More Money Than God_Hedge Funds and the Making of a New Elite

by Sebastian Mallaby

  Tiger’s success in stock picking undoubtedly owed something to its freedom to go short, an option denied to the majority of fund managers. Nearly all the Jones-style hedge funds had been washed out in the early 1970s, so the competition among short sellers was modest. Even better for Robertson, Wall Street analysis was congenitally bullish: On one reckoning, brokers at the major houses issued ten buys for every sell recommendation in the early 1980s.16 No analyst wanted to put a sell recommendation in writing for fear of losing his relationship with the companies he covered, especially since the investment bankers at his firm coveted advisory fees from those same companies. So Robertson would call up the analysts and sweet-talk them into divulging their best short ideas over the telephone. “I know you all consider these companies to be your children, but just call me with your least favorite child,” Robertson would coax them.17

  Robertson was temperamentally a skeptic, and short selling came naturally to him. In a typical letter to his investors in July 1983, he complained of bullishness gone wild. “The media, public and analysts, virtually everybody, are so bullish that they could be described as ‘eating grass,’” Robertson declared. “When this happens it may be best to crawl in a log and slurp some honey.” When the market hit a weak patch, Robertson’s skepticism paid off. In 1984, for example, the S&P 500 index rose just 6.3 percent while Tiger returned 20.2 percent; more than half of Robertson’s returns came from his short investments.18 The following year a portfolio manager named Patrick Duff began to suspect that a hotel chain called Prime Motor Inns was in a rather worse position than its accounts suggested. Duff did nothing about it, because he was working for a conventional pension fund at the time; but when he joined Tiger in 1989, he persuaded Robertson to short the company. Within a year, Prime Motor Inns fell from $28 to $1, demonstrating how profitable short selling could be. Robertson had an arrow in his quiver that conventional funds lacked. “It’s me and the patsies,” he once told an associate.19

  But Tiger’s defiance of efficient-market presumptions cannot be explained entirely by short selling. In most years Robertson would have beaten the market even without the profits from his shorts, suggesting that he had an edge precisely where the theory said no edge was possible: in traditional stock buying. Moreover, Robertson’s record, like Buffett’s record, was not an isolated phenomenon. Just as Buffett was part of an investment “village”—the cluster of superstars who had been schooled in Ben Graham’s value-investing style—so Robertson was a village headman. On one count in 2008, thirty-six former Tiger employees had set up “Tiger cub” funds, which collectively managed $100 billion; and Robertson had seeded a further twenty-nine funds after restructuring his firm in 2000.20 These Robertson protégés did well: A test of Tiger cubs’ performance, presented in the first appendix to this book, shows that they beat not only the market but also other hedge funds. Moreover, the test covers the years 2000 to 2008, a period in which the profusion of long/short equity hedge funds had long since ended whatever easy profits might have existed in short selling during the 1980s.

  If Robertson’s achievement had stood by itself, it might have been possible to dismiss him as a lucky coin flipper. But the success of Tiger’s numerous offshoots puts paid to that thesis. Whatever the source of Robertson’s investment edge, it was profitable—and transferable.

  THE REAL EXPLANATION FOR ROBERTSON’S SUCCESS begins with an updated version of an A. W. Jones innovation. Jones had revolutionized money management by paying for performance. He rewarded his segment managers in proportion to their returns; he created incentives for outside analysts to bring him good ideas, tracking the profits that they generated and handing out commissions accordingly. Likewise, Robertson put rocket fuel in the veins of his employees, but he did it in a different way. It was not just about money.

