Barton Biggs Talks Hedge Fund Mythology

Are you bullish right now?

Yes, I am bullish for 2006. Many of the great thinkers are bearish about the imbalances in the world economy, but I believe we have, and are going to have, at least for a while, moderate growth and moderate inflation. If so, stocks can go a lot higher, particularly in certain markets and sectors.

What are the characteristics of a great investment manager?

Great investors come in a variety of different models, but in general, clairvoyance, obsession and a massive amount of courage are useful characteristics. They have to be obsessive because they have to be crazed by competing in a game that attracts the smartest and the most obsessive people in the world.

Why do you prefer value to growth?

I've always been a value investor. Historically, value beats growth by almost 300 basis points a year. It's a complicated subject. But I also want to keep an open mind, so I am also somewhat eclectic, and there are times, like right now, when growth is so under-priced relative to value that growth is also attractive. I think that some of the big-capitalization stocks are on a relative basis reasonably attractive.

In your book, you say that being big is not always good. Does it mean that the superstar hedge funds aren't so great?

I was referring to traditional investment-management companies. Size is the enemy of performance because running a large amount of money is by definition harder than running a small amount of money. If a big manager is truly exceptional -- hedge fund or traditional -- then that manager can offset that handicap. Big funds may be very appropriate, but you have to discriminate. If you are Steve Cohen, you can run $10 billion better than most people would run $500 million.

With lower returns and high fees, is interest in the hedges bound to cool?

I don't think so because hedge funds still attract the best and brightest, so as an asset class, they are going to deliver superior performance. However, as I said before, there are no guarantees and investors should study their prospective hedge funds very intently and read the fine print in offering documents. If the story sounds too good to be true, it probably is too good to be true. The hedge fund industry will continue to grow even though the growth of assets and the number of funds have already slowed down.

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