In early November 1989, when Griffin was on leave at business school at Stanford, the fax machine that he had installed in his room sputtered out a message from the chief: “Big guy, the Berlin Wall is coming down soon. This is gonna be a VERY big deal.” A few days later, the wall duly fell, and two days after that Tiger began to load up on German securities. Robertson knew next to nothing about Germany; but Griffin had studied the German market during a summer stint in London, and Robertson was not going to let an absence of experience get in the way of a historic opportunity. Tiger bought Deutsche Bank, which stood to profit from a unification boom. It bought Veba, a large utility that owned power plants along the West German–East German border and could be expected to capture the emerging eastern market. It bought Felten & Guilleaume, the firm that made the power cables that would carry the electricity into the new territories. Sure enough, Germany’s stock market went on a euphoric tear, and Tiger’s stake in Felten & Guilleaume soon doubled.37
The following summer, Robertson and Griffin rode into Germany. They went to East Berlin, where they discovered that nobody had heard of hedge funds or Julian Robertson. They also discovered that Germany was not quite what Robertson had thought. Sitting in the waiting room on his first company visit, Robertson touched the table and held up a dust-blackened finger. “These people have a long way to go,” he said a bit suspiciously. The meetings continued, with Robertson asking Wall Street questions and the Germans doing their best to be genial, and all the while Robertson was grappling with the gap between what he could see in the numbers and what came out of the mouths of these people. By American standards, and relative to the factories and other assets that they owned, German stocks were ludicrously cheap. If the Germans could manage these assets as American managers would, they would generate huge returns for shareholders; and if the incumbent managers were too sluggish to do that, surely a wave of Wall Street–style takeovers would quickly solve the problem?38 But the more Robertson toured Germany, the less enthusiastic he became. He would sit in a manager’s office and ask about his company’s return on equity, but the managers cared more about their sales than their profits; they were running the company for the sake of the employees rather than for the shareholders. At the chemical company Bayer for example, Robertson was treated to a lavish lunch by the company’s top management.
“It must be great to be the chief executive if you can eat like this,” Robertson said, not mentioning that he would have preferred that the company save money.
“Oh no,” his hosts replied. “We serve this meal to all employees.”
“My! The planes here fly so close,” Robertson said, looking out the window.
“Yes, that is the company flying club,” came back the answer. “Anyone who wants can train for their pilot’s license.”39
After the lunch ended, Robertson delivered his verdict to Griffin: “These people just don’t get it.” German managers could not care less about return on equity. By 1994, Robertson had come full circle on his view of the Germans. The nation’s industry was nothing more, he wrote, than a “giant flab bag of inefficiency.”40
Robertson’s adventure in Germany, his transition from bull to disaffected bear, contained a warning for Tiger. In branching out in all directions, the fund was lurching into areas that it barely knew. Expansion generated new opportunities—including opportunities to be wrong, and perhaps one day to lose some serious money.
AT THE END OF 1990, ROBERTSON SAT FOR ANOTHER MAGAZINE profile. The essay opened as though lifting the veil on a secret. “The public manifestations of Julian Robertson are…sparse,” it began. “An SEC filing here. A paragraph in the financial press there. Fame has not come to Julian Robertson. Fortune, yes. But not fame.” Of course, these observations were self-canceling, since there is no better way to attract attention than to be described as a secret, especially when the article proceeded to broadcast Robertson’s performance record. Money from wealthy individuals, and increasingly from endowments, began to flood into Tiger’s coffers. The year after the article appeared, Tiger became the third hedge fund to manage more than $1 billion.
Throughout the 1980s, Robertson had proclaimed that small was beautiful, arguing that it gave him a significant edge over lumbering competitors. But in the 1990s he threw caution to the wind: A bigger staff, a bigger office, a bigger list of exalted investors—it all seemed too appealing. In the race to accumulate assets, Robertson became fearsomely competitive. He passed the $1 billion milestone behind Soros and Steinhardt, but by the end of 1993 he was running a formidable $7 billion, more than Steinhardt and only slightly less than Soros. Even being number two was not quite good enough, and Robertson envied Soros’s ability to capture the limelight. There had been many years when Tiger had posted better performance than Quantum, and Robertson was so obsessed with the comparison that he could recite his victories by heart. In 1981 “we beat him to death; [in 1982] he beat us; [in 1983] we beat him to death; [in 1984] we beat him to death again,” he had once informed an interviewer.41 But somehow it was Soros who garnered the most attention and the most assets.
