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

by Sebastian Mallaby

  61. There was also a fusion between macro investing and micro investing. Hedge-fund investors who looked at the overall economy and those who looked at specific stocks borrowed each other’s tricks, with varying success. For example, Mark Dalton, the president of Paul Tudor Jones’s firm, recalls conversations between Tudor and Julian Robertson’s Tiger in the late 1980s and early 1990s. “We had a series of conversations probably over three or four years…. I think it probably influenced both of us…. Clearly we recognized that the complementary analytical capabilities and information flow of long-short equity to macro could be very helpful.” Mark Dalton, interview with the author, September 29, 2008.

  62. Donald MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, MA: The MIT Press, 2006), p. 206.

  63. Ibid., p. 193.

  64. Moreover, much of the market’s trouble came from the breakdown of its back-office systems, which caused markets to seize up and exacerbated the panic. Portfolio insurance was far from being the sole culprit.

  65. Soros, The Alchemy of Finance, p. 5.

  66. MacKenzie, An Engine, Not a Camera, p. 114.

  67. Ibid., p. 115.

  68. In the mid-1970s, the stocks of small firms had been found to outperform those of big firms; and later researchers discovered that outperformance was concentrated in the first two weeks of January. Both findings appeared to damage the efficient-market theory, since returns were not supposed to reflect firm size or the vagaries of the calendar. But once the small-firm effect and the January effect became known, speculators pounced and they were arbitraged away. Just as the theorists predicted, a handful of well-informed investors had pushed prices to their efficient level. In 2002, G. William Schwert found that the small-firm effect had disappeared and that the January effect had halved since its identification. See G. William Schwert, “Anomalies and Market Efficiency” (working paper 9277, National Bureau of Economic Research, 2002).

  CHAPTER FIVE: TOP CAT

  1. This account of the Jensen-Buffett debate comes from Roger Lowenstein, Buffett: The Making of an American Capitalist (New York: Broadway Books, 2001), p. 316–18, and from the text of Buffett’s speech, reprinted as “The Superinvestors of Graham-and-Doddsville,” in Hermes, the Columbia Business School Magazine.

  2. Buffett emphasized the point that the Grahamites had built their records independently. If they had just been copying one another, their similar returns would not have proved anything.

  3. The account of Julian Robertson in this chapter and later in the book is based primarily on some twenty-five hours of conversation with twelve former or current employees, most of whom do not want to be identified. In addition, it is based on the voluminous and colorful letters that Robertson wrote to his investors between 1980 and 2000. I am grateful to Julian Robertson for allowing me to read the full set of these letters and for granting me an extensive interview.

  4. George Soros (not the source of the Louis Bacon anecdotes) reflected on the loneliness and objectivity of the trader: “My philanthropy rescued me from the isolation to which my pursuit of profit consigned me…. In most social situations—in politics and in personal and business relations—it is possible to deceive oneself and others. In the financial markets, the actual results do not leave much room for illusions.” George Soros, The Alchemy of Finance (Hoboken, NJ: John Wiley & Sons, 1987), p. 43.

  5. Robert L. Burch, e-mail communication with the author, May 18, 2007.

  6. Thorpe McKenzie, interview with the author, August 15, 2008; Thorpe McKenzie, e-mail communication with the author, October 8, 2009.

  7. Robertson made gestures toward delegation, but these were hollow. Dwight Anderson, a former analyst, says publicly what his ex-colleagues confirm privately: “Everyone at Tiger was really just an analyst—Julian was the only portfolio manager.” Quoted in Steven Drobny, Inside the House of Money (Hoboken, NJ: John Wiley & Sons, 2006), p. 253.

  8. Thorpe McKenzie, Robertson’s colleague at Kidder Peabody in the 1970s and his junior partner in setting up Tiger, recalls Robertson’s invoking A. W. Jones. “Julian always said that if you did not know whether the market was going to go up or down, A. W. Jones had said that you could still get out and pick stocks to go long and short. That was one of the first things Julian ever said to me.” McKenzie interview.