  There was something about Robertson that made you want to please him. He would zero in on people with his Carolina charm, flattering and drawling until they purred like sleepy kittens. “Pah-wah-ful, Bob,” he might address a young subordinate. “Ah find mah-self utterly pah-ra-lyzed without your pah-wah-ful assistance.” The rich pleasure of basking in Robertson’s attention was spiked with the knowledge that his mood might turn. “Why, you petty tin-pot dictator,” he might say, and his voice would be ice cold. “You Latin American dictator.” Robertson would assemble his lieutenants each Friday around a long table to listen to the fruits of their week’s work, and the emotional payoffs were extreme. “That is the be-yest idea Ah ever saw,” he might exclaim after listening to a square-shouldered twentysomething analyst deliver a stock pitch, and the young hunk would be whooping and high-fiving himself inside his swollen head for the rest of the meeting. “That is the dumbest idea Ah ever heard,” Robertson might also say, in which case six-foot-plus of Wall Street alpha male would shrivel pitifully.21

  Working for Tiger was not merely a job. It was like joining a special-forces unit. The commander made you bigger, brighter, tougher than you were before; he made you believe that you could beat the market, year after year, because you were part of a team that would outthink and out-hustle every rival. For the first dozen years or so of Tiger’s history, the commander operated from a desk out in the open, next to his young men; they watched him schmooze and holler down the phone, sucking information out of his vast network.22 Robertson’s two assistants operated a pair of giant Rolodexes, almost the size of wagon wheels, and if a Tiger analyst pitched an investment to the boss, Robertson would soon be testing the idea on three old friends who worked in that same company. The analyst might say, “I think it’s time to short Boeing.” Robertson might respond, “I know the guy who used to run Boeing’s international marketing.” The assistants would work the wagon wheels, the former marketing chief would crackle on the speakerphone, and Robertson would tell his twentysomething analyst to defend his short recommendation.23

  For a young man with the wits to thrive in this environment, the sky was the limit. So long as you were doing well, you basked in the attention of the boss: He would call you “big tiger” and show you off to his exalted buddies. Robertson introduced one young analyst to Jerry Reinsdorf, the owner of the Chicago Bulls, saying, “This man is my Michael Jordan.” He introduced a lieutenant who loved golf to Jack Nicklaus and Ely Callaway. He took one prized employee to the White House to visit Bill Clinton: “Bill, this is Lou,” Robertson said. “He can do anything in the world. He is unbelievable.” But as always with Robertson, the risks could be as great as the rewards. Eighteen months after his introduction to Clinton, that same Lou was gone. He had gone from White House to shit house in record time, as he put it to a colleague.24

  Robertson drew people in by sheer force of personality. He met the singer Paul Simon and persuaded him to invest in Tiger on the strength of a shared passion for baseball.25 The writer Tom Wolfe was a Tiger investor too, and Robertson knew how to use these stars to recruit others. In 1986 he set his sights on hiring a Goldman Sachs analyst named Michael Bills, never mind the fact that Goldman’s big pooh-bahs were promising the young man a great Goldman future. Robertson gave Bills the full charm treatment, and he wheeled in Lew Lehrman, the financier, philanthropist, and history buff who had campaigned for the New York governorship in 1982, wearing his trademark red suspenders. In all his long experience, Lehrman earnestly told Bills, he had never encountered an investor to compare with Julian Robertson—not anyone, not ever. Then Robertson brought out his trump: Tom Wolfe called Bills to talk about the young man’s father. Bills senior had served as a military pilot, and there was no better tribute to military pilots than Wolfe’s book The Right Stuff. Pretty soon Wolfe and Bills were sharing their profound feelings about flying and honor and courage. By the end of that twenty-minute call, Goldman Sachs had lost its man. Bills signed on with Tiger.

