Barton Biggs Talks Hedge Fund Mythology

After 30 years establishing himself as one of the best investment strategists in the world at Morgan Stanley(MS Quote), Barton Biggs left Wall Street to start his own hedge fund, Traxis Partners. Created three years ago, the fund now has more than $1 billion under management.

Biggs recently chronicled the challenges faced by hedge fund managers in a book called Hedgehogging. While writing about superstar managers such as Warren Buffett, George Soros and Julian Robertson, Biggs also reveals his own experiences dealing with the ups and downs of the market.

Biggs took the time to share some of his insights in an interview with TheStreet.com.

TheStreet.com: Your book talks about the dark side of being a hedge fund manager: the anxieties, the insecurities. Are you trying to demystify hedge funds?

Barton Biggs: The world thinks that hedge funds are a magic road to riches for the manager and the investor. That's an illusion and a dangerous one. A lot of people start hedge funds without realizing all the slings and arrows of outrageous fortune that can afflict them and their fund. Investors are investing in hedge funds without understanding that not all hedge funds are going to succeed. It is important to demystify all that.

What do you think of managers who do not short stocks and who call themselves hedge funds?

Hedge funds that do invest long-only using leverage are not hedge funds. They are leveraged long funds. Some hedge funds are starting long-only product lines. That's different than being a long-only fund. Hedge funds are funds that use leverage to magnify their alpha-creation and always have some longs and some shorts.

Does that apply to activists?

I don't know much about them. They can call themselves activist funds. I would not call them activist hedge funds unless they're hedging their long investments.

Talk about sentiment measures and contrary indicators.

Being a contrary investor means you believe the time to buy is when there is a lot of negative sentiment and pessimism. And you sell when there is too much optimism. Occasionally you are lucky enough to find a person who is a contrary indicator. I talk about this in the book. They can be very valuable. They tend to get most bullish at the top. I can identify them just by dealing with them, by experience. You have to figure them out.