The Hustle

by Doug Merlino

  Dino started his hedge fund in July 2004 with $1.5 million, about half of it his own money. Back then, the whole operation consisted of him sitting at a computer screen, working the phones for information, and trading stocks. In its first three years, the fund grew to more than $100 million in assets and returned 232 percent (in the same period, the Standard & Poor’s 500 benchmark index of large companies returned 39.6 percent). That record placed it among the best-performing of the nine thousand or so hedge funds in the country. Dino hired an old fraternity brother from the University of Washington to work as an analyst, moved to a bigger office, and then had to tear out a wall in that office to double its size in order to fit more people. Institutional money managers in New York and Los Angeles who used to ignore his calls began to meet with Dino when he visited town. Despite his success, there’s no room for complacency. “You can’t sit still because there’s guys out there that are going to pass you right by. You have to actively, aggressively look for the next idea, or the next opportunity, or the next data point,” he tells me. “You can’t let your eye get off the ball. It’s the punch that you don’t see that gets you. They’ll knock you out.”

  If you were looking to find the single person who has most adroitly ridden the changes in Seattle’s economy over the past two decades, Dino could certainly be a finalist. Like a basketball player who always gets to the open spot on the court before his defender does, Dino has examined how things are playing out and hustled to position himself ahead of the money.

  As it turned out, our basketball team worked out for Dino perhaps better than anyone. Though he had been rejected by Lakeside twice, Dino got into the school in sophomore year. He credits his admission to his family’s persistence, higher visibility from being on our team, and Randy Finley’s cajoling of the school administration.

  The school changed the course of Dino’s life. While he was used to feeling at ease with his Greek family, Lakeside forced Dino—a fierce competitor on the basketball court but fairly shy off of it—to interact in a different way. “They helped you formulate opinions and articulate them, because I was more introverted, I kept things to myself,” he says. “It really kind of pushed me on that front.” His interest in business and finance grew from reading newspapers and business magazines in the school library, and his first job in the field—working part-time at the brokerage department of a bank during his senior year—was set up by a Lakeside contact.

  By the time he graduated, Dino knew that he wanted to manage money for a living. He enrolled at the University of Washington, where he majored in finance. He knew that if he planned on working as a money manager in Seattle, instead of moving to a financial center such as New York or San Francisco, he was going to have to stand out from the crowd. So he upped his hours at the bank to full time and took classes at night, with the thinking that he would finish college with the real-world experience that others would only get in their first jobs after graduation. He had virtually no social life in college, but coming from a family of Greek immigrants from poor, rural backgrounds, he felt he had to grab every opportunity while it was there. When he graduated in 1994, everything seemed to be going according to plan. Dino took a job as an analyst at a Seattle-based financial management company, and his career looked to be off to a promising start. It just happened that the city was about to be turned upside down.

  The beginning of the dotcom stock boom is generally pinpointed to August 9, 1995, the day when Netscape, the company that had designed the Internet browser of the same name, first offered its shares on the market. Even though the firm was only a year and a half old and had yet to turn a profit, the stock soared from an initial offering of $28 to $58 a share. Its founders were instantly rich.

  Like the crack epidemic, the dotcom craze seemed to come from nowhere and land like a fist. But as with crack, the conditions that prepped the way were a long time in building. Beginning in the 1970s, American corporations had begun a “restructuring” process that involved eliminating jobs through layoffs, increasing productivity through the use of technology, and relocating manufacturing operations to cheaper locations overseas. As corporate profits increased in the 1980s, the stock market, which had been moribund for more than a decade, began to spasm back to life. At the same time, Americans started to funnel money into individual retirement accounts, which were then newly invented. Mutual funds sprouted to guide money into the market just as tens of millions of baby boomers began to save for their golden years. All these factors came together to sluice money into the market. This flow needed a place to be invested just as the Internet, in the mid-1990s, began to come into the public consciousness. No one knew exactly how people were going to use the Internet, but it seemed sure that they would. Companies that figured out how to profit from it would make fortunes. With the Cold War over and American economic dominance seemingly stretching as far into the future as anyone could see, anything seemed possible.