Robertson’s competitive expansion involved risks, however. It forced him to diversify beyond his core strengths: There were too few opportunities in the U.S. equity markets to sustain a fund worth several billion dollars. Small-cap stocks, in particular, became virtually off limits: An analyst might identify a promising small company and figure that its value could double over three years, but if there was only $20 million worth of shares available to buy, it was hardly worth bothering with.42 Robertson’s charge into foreign equity markets was one response to this problem. But in going abroad, Robertson was betting that his American instincts would work in different cultural settings. The German experience showed that companies that appeared undervalued by American metrics might actually be fairly valued given the German indifference to profits; and meanwhile, Robertson encountered the mirror image of the German problem in Japan. With impeccable logic, Tiger had shorted Japanese bank stocks: The big banks were mismanaged, they lent at interest rates that brought in negligible profits, they were laden down with bad loans and yet traded at huge multiples. In 1992 Robertson assured his investors that Tokyo’s bizarre valuations presented a rich opportunity for Tiger.43 But three years later Robertson’s Japan analyst was forced to write a memo asking why bank stocks refused to collapse. “I don’t know the answer to that question,” he admitted candidly.44
Tiger’s expansion also pushed Robertson to take more risks in macro trading. He had dabbled in currencies from early on: Just over a quarter of his huge gain in 1985 came from a bet against the dollar—a smaller version of the Plaza accord play made famous by George Soros.45 Meanwhile, Tiger also did well on a version of the “carry trade” that Bruce Kovner had been milking since his time at Commodities Corporation. Robertson bought Australian and New Zealand bonds with interest rates ranging from 16 percent to 24 percent, borrowing much of the money to do so in countries whose interest rates were less than 10 percent and locking in the difference. But as Tiger expanded in the early 1990s, Robertson resolved to redouble his commitment to the currency markets. In 1991 he hired David Gerstenhaber, a Japanese-speaking currency specialist from Morgan Stanley. A currency trader named Barry Bausano arrived at Tiger soon after.
The trouble was that Robertson was not equipped to thrive as a macro trader. Jim Chanos, the short seller who worked with both Soros and Robertson, vouched for Robertson’s superior grasp of stocks; but no macro trader would have said the same about Robertson’s grasp of interest rates or currencies.46 Indeed, the value-investing mind-set almost disqualified Robertson from mastering macro. Value investors generally buy stocks using little or no leverage, and they hold them for the long term; if the investment moves against them, they typically buy more, because a stock that was a bargain at $25 is even more of a bargain at $20. But macro investors take leveraged positions, which make such trend bucking impossibly risky; they have to be ready to jump out of the market
if a bet moves against them. Similarly, value investors pride themselves on rock-solid convictions. They have torn apart a company balance sheet and figured out what it is worth; they know they have found value. Macro investors have no method of generating comparable conviction. There is no reliable way to determine the objective “value” of a currency.
The macro traders who worked for Robertson in the 1990s struggled to adapt to his style of investing. They quickly found that the boss could not abide charts, which he had been known to describe as “hocus-pocus, mumbo-jumbo bullshit.” They also found that their risk-control instincts rankled with him. If a trade went against them, the macro men reckoned they were late on it or simply wrong; it would be wiser to get out than to stick around and play the hero. But Robertson reacted in the opposite way. He had conviction; he would stay the course; he was going to reach the mountaintop eventually. One time the macro men feared that the markets would turn against their European bond position in the short term, and they advised Robertson to protect Tiger from losses by putting on a temporary hedge.
“Hedge?” Robertson retorted angrily. “Hey-edge? Why, that just means that if I’m right I’m going to make less money.”
“Well, that’s right,” the macro men answered him.
“Why would I want to do that? Why? Why? That’s just dirt under my fingernails.”
That was the end of that attempt at risk management.
