Once I’ve checked the “NYSE Highs/Lows,” I go to the bond column and scan that to see who is forecasting what for interest rates. Now I’m through with section C and I throw it on the floor to my left. Then I go back to section A and skim through it, looking to see the interpretations of recent economic news and individual corporate events or results, and discard it on the floor to my right.
Sometimes I flip quickly through section B, “Marketplace,” where there are some smaller articles on companies I might be interested in. But there is rarely anything in section B to interest a trader.
It takes me less than ten minutes to read the Journal, but ten minutes with the Journal first thing in the morning gives me my initial feel for what’s going on in the markets and a couple of quick and easy indicators that I can throw into my mix. With all the other information I have flowing into me, I can’t spend any more time than that reading the Journal, but any serious trader wouldn’t want to spend any less.
13
Sabrina Partners
Elders Futures Inc., a futures brokerage firm, had started courting me several months before Commodities Corp’s Semi-Annual Trader’s Dinner. Elders wanted me to manage a $20 million fund and was offering me a 6 percent guaranteed management fee plus a performance fee of 20 percent of the profits. That was $100,000 a month guaranteed plus whatever I could make on the performance fees, all risk-free. This deal was a lot sweeter than Commodities Corp’s, so in the last quarter of 1988, I stopped trading for Commodities Corp and started trading for Elders. But still, trading for somebody else didn’t feel right.
It was the same problem I’d had with Commodities Corp. Handling larger positions changed my time horizons. I had a tendency to hold losers longer, hoping that more time would give them a chance to work themselves out. I talked to Audrey about it.
“Audrey, I just don’t like trading for these people. Having to check in every two hours cramps my style. It might be a sweet deal, but I want my freedom.”
Nobody was telling me what to do, Audrey would say. I could make any trade I wanted. I had my freedom. What was the problem?
“I don’t like all these people looking over my shoulder. Elders has a lot of foreign money that comes in and leaves every month. When money’s pulled out, it’s replaced by other Elders funds, but every time that happens, I feel rejected. I feel like I haven’t done the job.”
Audrey would tell me I was crazy to take it personally. It was one of my own rules, she’d remind me. I had to divorce my ego from the game.
“But they keep calling me all the time. This is supposed to be a one-year commitment, but I have to check in practically every day. I don’t like anybody second-guessing me. It’s the freedom of knowing that I’m my own boss. That’s why I went out on my own to begin with.”
I was still my own boss, Audrey would say. Nobody was stopping me from making trades on my own account, and I didn’t have to report those trades to anybody (except the IRS).
“But I don’t feel comfortable with that. I’m conflicted. I’m always having to decide, Is this trade for me, or for the fund? Other fund managers can do that. I can’t. When I trade for myself, it’s short term. When I trade for the fund, it’s longer term. If I make money for myself short term but then a position goes bad for the fund, it doesn’t feel right.”
Well, why do you need a fund? Audrey would say. You’re making millions on your own. Forget the fund.
“But I want to make tens of millions. I want to be the biggest and the best. And to do that, I need OPM, other people’s money.”
Hey, Audrey would say, start your own fund, make your own rules, put your own money into it, and be your own boss. You control the lockup period and report once a month, which is all the regulators say you have to do. No conflicts. No checking in. No problems.
So, early in 1989, I stopped trading for Elders. I told my lawyer, John Tavss of Seward & Kissel, who specialized in setting up hedge funds, to start drawing up the papers for my own fund. By June, John had the papers ready to go, but I still wasn’t sure. I’d think about how I’d never had a losing year since I’d started trading on the American Exchange back in 1979, how I’d put together a run of fifty-five consecutive months without a loss for my own account, how I worked out of an office right in my home, how I had the one thing I always dreamed of, my complete freedom. Why did I need to manage other people’s money? Then I’d remember how I’d felt strutting around Commodities Corp’s Semi-Annual Trader’s Dinner with the likes of Michael Marcus and Bruce Kovner and watching Paul Tudor Jones leave for his retreat on the Eastern Shore in his own private chopper. I liked sniffing around with the top dogs. To do that, I needed OPM, other people’s money.