  Tiger’s roster of investors was crammed with captains of industry and finance, and Robertson never hesitated to call on them for insights. His letters to his partners frequently encouraged them to call in i
deas, “or, particularly in the case of ladies, intuition.” In the early 1980s Tiger tripled its money in a stock called Mentor, which a Tiger investor had recommended. In the early 1990s the fund’s best stock picks included General Instrument Corporation and Equitable Life Insurance; in both cases Tiger friends who were connected to those firms had urged Robertson to buy them. Around the same time, Robertson began to buy stock in Citicorp, mainly because the bank seemed poised to recover strongly after clearing out its real-estate losses, but also because a Tiger friend was willing to vouch for John Reid, Citi’s chief executive. Robertson was not engaging in insider trading: His contacts were offering broad guidance, not secrets on upcoming earnings announcements that could have an immediate impact on stocks. But he was consciously building his network and cashing in on it brilliantly.26

  To those who watched Robertson up close in his heyday, there was no doubt about his talent. He could drop in on a meeting with a chief executive and demonstrate a grasp of company detail that rivaled that of the analyst who tracked it.27 He could listen to a presentation on a firm he knew nothing about and immediately pounce on the detail that would make or break it. He could play golf with the chief executive, see the man nudge his ball into a better position when it landed in the rough, and write himself a mental note never to buy stock in the man’s company. Jim Chanos, a celebrated short seller who ran money for the three hedge-fund titans of the 1980s—Robertson, Soros, and Steinhardt—remembers Robertson as the most intellectually engaging of the bunch. “If I had had to give my own money to any of them, I would have given it to Robertson,” Chanos recalls. “I knew that he knew stocks better than anyone.”28

  ROBERTSON’S PERSONALITY, HIS ABILITY TO GET THE best out of people, constituted his clearest advantage. But this sort of edge could be tricky to define, and people who knew Robertson less well than Chanos could be forgiven for missing it. An Institutional Investor profile from May 1986 set out to describe what the magazine billed as “the red-hot world of Julian Robertson,” but it made the special sauce seem bland. “It’s not that Robertson does anything dramatically different from other money managers; it’s just that he does it so well,” the profiler pleaded.29 Meanwhile, Robertson’s supposed knack for judging managers could sometimes misfire: Writing off a company because its boss cheated at golf fell short of scientific method. But although Robertson’s approach was neither formal nor original, he was right more than he was wrong—and that is the definition of success in money management. No system, human or computerized, is correct all the time. The mathematicians who build state-of-the-art quantitative systems are delighted when they call the market right on six out of ten occasions.

  The same six-out-of-ten rule applied to another hallmark of the Tiger style: long-termism. Wall Street analysts typically feed clients the twelve-to eighteen-month view, and hedge funds frequently do well either by being more short-term or more long-term. Robertson was firmly in the long-term camp. His ideal investment—a fah-bulous investment, as Robertson would say—was something that might plausibly double in three years. If Robertson believed he had found such an investment, he was willing to hang on, gritting his teeth through the hard times until the world caught up with his analysis. In 1983 Robertson decided that oil prices would come down, and he took big short positions in oil and oil-service stocks. The bet hurt for a while, but it was right: Three years on, crude had halved in value. In 1984, Robertson shorted generic pharmaceutical makers, believing that there could be no durable profit margin in nonbranded products. Again, the bet lost money, but Robertson kept faith. Two years later, he celebrated the collapse of Zenith Labs, whose stock crashed 45 percent in the space of one quarter.30

  Tenacity, like character judgment, is not the sort of edge that pays off every time—and sometimes when it did, luck was the crucial factor. In 1987 a young lieutenant named John Griffin persuaded Robertson to short a small appliance maker whose manufacturing was based in China. The company proceeded to rack up terrific Christmas sales, and the stock shot up from $20 to $25. Griffin and Robertson stuck with their convictions, but the news did not improve: The company powered its way into the spring, and the stock hit $35. In 1988 Griffin went off to business school at Stanford but begged his commander to keep faith with the trade: It would come good! He was convinced of it! Robertson indulged Griffin, even though the stock had by now doubled to $40—meaning that the bet had so far cost Tiger 100 percent of its original stake. One day at Stanford, Griffin got a fax from the big man. There were no words on the paper. It just said, “$50!”

