Investors' chronicles

What makes hedge fund managers tick and make big bucks? “All you have to do in hedge funds is perform,” says Julian Robertson, the 75-year-old veteran who built Tiger Management, a stellar performer which has earned 25% per year in the past 20 years. “If you perform,” he says, “money is going to pour in.”

A decade ago, people who ran these funds were seen as cowboys who occupied a quirky, little known corner of the financial service industry, until once in a while a George Soros or Boone Pickens hit the headlines. Hedge fund managers didn’t fit into large organisations. Their aim was to make money under any conditions. Yet the two largest funds today are affiliated with JP Morgan Chase and Goldman Sachs. Two of the seven largest firms account for almost $200bn of the industry’s assets.

So who are the legendary figures of the hedge fund industry and some of the talented newcomers? For more than a decade, Katherine Burton, a Bloomberg news reporter, covered hedge funds and the top managers with a gift for high returns and low profiles. But as Burton points out in her book Hedge Hunters, as new entrants crowded the field, performance suffered. “The average annual return for a hedge fund between the start of 2000 and July 2007 was less than 9%, a dramatic decline from 18% in the previous decade.”

Edging ahead

So what makes a great hedge fund manager? And what accounts for the ability to thrive under conditions that made survival an achievement? Approaches to investment managements are as varied as personalities and background. To succeed as a hedge fund manager, you’ve got to have edge. Boone Pickens’ edge came from being in the oil and gas business for more than half a century.

Raw intellectual horsepower and a real feel for the market are vital talents, plus the ability to see trends before they happen, as well as aggressive strategies such as short selling, using derivatives for performance, or trading in high yield bonds and bank debt.

Today, MBA students across the US eschew jobs with the big investment banks to join the funds. The really successful traders are seen as the Carnegies and Rockefellers of the 21st century.

The downside is that hedge funds are not a sure path to riches. Roughly one in every two new hedge funds fails within three to five years.

But then you find people like Mark Yusko who formed Morgan Creek Capital Management in 2004 after a career as investment manager for several universities. Money, he decided, is managed by people, not institutions. “A lot of people get hung up on the idea that a great manager has to come out of a certain educational institute or requires certain credentials, or has to have worked at one of the big banks. It’s exactly the opposite,” he says.

John Armitage, an old Etonian who founded Egerton Capital, a $6bn hedge fund in London in 1994, looks for under-valued European companies in industries that he and his team understand ­ stocks that he expects will go up by 30% over 12 months.
By contrast, Marc Lasry, a big supporter of Hilary Clinton, whose daughter Chelsea works for him, buys senior bank loans or bonds cheaply. “Senior debt is first in line to be paid if disaster strikes,” he says. If he buys debt at 50 US cents and ends up with $1 three years later he makes at least 25% annualised return.

Boone Pickens, one of America’s wealthiest investors and one of the oldest at 79, says he’s made more money since he turned 70 and he intends to go on making money. His energy stock hedge fund invests 90% in equities and 10% in commodities and averages returns of about 38% a year. Between 1986 and 1996 he and his team turned $2m into $150m, trading oil and gas futures.

Then there is Julian Robertson, whose hedge fund, Tiger Management, considered one of the best in the business, attracts and trains many highly successful young hedge fund managers known as the Tiger cubs.

“If you want to be in hedge funds you have to be obsessive,” says Egerton Capital’s John Armitage. “You have to have guts, you have to know when to stick to your convictions and when to walk away.”