  Russell Horowitz, a 1984 Lakeside graduate who had worked as an investment banker in New York, watched Netscape catch fire and realized that people who got in early on the Internet could make a lot of money. He came up with an idea for a dotcom and recruited John Keister, a former Lakeside classmate and soccer teammate, as a cofounder. The company, Go2Net, was a web “portal,” a site that offered people a variety of information—stock prices, sports scores, news headlines—all in one place. The idea was to draw traffic and then make money through advertising. Though Horowitz and Keister were six years older, Dino had gotten to know both of them through the annual Lakeside alumni basketball game. After he’d started to work as a financial analyst, Dino kept in touch with Keister, occasionally calling him and passing on stock tips. The pair approached Dino and asked him to join their start-up. He became Go2Net’s fourth employee.

  Dino was one of those rare people who know from a young age exactly what they want to do—in his case, manage money—and then single-mindedly apply themselves to getting there. The job with Go2Net offered him two pieces that fit with his ultimate goal. The first was the chance to get in and observe how a company actually runs, so he could use the experience in evaluating the management of other businesses as an investor. Second, he was put in charge of the stock market section of Go2Net, including writing a column of investment advice, so he remained in touch with the market. “The whole passion behind it was staying in finance and sharing my knowledge with individual investors, that was the reason why I went there,” Dino says. “I didn’t know what the Internet was going to be like. It was early.” The early days passed quickly. Go2Net went live on the Internet in November 1996. Five months later, the company went public at an initial stock price of a little under $7. Two years later, it had climbed to $199; a $10,000 investment at the public offering would have been worth more than $280,000.

  Though it’s forgotten today, in the late 1990s Go2Net often appeared next to Amazon.com when business reporters rolled out examples of Seattle start-ups with stratospheric stock prices and world-changing potential. Articles such as “Young, Rich and Wondering How to Spend” ran in newspapers, relating tales about people like the Taco Bell manager from Phoenix who moved to Seattle, joined a dotcom, and became a millionaire before age thirty. Exactly as it had in the days of the Klondike Gold Rush a century earlier, Seattle swelled with new arrivals looking to make quick fortunes.

  The euphoria created by easy money is hard to relate. Though I didn’t live in Seattle during the dotcom frenzy, every time I visited and went out with high school friends for drinks, the talk always centered around who had landed a job at what start-up as well as rampant speculation about how much he might make when he could cash his stock options. The idea that, by age thirty, you could be rich enough not to work for the rest of your life was intoxicating, leading people to abandon their plans and desperately seek—with a lust similar to Humphrey Bogart’s cascading mania for gold in The Treasure of the Sierra Madre—to get on with the hottest dotcom. “Greed was driving a lot of new people that wanted t
o get into the industry. They weren’t there for the right reasons.… It was across the board from the top to the bottom,” Dino says. “Once you get one guy making money, it’s like, ‘Jesus, that guy made a million bucks, I’m going to do it, too.’ ”

  As Go2Net rode the wave, Dino took a new job in the company as head of investor relations and vice president for corporate development and strategy. By 1999, Go2Net, which had revenues that year of $22 million and a net loss of $10 million, was worth more than $1 billion. Then, on March 11, 2000, the dotcom bubble—which had inflated the value of hundreds of companies to ridiculous levels—burst. Over the next year, the tech-heavy NASDAQ stock exchange lost 60 percent of its value.