  9. Julian H. Robertson, letter to the limited partners, March 8, 1983.

  10. For example, Robertson bought puts on the S&P 500 in 1985. In a letter to his limited partners, he explained: “Most banks and investment advisory concerns would throw up their hands at the use of such ‘speculative’ options. In reality though, what could be more conservative?” Julian H. Robertson, letter to the limited partners, July 1, 1985. It’s interesting to note that around the same time, Warren Buffett was ridiculing derivatives and proposing a 100 percent tax on profits from them.

  11. Julian H. Robertson, letter to the limited partners, March 30, 2000.

  12. Julian H. Robertson, letter to Robert A. Karr, February 17, 1995.

  13. Daniel A. Strachman, Julian Robertson: A Tiger in a Land of Bulls and Bears (Hoboken, NJ: John Wiley & Sons, 2004), p. 62.

  14. Between 1980 and 1997, Tiger beat the S&P 500 index in fourteen out of eighteen years. In this period his balance of short and long positions varied. But in late 1987, for example, Robertson’s portfolio was less than 70 percent net long, meaning that it would capture only about two thirds of the rise of the market index. No matter: The S&P 500 rose 16.6 percent the following year, while Tiger rose 21.6 percent. Some time later, in April 1994, Robertson informed his investors that Tiger was 50 percent net long, adding that this was about average for Tiger over the previous several years. Julian H. Robertson, letter to the limited partners, April 8, 1994.

  15. It can be argued that stock in small companies is relatively likely to be owned by founders or directors, who may sell in order to realize wealth—providing buyers such as Tiger with an easy bargain. On the other hand, insiders who sell stock sometimes have an informational advantage over buyers.

  16. Maggie Mahar. Bull!: A History of the Boom and Bust, 1982–2004 (New York: HarperBusiness, 2004), p. 56.

  17. Julian Robertson, interview with the author, December 12, 2007.

  18. Julian H. Robertson, letter to the limited partners, January 17, 1985.

  19. Katherine Burton, Hedge Hunters: Hedge Fund Masters on the Rewards, the Risks, and the Reckoning (New York: Bloomberg Press, 2007), p. 4.

  20. Julie Dalla-Costa, “Tigers…Together?” Absolute Return, July/August 2008, p. 29.

  21. A former Tiger employee recalls, “The thing that was special about him was that he was extremely symmetrical. If he thought you hadn’t done your homework, or that your analysis was flawed, he would be very aggressive, very confrontational. Symmetrically, though, if he thought you had done exceptional work or were generating exceptional outcomes he would lavish you with praise, and publicly. You were his big tiger.” Robertson’s habit of calling ideas either the best ever or the worst ever is described by several former Tiger analysts.

  22. A Tiger alum recalls, “Julian sat in the center of the L. It was just a blast. We were all close to one another, and Julian was right there. We all overheard each other’s conversations. It was just a constant flow of information and ideas. And you had one of the greatest investors ever right there. It was just fun every day.” Another Tiger recalls, “There was no notion of privacy. You expected to get in early, seven A.M., and leave at five P.M. During that time, you were on. No personal phone calls. You were talking about companies, ideas, industries, news. Julian was loud. You could hear every conversation.”

  23. One former Tiger employee recalls, “I came in with a short idea and he said, ‘Well, you know, my friend so-and-so is the biggest bull on that stock.’ We’d have a bull-bear debate. He’d get the guy on the phone. I’d say what I thought; he would say what he thought. Julian made the decision.”

  24. The White-House-to-shit-h
ouse recruit was Lou Ricciardelli.

  25. “The first time I met Paul I don’t think he had much money at all. We had a friend, a mutual accountant. I’m convinced the reason he invested with me was because we were both baseball nuts.” Robertson interview.

  26. Asked about getting ideas from the partners, Robertson says, “We really encouraged that…. We called on them a lot.” (Robertson interview.) A former Tiger employee recalls that in 1986 Tiger created a new fund called Puma partly in order to be able to take money from chief executives and other well-connected businesspeople. “People like that we really wanted in the fund,” this source says. Regulators had raised questions about hedge funds’ access to information from well-placed investors during the flurry of inquiries in the late 1960s, but no rule was ever promulgated to obstruct this channel. Company executives and directors are free to recommend their stock to hedge funds or anyone else so long as they do not disclose inside information.

