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.”
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
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
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.”