  The plunge trimmed the price of Go2Net’s stock, but it shouldn’t have finished off the company, which still had cash in reserve and was not losing a ton of money. The beginning of the end came in July 2000, when InfoSpace, another Seattle Internet company, acquired Go2Net for what was then valued at a $4 billion deal. Naveen Jain, a charismatic CEO who had formerly worked as a software engineer at Microsoft, had founded InfoSpace in 1996. It was basically a phone book on the Internet. Jain later announced that the company, for a monthly fee, would begin to deliver stock prices and other information to consumers through their cell phones. Wall Street analysts bought into it, the masses bought the stock, and, at the time of the merger, InfoSpace—which had never turned a profit—was worth more than $11 billion. Dino, though, didn’t agree with the move to join the companies. “I wasn’t a part of that whole process. I maybe said, ‘Hey, it looks interesting,’ but I wasn’t really involved in the decision,” Dino says. “After that merger I left. It wasn’t a pretty time.”

  Things quickly went sour. In an article published several years later, the Seattle Times reported that before the merger, InfoSpace executives had been using “accounting tricks and dubious deals” to boost revenues to keep the company’s lofty stock valuation from collapsing. After the companies formally merged in October 2000, Jain and Go2Net’s founder, Horowitz—the chairman and the president of the company, respectively—began to bicker as the dotcom bubble continued to deflate. In January 2001, Horowitz left. Jain remained at the helm for two more years, but it was a long way down. In a mirror image of the heady early days of the dotcom boom, $10,000 invested in InfoSpace in March 2000 would have yielded $20.67 by June 2002.

  By then, Dino was long gone. He’d decided that he was going to do what he always wanted to do: work for himself and make a living buying and selling stocks.

  A hedge fund is basically an investment vehicle for very wealthy people—Dino’s, for example, requires a minimum outlay of $500,000—looking for high returns on their capital. Unlike mutual funds, the way the average person invests in the stock market, hedge funds are lightly regulated. That allows managers to both go “long” on stocks—betting that their prices will go up—while also selling “short,” which entails taking a position against a stock in the belief that the price will go down. This means that a fund can be “hedged” to perform well no matter what direction the market takes. Hedge funds typically take 20 percent of profits as well as an annual management fee of 2 percent of the money in the fund.

  The job of a hedge fund manager is to scour the global markets to find investments that will beat the average return, whether that is investing in a Seattle software company, platinum mines in South Africa, or betting that the value of the Japanese yen will rise against the U.S. dollar. Some hedge funds use computer models to try to predict shifts in the stock market, allowing their managers to place large bets on those movements. Other funds, like Dino’s, seek to identify companies whose fortunes are changing—for better or for worse—and buy their stocks or sell them short before other players in the market catch on. In many ways, the job of running a hedge fund is similar to that of a professional athlete. As in sports, performance is easily measured—by points, rebounds, and assists in basketball, and by overall return as a hedge fund manager. Underperformance will end your career. Dino nods when I mention the analogy. “You’re as good as your numbers. If you don’t do well, guys fall like that,” he explains, snapping his fingers.

  Until fairly recently, hedge funds were a fairly arcane type of investment, mainly known by Wall Street insiders and the rich. Occasionally, hedge fund managers made the news, such as when Long Term Capital Management, a huge fund, lost $1.9 billion in one month in 1998 and set off a global financial crisis. Hedge funds really began to grow in popularity after the dotcom crash. While the stock market fell 40 percent between 2000 and 2002, the average hedge fund stayed even. That—as well as low interest rates after 9/11 and easy money created by the housing boom—spurred an inflow of money to such funds. In 2000 there were about four thousand hedge funds with $324 billion under management. By 2007, there were an estimated total of nine thousand hedge funds responsible for around $1.5 trillion.

  By midmorning on the day I visit Dino’s office in August 2007, the market has dropped several hundred points. It is the beginning of the subprime mortgage crisis, in which tens of thousands of people, lured into home loans by low introductory rates, began to default as the teaser rates expired and reset higher. Most of the people classified as “subprime” mortgage lenders either had spotty credit histories or lower-than-average incomes for borrowers. Their loans had been made possible by inventive Wall Street securities that bundled the mortgages and sold them as bonds (in the old days, mortgages were issued by local banks, which had a greater interest in making sure a borrower could make monthly payments). As long as interest rates stayed low and the price of homes kept rising, everyone made out—people with lower incomes got to buy homes, and Wall Street made a killing. Now, with credit drying up and insecurity about what would happen next, markets from New York to London to Shanghai were seizing up.