  27. A Tiger alum recalls, “He could come into a meeting where you kind of thought, ‘I’m glad the boss is coming so the management team gets to see the guy who runs the place, but it’s not like we’ve talked about this sector lately. I wonder what he’s going to know.’ And it was uncanny what he would know.”

  28. Jim Chanos, interview with the author, May 29, 2007; Jim Chanos, e-mail communication with the author, August 6, 2008.

  29. Julie Rohrer, “The Red-Hot World of Julian Robertson,” Institutional Investor, May 1986, p. 134.

  30. Robertson wrote to his investors in 1985 that the generic stocks were a sure win, despite what they had cost him in the past few months. “I feel so confident that mentally, I am almost accruing future profits from our past losses.” Julian H. Robertson, letter to the limited partners, May 25, 1985.

  31. John Griffin, speech to 100 Women in Hedge Funds on behalf of iMentor, November 14, 2007.

  32. Strachman, Julian Robertson, p. 200.

  33. A Tiger veteran sums up the sense of separation between Tiger and traditional fund managers. “It was us and them. They were the mutual funds, the dumb money, the indexed money, the money that didn’t care. We looked at what we were doing as so different. It was paid for performance. It was going short and long. It was using leverage. And the returns were there. We went at it each year thinking we could make thirty or forty percent. We would go for it.”

  34. Julian H. Robertson, letter to the limited partners, February 4, 1991.

  35. “John and I, we used to compete viciously on the tennis court all over the world.” Robertson interview.

  36. Julian H. Robertson, letter to the limited partners, February 4, 1991.

  37. Gary Weiss, “The World’s Best Money Manager—What You Can Learn from Julian Robertson,” Business Week Assets, November/December 1990.

  38. Julian H. Robertson, letter to the limited partners, February 4, 1991.

  39. This is the conversation as recalled by John Griffin and Julian Robertson.

  40. Julian H. Robertson, letter to the limited partners, November 10, 1994.

  41. Rohrer, “The Red-Hot World of Julian Robertson,” p. 134. In another interview in 1996 Robertson lamented that Soros could get an appointment with Hans Tietmeyer, the president of the Bundesbank, at a moment’s notice, whereas Robertson had to hustle for an audience. (Gary Weiss, “Fall of the Wizard,” Business Week, April 1, 1996.) A hedge-fund manager who knows Robertson comments, “To my mind Julian always had this inferiority complex that he wanted to be Soros. It was kind of like Morgan Stanley versus Goldman Sachs. He would run around being Macro Man so he could be like George.”

  42. The difficulty of finding stocks in which Tiger could take financially meaningful positions frustrated some Tiger analysts and contributed to defections. See, for example, Dwight Anderson’s complaint: “The entire universe of stocks that I could invest in had collapsed to about 20 names.” (Quoted in Drobny, Inside the House of Money, pp. 251–52.) It is notable that most Tiger cubs have tried to control the growth of their funds, though the manageable ceiling for long/short equity funds has risen as markets have grown deeper and more liquid.

  43. “Japan remains a fertile hunting ground for both longs and shorts, opportunities resulting from a lack of real analysis, and a market psychology that ignores fundamental valuations.” Julian H. Robertson, letter to the limited partners, September 9, 1992.

  44. Tim Schilt, internal memo to Tiger staff, August 21, 1995.

  45. The day after the Plaza accord, Robertson’s dollar-related bets netted $8.3 million, his best haul in a single day, though still less than the $30 million that Soros pocketed that Monday. Rohrer, “The Red-Hot World of Julian Robertson,” p. 134.

  46. Robertson himself wrote to his partners, “Druckenmiller’s, Jones’s, and Soros’s grasp of macro economics is in another league from mine.” (Julian H. Robertson, letter to the limited partners, April 5, 1991.) Speaking somewhat tactfully, the former Tiger commodity analyst Dwight Anderson has said: “In stocks, Julian had enough experience to have a great filter, but in commodities and macro, because he didn’t have 40 years of experience, he relied more on his analysts to guide him.” (Drobny, Inside the House of Money, p. 250.)