THROUGH THE 1980S AND EARLY 1990S, ROBERTSON’S strengths dwarfed his potential weaknesses. His special-forces unit parachuted into markets around the world; and although it could stumble, as the exaggerated hopes for Germany had shown, it was more often successful. Robertson frequently took a macro conviction and expressed it in stocks. After the Plaza accord it was clear that the dollar would be in for a weak spell; Robertson identified the U.S. firms that would benefit from strong exports and rode them to great profits. After U.S. real estate collapsed in 1990, Robertson correctly saw which banks to short; and the moment that the bad property debts were gone, Robertson went long financials. Meanwhile, Tiger’s march into bonds and currencies, though dangerous, paid off spectacularly for a while. From the start of 1988 to the end of 1992, Tiger beat the S&P 500 index for five straight years; and the next year Robertson surpassed himself. He returned 64 percent to his investors after subtracting fees, and Business Week estimated that his personal earnings for the year had come to $1 billion.
And yet around this time, something subtle shifted. Robertson spent more time away, and not always because he was traveling on business. In a ten-week period at the start of 1993, he spent five long weekends skiing in Sun Valley, one long weekend hunting sailfish in Costa Rica, three days at the Augusta National Golf Club, and a full fortnight in Kenya. He remodeled Tiger’s premises, setting himself up in an elegant corner office that distanced him from his lieutenants. He hired a psychiatrist, a natty man named Aaron Stern, to help manage his people and his own mood swings, putting a new buffer between himself and his analysts. As Robertson became less of an everyday presence, his intensity and passion grated more. For days on end the lieutenants would not see their commander, and then he would descend on them, demanding facts and figures and the fresh scoop on the stocks that they were following. “If you bleed easily, you won’t be happy here,” the psychiatrist would warn people; and he was right. Many of the analysts who joined Tiger were out within a year or so.
But Robertson also lost people whom he wanted to keep. At the annual Tiger party in the fall of 1992, Robertson had introduced his macro men: “Meet David and Barry, who earned $1 billion last year.” A reference like that made it easy for the duo to raise capital on their own, and in the spring of 1993 they quit to set up their own hedge fund. Soon the macro team’s secession turned out to be the start of a series.47 Tiger had grown so successful that the lieutenants felt they ought to be running their own shows, particularly since Robertson refused to share control; he had toyed with the idea of creating subportfolios that lieutenants could run, but he never ceded real authority. Besides, quitting was becoming seductively easy. Wealthy investors were increasingly on the lookout for the next generation of stars, and a Tiger analyst could go out on his own and quickly raise a fortune. Within two months of opening their doors, Gerstenhaber and Bausano were running $200 million in their Argonaut fund, many times more than the $8.5 million with which Tiger had started back in 1980.
As the Tiger family expanded, Robertson tried to preserve the special-force culture with trips out west to the mountains. The Tigers flew out there in Robertson’s plane, primed to do battle with the elements. One winter, they strapped skins under their skis and hiked up a mountainside with sixty-pound packs, sleeping in tents at temperatures below zero. On another occasion they were taken to a forest and divided into teams, each equipped with a few bikes and a list of objects to collect before their rivals got to them. After their exertions, the Tigers would convene around the campfire and Robertson sometimes arranged for two analysts who had been quarreling to share the same tent. But these contrived efforts at team building frequently backfired, and the tensions in the Tiger family bubbled through the cracks in the camaraderie. The evening campfire gatherings created the expectation of a grand discussion on the future of Tiger: Would Robertson allow some of the men to run their own portfolios? What was the succession plan at Tiger? But Robertson had no intention of ceding control. He had not organized these retreats to discuss his own retreat, and he reacted angrily.
On one of those trips out to the mountains, a guide led a group of Tigers to three ropes slung across a ravine, a sheer fall of several hundred feet beneath them. The rain was driving and the wind was blowing hard, but the young men proceeded anyway. One by one, they fixed a pair of safety lines from their climbing harnesses onto the makeshift rope bridge and stepped out over the nothingness. As each man neared the center of the crossing, the point farthest from the ropes’ moorings, the whole construction wiggled in the wind, and the spirit of Julian Robertson, fearless investor, adventurer, and commander of men, shone down upon him. Then an analyst named Tom McCauley slipped on the wet rope. He fell perhaps ten feet before the safety line saved him.