When the kids got out of school in June, we took a vacation to Aspen. I’d never been to Aspen, but Aspen was where Helmut Weymar and a lot of other big shots went to get their brains recharged, so why not me? The crisp, clear mountain air two thousand miles away from New York City and the markets would give me a chance to reflect. I’d spent nine and a half years as a securities analyst, then nine more trading with success beyond my wildest dreams. Now I had to decide whether to raise the bar another notch.
Every morning I’d step out of the three-bedroom condo right at the base of Snowmass, hop into my Jeep Wrangler, put the canvas top down, breathe in the cool mountain air, and drive like a cowboy into Aspen for the Wall Street Journal. I’d pass the airport and see the Cessnas, Lears, and Gulfstreams that belonged to the movie stars, international jet-setters, and big-time executives. I wanted to be one of them. To do that, I needed OPM, other people’s money.
The first thing I did when we got back to New York was rent the biggest, fanciest office I could find. It was at the top of a brand-new building at 750 Lexington Avenue and had an unobstructed view of Central Park. It wasn’t cheap, but so what? I signed a three-year lease for three thousand square feet at $12,500 a month, $150,000 a year, but so what? That was a pittance compared to what I was going to make. I turned Audrey loose on the furniture. She selected a post-Impressionistic motif with an accent on cubism and overtones of nouveau-baroque that rang the register up to the tune of $75,000, but so what? We had to look good, and I’d always pictured myself sitting in my own fancy offices with my feet propped up on the partner’s desk.
My friends Al and Cliff, the owners of the Fresco-Palette Gallery on the Upper East Side, lent me a collection of modern art. Walking into my new offices was going to be like walking into the Guggenheim. I dropped another $30,000 on the latest computers and a new telephone system, but so what? It had to be state of the art. Then I went out and hired my first two employees. I paid them each $20,000 per month. That was a lot, but so what? Working with me would quickly turn them into stars. By the end of the summer, I was feeling and looking like a top dog. Now I needed to dig up some investors with really big bones to pay for it.
Actually, I needed two sets of investors, one for my domestic fund and one for my offshore fund. The big shots had two funds, and I wanted to be big. Two funds meant twice as much money.
Back in the sixties, while I was still in business school, a hedge fund was a limited partnership where the general partner was the fund manager and the limited partners were so-called sophisticated investors who had at least $1 million in net worth. Under U.S. law, there could be no more than ninety-nine limited partners with a typical minimum investment of $500,000, and the funds were invested mostly in U.S. stocks.
By the end of the eighties, that had all changed. Comparing the original hedge funds of the sixties to the hedge funds of the nineties was like comparing John Wooden to Michael Jordan. Managers like George Soros, Julian Robertson, and Michael Steinhardt had raised so many billions that they couldn’t find enough good U.S. stocks, so they’d shifted the focus of their funds to larger global markets where they could make bigger plays and get more leverage. They set up offshore funds that weren’t regulated by SEC laws and began speculating in currencies and interest rates worldwide.
They’d play the dollar against the yen, or the U.S. Treasury against the Bundesbank.
To compete for these really big investors, the ones with the really big bones, I had to set up two funds, Sabrina Partners L.P., a domestic fund, and Sabrina Offshore Fund Ltd. I set the minimum investment for each of the funds at $1 million with the stipulation that the money couldn’t be taken out for a year. I thought that that would give me the freedom to trade without worrying about people looking over my shoulder.
Because I was the Champion Trader, I charged a 4 percent fixed management fee, plus the usual 20 percent of profits. Because investors were investing in me, it was important for me to sell my trading style and methodology. In my prospectus, I stressed that, unlike most money managers, I was a triple threat. I traded stocks, options, and futures, and I had a track record of consistently making money in all three. In any one period, I might not make as much as any given trader in any given market, but over time, I’d beat them all. I was the Champion Trader. John Liscio had said so in Barron’s, and Jack D. Schwager had said so in Market Wizards.