  47. Arnold Snider, Tiger’s drug-stock analyst, went out on his own in late 1993. The next three years were marked by a series of high-profile departures.

  48. This episode is reconstructed from conversations with three eyewitnesses.

  CHAPTER SIX: ROCK-AND-ROLL COWBOY

  1. In 1984 a survey carried out by Sandra Manske of Tremont Partners identified only sixty-eight hedge funds, leading to the estimate that the number of funds extant at any one time in the 1973–87 period was under one hundred. The numbers quoted for 1990 and 1992 come from Hedge Fund Research.

  2. A table published in Forbes identified ten hedge funds with assets of more than $1 billion—there were the Big Three, the Commodities Corporation trio, and four others: Odyssey Partners, managed by Leon Levy and Jack Nash; Omega Partners, managed by Leon Cooperman; Ardsley Partners, managed by Philip Hempleman; and John W. Henry, managed by the eponymous John Henry. See Dyan Machan and Riva Atlas, “George Soros, meet A. W. Jones,” Forbes, January 17, 1994.

  3. The story comes from John Porter, who worked at Louis Bacon’s Moore Capital. See Steven Drobny, Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets (Hoboken, NJ: John Wiley & Sons, 2006), p. 145. Equally, in an interview in 1987 with Barron’s, Jones said: “News is overrated in markets…. Futures markets react to new developments too quickly for news to matter, and one must remember the truism that price makes news and not vice versa.” See Jonathan R. Laing, “Trader with a Hot Hand—That’s Paul Tudor Jones II,” Barron’s, June 15, 1987.

  4. A longtime colleague of Jones says, “What Paul will tell you is that he makes his money, for thirty years without a losing year, assessing human reaction. There’s a body of information and he assesses human reaction with respect to this information. Fear and hope…that’s the whole business.” Another former Jones colleague says, “There’s a skill set which I think he has in abundance, which is to have a feel for the market. By looking at prices and talking to people, he would know how prices would behave, how many people are in the same position. He would know, for example, if a lot of people own the same position, in which case if things reverse they could suddenly get very ugly very quickly.”

  5. A former pit trader describes the Jones technique as follows. “Say you notice that one of the traders is long two thousand contracts. He is an individual and he is speculating. If the market starts falling hard, he is going to have to get out, because you understand his risk psychology. So if you have a big order, you wait for a quiet time in the pit, then you go into the middle of the pit and start screaming as loud as you can that you are ready to sell in huge quantity. It is like yelling fire in a movie theater. You start a panic. You get the market going down, everyone is starting to sell, and then when this crescendos, you buy back whatever you s
old at the start and more, thereby completing your order.”

  6. Scott McMurray, “Quotron Man: Paul Tudor Jones II Swaggers and Profits Through Futures Pits,” Wall Street Journal, May 10, 1988. See also Stephen Taub, David Carey, Amy Barrett, Richard J. Coletti, and Jackie Gold, “The Wall Street 100,” Financial World, July 10, 1990, p. 56.

  7. Trader: The Documentary, 1987, Glyn/Net Inc.

  8. In one example of Jones’s loose grip on the causes of his own success, analysis by Commodities Corporation, which had seeded Jones, determined that he tended to lose money on cotton, the market he believed he knew best. When the Commodities Corporation analysis was presented to Jones, he had difficulty accepting it.

  9. A 1987 profile in Barron’s reports: “And a year ago in April, Jones’s research chief, 27-year-old Peter Borish, decided to start tracking daily the bull market of the twenties against the post-1982 bull market. He admits to fudging the exercise somewhat by juggling the starting periods. As a Monday-morning quarterback, he could see that starting the twenties countdown in February 1925 and the eighties market in October of 1982, he got a particularly snug fit. ‘It wasn’t totally unfair,’ Borish observes, ‘because the starting points had some historic parallels as both occurred four years after serious sentiment lows—the 1921 recession and the 1979 Carter financial crisis.’” Jonathan R. Laing, “Trader with a Hot Hand—That’s Paul Tudor Jones II,” Barron’s, June 15, 1987.