by John Hawkins | May 16, 2011 5:55 am
I just finished up Diary of a Hedge Fund Manager: From the Top, to the Bottom, and Back Again. It was an outstanding book, not only because it taught me a lot about how hedge funds work, but because it was well written and very motivational.
Unfortunately, the hedge fund business pays a higher multiple for short-term performance than it does long-term adherence to principles. We’re only now seeing the ugly side of that reality. Wall Street’s latest cycle of earnings gamesmanship and off-the-charts leveraging constituted an ambitious compensation mousetrap, not a sustainable business model. — P.5
I might not have fully appreciated the value of preparation, but I’ve since found it trumps all else, in sports or business. — P.21
If I wasn’t out entertaining, I stayed at my desk until my bosses left, usually around 6 P.M., then I’d work out in the CSFB gym until 7 P.M. when I could grab a free meal in the CSFB cafeteria, always chatting away with the junior analysts I was courting. Then I’d go back up to the desk to see if there were any other messages or whether any of our clients needed anything, then I would go home by 8 P.M., then straight to bed, and then back up at 6 A.M. for another go-round. — P.53
By the middle of 2006, it was starting to become clearer to me that the hedge fund industry was becoming a dangerous bubble, with too much money chasing the same trades. This was leading hedges down narrower and narrower paths in which they bought riskier credit instruments to round out their strategies, and they morphed into lenders and purveyors of private placements, fueling a private equity bubble forming alongside an even larger housing bubble all contained within an even larger credit bubble, or what George Soros would call the “Super Bubble,” formed over three decades of credit expansion going back to the Reagan-Thatcher era of laissez-faire market conditions. — P.130
In 1971, the entire hedge fund industry only had assets of $3 billion, according to a study done by New York-based hedge fund advisory firm Hennessee Group. Now a handful of elite managers were taking that much home per year in just pure profit from investor fees. — P.131
My talk of and belief in the gathering economic storm clouds was by no stretch lost on everyone at Blue Wave, and certainly by mid-2007 there were hedge fund managers such as Peter Thiel and John Paulson who were betting that the housing bubble would collapse. NYU professor Nouriel Roubini and Yale professor Robert Shiller had both by this time been quite vocal about similar issues, though for the most part, like Robert Babson in September 1929, they were written off as cracked, doomsday theorists. — P.149
Hedge funds weren’t going to be sustainable, because they weren’t being run as businesses and had no emphasis on establishing clearly defined processes for reproducing results on a consistent basis. Hedge funds were being run more as vehicles for producing fee revenue for the hedge fund management company, but with less than adequate downside protection that the hedge was supposed to provide. Hedge funds had originally been conceived as sophisticated vehicles for delivering Wall Street’s finest investment acumen, with built in downside protection, i.e., the hedge. Now, they had devolved into nothing more than highly touted engines for producing excessive compensation. — P.156
Regardless of all the many signals, no one set of factors can or will ever tell an entire story. History will assign a neat set of circumstances for this past crash — the popping of the housing bubble, one created in large part by the U.S. government-sponsored entities Freddie and Fannie, exacerbated by an overindulgent credit derivatives market. Sounds right. — P.175
If history has proven anything, it’s that patterns repeat, again and again. Greed takes over and the self-fulfilling groupthink of the herd trumps rational process. — P.175
Function in disaster; finish in style. — Howard Penney — P.194
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