Raising money for Sabrina Partners L.P., the domestic fund, was something I could do. I took packs of five-by-eight cards, just as I had done for my honors thesis at Amherst, but this time, instead of theories from John Maynard Keynes and Adam Smith, I marked down the name and number of everybody I knew who had a million dollars. I called them. I wrote them. I met them for drinks. I sent them a prospectus. I sent them clippings about me, the Champion of Wall Street and the Champion Trader. I sent them copies of Liscio’s article. I sent them copies of Schwager’s book. I called them back. I wrote them again. I supported their favorite charities. I mailed them another prospectus. I sent them more clippings. I implored them to drop by and see me at my new offices, the ones at the top of the brand-new building at 750 Lexington Avenue with the unobstructed view of Central Park. When they showed up, I plopped them into Audrey’s post-Impressionistic furniture with an accent on cubism and overtones of nouveau-baroque, and waxed eloquent about Al Fresco’s and Cliff Palette’s collection of modern art. By October, I’d raised $22 million for Sabrina Partners L.P. (having coughed up $5 million of my own as general partner).
Finding investors for Sabrina Offshore Fund Ltd. was something I couldn’t do on my own. I’d been to Europe a few times, but I didn’t know any of the international jet-setters. Typically, the way U.S. money managers found international investors was to align themselves with brokers who had international contacts and could make the proper introductions. The problem with that approach was that some brokers were looking for huge fees, but I decided to test the waters anyway. A guy from Dean Witter was the first to call. He claimed that he had some “great” international contacts, but he wanted 25 percent of whatever I made from his contacts. I wasn’t about to give him or any other parasite 25 percent of my profits, so I put the word out that the best I was willing to do was to trade contacts for commissions. You send me clients, I’ll send you commissions, that was the deal.
Two brokers took it. Paul Saunders and Kevin Brant, with Kidder, Peabody, got in touch. They were in the money-raising business. They had a colleague named Rakesh Bhargava who was Indian and had a lot of big money connections to India and Pakistan. I’d always thought that India and Pakistan were bitter enemies, but apparently when it comes to making money, so what? Kevin and Paul offered to have Rakesh set up some meetings in London during the middle of October. That would be fine, I said, so Kevin and Paul scheduled a meeting in London.
I was looking forward to this trip. I loved London. I remembered being there during the summer of ’67 and fantasizing about going to the London School of Economics and getting a master’s degree in economics. I remembered taking the tubes through Knightsbridge from a fourth-floor walk-up I was renting out by Old Cromwell Road. I used to walk by the betting parlors, wondering if someday I’d ever make a betting coup. I’d taken the train to Epsom to watch the ponies. I loved it, even though they ran in the wrong direction. I’d taken a double-decker bus to Harrod’s and wondered whether I’d be back to do some serious shopping. I’d passed the Ritz, the Connaught, and the Berkeley (which they pronounced “Barkly,” probably because of all the top dogs who stayed there). I’d passed Claridge’s, the most splendid hotel in all of England, dreaming that someday I’d be staying there, that I’d step out of a Rolls, and a doorman in his bright red doublet with shiny brass buttons, his big black top hat, and his spotless white gloves would bustle over and open the door for me. Claridge’s was where I wanted to be this trip, so I called my dear friends Al and Cliff. Because of their connections in the world of international art, they were welcome at Claridge’s and all the other finest hotels, and they got me a room.
On Friday morning, October 13, I liquidated all my positions and was just sitting watching the screen waiting for the driver to come and take me to the airport when I saw the market go into free fall. There had been a proposed leveraged buyout of United Airlines for a very high price of $300 per share, but the financing had disappeared and the deal had fallen apart. It was the tail end of the Drexel Burnham junk bond era and everything was unraveling. The market was telling us that it was time to start paying for all those extraordinary excesses of the eighties. I felt right away that the collapse of this deal was a signal, that this was going to be one of those four or five times a decade when a trader has a chance to make some really big money. And here I was, in perfect shape to act on it. All my positions were cleaned out and I was sitting on a pile of cash. I called Paul and Kevin. “Cancel the trip,” I said. “I’m not going anywhere in this market.”
