfullyweatheredthe vagariesofthefinancialmarketsforadecadeormoreandproduced returnsthatfaroutstripthoseoftheirpeers.Ichosethembecause P REFACE xi ofthepartsthey’veplayedintheevolutionofhedgefunds.They excelatdifferentstrategiesandsomeeitherhonedtheirinvest- mentskillsundernotablementorsorbecamementorsthemselves, influencingpracticesthroughouttheindustry.MichaelSteinhardt isamongtheindustry’sfoundersasisJulianRobertson,whoisre- nownedfordevelopinginvestmenttalentatTigerManagement. TigerCubsLeeAinslieandDwightAndersonwerewithRobertson intheearlydaysbeforeheadingoutontheirown.KynikosAssoci- ates’JimChanos,whomakesmoneysolelyonstocksheexpectsto tumble,isthelongest-survivingshortsellerwiththemostassets