The Tigers looked on at their comrade, dangling from the rope with a long chute of emptiness beneath him. McCauley had taken the fall in true Tiger fashion; he was laughing and bouncing on the safety line, using the whole apparatus like an outsized baby jumper. Then one of the onlookers gave a start. Rather than having two safety lines holding him, McCauley had just one; and the carabiner on the end of that line was coming open. Some of the Tigers shouted; others went plain numb; and some found themselves musing surreally about the fluffy white outfit that McCauley had on—he looked like the Pillsbury doughboy.
“Hey, Tom, stop bouncing,” somebody shouted.
“There’s an issue with your carabiner.”
“REALLY, STOP BOUNCING.”
There were a few long seconds while the guide shimmied out onto the rope and locked McCauley’s carabiner shut. But that moment when Tiger’s reach exceeded its grasp stuck in the group’s memory.48
6
ROCK-AND-ROLL COWBOY
The late 1980s marked a turning point for hedge funds. After the bear market of the early 1970s, the industry had almost been wiped out; the few dozen funds that existed operated mostly under the radar, and the amount of capital they managed was insignificant. But after the 1987 crash, something profound changed. By one count in 1990, six hundred hedge funds had sprouted from the desert, and by 1992 there were over a thousand.1 Financial commentators began to refer knowingly to the “Big Three”—Soros, Robertson, and Steinhardt—and 1993 was celebrated as “the year of the hedge fund.”2 Behind the Big Three, a pack of younger rivals was expanding fast, and the connections among the leading stars reinforced the sense of a new movement. Julian Robertson was related by marriage to the young trader Louis Bacon. Michael Steinhardt had gone into business briefly with Bruce Kovner of Caxton. The hedge-fund moguls went hunting a
nd fishing on one another’s estates, sat on some of the same charitable boards, and gathered annually in the Bahamian resort of Lyford Cay. Their very presence in one room signaled the birth of a new force on Wall Street.
The most colorful of the younger titans was Paul Tudor Jones II, the Patton aficionado and Soros friend whom we have already encountered. He was born in 1954 to a Memphis family with deep ties to cotton: His grandfather had prospered as a cotton merchant, and his uncle, Billy Dunavant, was a proud baron of the industry. After studying undergraduate economics at the University of Virginia, Jones landed an apprenticeship with a cotton trader in New Orleans, then moved after two years to the New York Cotton Exchange. Rubbing shoulders with the floor traders, it was hard to believe that markets reflected all available information in some kind of efficient way. The key drivers of prices in the commodity pits were not the economic data but the wild guys screaming in your face—the cotton cowboys who downed martinis at lunchtime and then wheeled into battle, determined to gun the market up or down, depending on how things felt to them. To be sure, the cowboys responded to new information—announcements about growth and unemployment and so on. But if you aimed to survive as a floor trader, it was less important to understand the news than to foresee the pit’s reaction to it. The story is told of a floor operator who made $10 million in a spasm of trading following the release of a government inflation report. When the pandemonium had subsided he walked out of the ring and asked, “By the way, what was the number?”3
Jones left the floor of the cotton exchange in 1983 and set about building his own firm, Tudor Investment Corporation. Still not thirty, he was young to head out on his own; but he had a helping hand from Commodities Corporation, which invested $35,000 in his fund and put him in touch with a community of veterans who validated his view of the markets. Quickly, Jones emerged as a prodigy with a distinctive style. He approached trading as a game of psychology and high-speed bluff, a kind of poker that combined sly subtlety with crazed bravado. It was not enough to look at your own cards and decide what you might bet; you had to sense what other traders were up to—whether they felt greedy or afraid, whether they were poised to go all in or were dangerously extended. You might hear bullish news for sugar, but then you had to ask yourself how others would react. If the big traders had already bought their fill, the news would scarcely budge the price; but if they were waiting to rush in, the market would take off like a rocket.4 The more you watched your rival traders, the more you knew how they would play; and eventually you could get inside their heads, luring them along when they were in the mood to buy, spooking them out of the market when they were feeling fearful. If you sensed that the big traders were nervous, you could yell that you were selling and know that they’d sell too. Then you could pivot right around and buy the hell out of the market.5
More Money Than God_Hedge Funds and the Making of a New Elite Page 15