They understood completely. Personal upheavals like death, marriage, or sickness are unacceptable excuses for a trader to miss a meeting, but canceling to make money is eminently acceptable. They called Rakesh and told him to reschedule the meeting for the following week. Rakesh said, no problem. If anything, canceling the meeting to trade into a favorable market only enhanced my reputation. I was the guy with the Midas Touch, I was the Champion of Wall Street, the Champion Trader.
I watched the market plummet all day and by late afternoon the Dow was down 190 points. All everybody was thinking was, Here we go again. It’s going to be another crash of ’87. Perfect. I knew exactly what to do. During the crash of ’87 investors ran up the price of bond futures figuring that since the bubble had burst in stocks, people were going to move money out of stocks into fixed income securities. The bond futures market closed at 3:00, so at 2:58, I loaded up. The stock market was open until 4:00, and as stocks continued to plunge, bond futures skyrocketed. I quickly dumped my entire position in the secondary bond futures market that stayed open until 4:15. I’d made $70,000. Not a bad day, but I was sure that the best was yet to come. I didn’t think this market was like the one in 1987. Interest rates were much lower, the P/E ratios on stocks were much lower. I was thinking of going long.
Right after the markets closed, I got a call from John Liscio. Every now and then, John would call me for my opinion on the market. I told John that I was bullish, that I was going long. On Monday the sixteenth, the following squib appeared in Barron’s:
When we first caught up with legendary trader Marty Schwartz after Friday’s close, he didn’t know what to make of the 190 point stock market rout. “What really started bothering me,” he related, “was that everybody had profits. Historically, when the market is up more than 30% within a year, it’s very dangerous.” But Schwartz, one of the wealthier and more honest traders we know, had the sound of a man who sold out his entire position the day before. “I really don’t think it’s all that bad,” he asserted. “Rates are much lower than they were in ’87 and multiples are dramatically lower. Maybe stocks won’t even open down 60 or 70 points on Monday like the futures are indicating. My inclination here is to study my chart book and get ready to go long.”
Having John Liscio was like having my own publicist, but when you go high profile, you better be right. Fortunately, on this occasion, I was. Fi
rst thing Monday morning, I jumped into the stocks that I wanted, like Philip Morris, Fannie Mae, and Freddie Mac, ones that had held up well in Friday’s fall and were poised to take off when the market turned around.
Based on the crash of ’87, I expected the market to open down but when it turned and closed up eighty-eight, I was really off and running. I rode the position through Tuesday noon, then I reversed my field and went short S&P futures. With everyone buying, it was time to sell, and I was right again. I covered my positions on Wednesday. By postponing my trip for a week, I’d made $500,000.
John Liscio called me again just as I was running out the door to the airport. He wanted to know how I was doing. I told him that I’d gone three for three, that I’d hit the bonds, the stocks, and the S&P futures, but I had to quit because I was leaving for Europe to raise money for my new offshore hedge fund. As I settled back in my leather seat and felt the Concorde lift off for London, I started focusing on how I was going to persuade international investors to put their money into my fund.
The breakfast meeting at Claridge’s couldn’t have gone better. In addition to Rakesh Bhargava, Paul Saunders, Kevin Brant, and me, there was the Sheik, a big real estate developer and international entrepreneur whose father had been the mayor of Hyderabad, or Rawalpindi, or Faisalabad, or some other damn place (which supposedly didn’t hurt the Sheik’s cash flow); the Rug Man, who to this day remains a mystery to me; Omar Khayyam, the head of the London branch of a major Middle Eastern bank; and Stirling Sixpence, the former chairman of a British holding company well known in the States for engineering hostile takeovers. How they were connected was beyond me, but I did know that all of them would do business with the devil himself if they thought that it would make them more money. That was how international commerce worked.
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