  Months passed. And then, in April 1989, one hundred thousand demonstrators marched into Tiananmen Square in China’s capital. The demonstrations gathered momentum; the protesters pressed political reform; a full-blown revolution seemed possible. Not surprisingly, American companies with factories in China saw their stocks fall off a cliff. Tiger’s short was no exception.

  Griffin ran excitedly to a pay phone. At last he was redeemed! He was ecstatic to speak to his mentor.

  “Julian, I told you it would work! You stayed with it! You believed in me! It worked! I KNEW it would work!”

  Seated on the other side of the American continent, Robertson listened to this outburst. “Now, John, now, John,” he answered in his honeysuckle drawl. “The way Ah see it, is that it took a revolution of a bihl-lion people for your darn short to work out.”

  If this story shows how Robertson’s tenacity could hurt in the absence of sheer luck, it also shows his genius. A young hotshot like Griffin, who would later run his own multibillion-dollar hedge fund, had left Tiger for business school. But psychologically he had not left at all; he was still running to get the big man on the phone, desperate for redemption. Even a quarter century later, the bond remained intense; in a speech in 2007, Griffin described the enduring sense that Robertson was watching over him, judging his decisions. “All money managers wish they had a little birdie on their shoulder who might whisper the correct market move from time to time,” Griffin declared. “Well, my little birdie has a deep southern drawl and a bald head. Sometimes I hear him chirp: ‘Big guy, don’t do that.’”31

  Under Robertson’s tutelage, young men like Griffin hustled harder than they might have elsewhere, and in the pre-Internet era, hustle counted hugely. The search engines and terminals that later made data ubiquitous had not yet been born; so if a Tiger analyst wanted to know how Ford’s sales were shaping up, he would sit on the phone until he had talked to Ford’s customers, competitors, and suppliers; to the car dealers, part makers, and Detroit rivals; to anyone, indeed, who might have a useful angle. One analyst who was considering a possible stake in Avon Products developed her own edge by becoming an Avon representative. Another was contemplating a short in a Korean carmaker whose engines were said to malfunction, so he bought two of its cars and hired a mechanic to test them.32 When Mexico defaulted at the start of 1995, most New York investors worried that American banks might take a hit. But Tiger’s analyst flew to Mexico and found that Citicorp was not exposed and, further, that Mexicans were eager to do business with Citi now that their own banks had been weakened. As panicky New Yorkers hammered Citi’s stock, Tiger snapped up more at bargain prices.

  Robertson’s gregarious personality marked him off from other hedge-fund titans, and it gave him an edge. It allowed him to set up a contest between the workaday masses and his own special-force unit. It was him against the patsies.33

  AS THE TAKEOVER BONANZA OF THE 1980S GAVE WAY TO the globalization bonanza of the 1990s, Robertson went global also. He was not a natural cosmopolitan, unlike George Soros. But travel suited his swashbuckling style, and he took to it vigorously. He flew to Hong Kong in the company of the buyout tycoon Teddy Forstmann. He zipped through Europe at high speed, reporting that the American embassy in Paris was “very, very liveable.”34 He lamented the low ratio of women to men on Brazil’s beaches but marveled at the sophistication of São Paulo’s business leaders. Everywhere he went, Robertson met new people and
discovered new ways to have fun. He would pitch up in a city, stroll into the first couple of meetings, and charm his hosts into setting him up with the top people in their Rolodexes.

  Robertson’s trips were managed by a “camp counselor” who helped him find his way around, and usually the counselor was John Griffin. Smart, indefatigable, an Ironman triathlete, Griffin was the ideal Robertson lieutenant. The two men pitched up at company meetings all over the world, then broke off to play high-voltage tennis before cross-examining another batch of companies.35 After a lunch at the Union Bank of Switzerland in Zurich, at which Griffin gobbled up a large dollop of chocolate mousse as well as a pastry, Robertson and his camp counselor raced back to the hotel to grab a rental car. As he reported later to his investors, the two men “turned the music up to full blast and took off for Austria with a brief stop in Lichtenstein. Purpose—skiing.”36