  Several huge hedge funds—many with assets valued well in excess of $1 billion—had already gone bust or lost large percentages of their capital. All had been “quantitative” hedge funds, which had relied on computer models to guide their investments. The risks of the subprime meltdown and resulting credit squeeze had not been factored into their calculations.

  “The quants are the ones really getting hit by this. We’re doing all right. We have a lot of shorts out,” Dino tells me as he looks at his portfolio on the computer screen. A cover ripped from a February 2007 BusinessWeek magazine is taped on the wall behind Dino’s chair, with the headline IT’S A LOW, LOW, LOW, LOW-RATE WORLD. Dino tells me that he stuck it up there to remind himself, in contrarian fashion, that the days of easy credit were probably just about over. “I knew it was near the end,” he says. “It was time to short the debt plays.”

  The brunt of running the fund involves finding investment ideas through research—basically, what the analysts do full time. When I ask Dino for an example of an investment that went well, he tells me about a brand of expensive designer jeans called True Religion. While Dino was researching, he saw a reference to the company and found out that the jeans were hot in L.A. and New York. Dino and his analysts checked out the firm, calling stores and distributors to try to gauge how the jeans were selling. They spoke with the company’s management to see if they had the ability to manage the brand as demand increased. When Dino invested in True Religion, it was trading at $1. Over the next year, as the jeans became a mainstream fad, the stock climbed to $20.

  As we sit in his office, Dino calls the CEO of a small company that is one of many trying to capture the market to stream movies over the Internet. Dino chats with the CEO on speakerphone for a few minutes before the CEO launches into an extremely detailed explanation of the company’s technology. As he does, Dino mutes the phone and continues to do about five things at once—sending instant messages to his trader, looking at his portfolio on his computer screen, and carrying on discussions with his analysts. At one point Dino picks up his cell phone as it rings and has a brief conversation.

  Just as the CEO finishes, Dino takes the phone off mute and
fires questions at him: “How much cash do you have? How much debt? What are the players in this space? What’s going to take this to the next level? How comfortable are the big studios with you delivering their stuff, given your size and the amount of capital you have behind you?”

  As the CEO begins another explanation, Dino puts the phone back on mute and continues multitasking.

  Two years later, in the fall of 2009, Dino and I meet on a Saturday morning in New York City. As we walk from his hotel in midtown Manhattan, we pass several groups of runners dressed in brightly colored outfits and carrying cups of coffee. They have just finished an international “friendship run” in advance of the New York City Marathon, set to start on Sunday. Dino, who is married with three kids and one more on the way, has a rare day off. Yesterday he met with current and potential investors in his fund. After meeting with me this morning, he’ll do some shopping and then get on a plane for Madrid, where he’s been invited to participate in an investors’ conference sponsored by Merrill Lynch. From there he’ll fly to Athens to visit family and check out a few potential investments.

  The past two years have been trying ones for the stock market, which lost more than half of its value between the fall of 2007 and the spring of 2009. Several thousand hedge funds—including many big players—have folded and disappeared. Dino’s fund, in the meantime, has continued its run. Between 2004 and 2009, Dino is up 414 percent, a time during which an investment in the S&P 500 would have yielded nothing. Since my visit to his office in 2007, Dino has hired two more analysts and moved the firm onto a high floor in the Rainier Tower, one of Seattle’s most prominent skyscrapers.

  We settle in at a large and crowded diner—Dino chats with the manager in Greek—to talk. When I ask how he rode out the financial collapse, Dino tells me that his fund went heavily short on the market in the months before it cratered. “You just gotta listen to what’s going on day to day,” he says over an egg-white omelet, fruit salad, and plate of hash browns. “When the car wash guy is buying a house, that’s just a balloon that’s inevitably going to pop.”