The Peril of Hedge Funds

No, it didn't shock me that Tiger closed its doors. We had known about Robertson's problems for months. His entirely too-visible core holdings never bounced, even on good days and his aversion to momentum left him with no room to make money in this environment.

No it wasn't shock. It was the sheer vulnerability of it. A few years back when Robertson had stumbled, Business Week had written a negative article about him and his team, one over which he sued the magazine. I wrote him and told him I had my money on him. I didn't know him from Adam, but I was in awe of him and knew he would come back, I knew he would triumph over adversity. I knew his stock picking and his prowess at hiring the best people would get him back in the game. And he did. He sent me a nice note at the time thanking me for believing in him, and for someone who viewed Robertson as a personal hero, I was thrilled even to be acknowledged by the legend.

Until the end of last year I thought Julian would come back because he always did. But when he didn't I knew it was just a matter of time. You see, I do what Julian does. I know that if you don't make money for two straight years in this business you are finished. Even if you are Julian Robertson.

The economics of hedge funds just don't let you lose money for two years without a vicious cycle setting in. You can't pay anybody bonuses, including the people who made you money, because the fund didn't, as a whole, make any money. So you lose your best people no matter what.

It is very hard to retain stars and ask them to work for free for more than two years. People don't have that kind of wherewithal.

I don't know what Tiger's partnership agreements look like, but if they are standard fare, he can't get paid until he gets people back to even. But take a look at that chart of his performance and you will see that getting back to even would not be easy. (Remember when you start at 100 and you lose 20%, you aren't back to even if you make 20% and 20% is darn good in this business.)

It was that fragility that scared me. All of those great years don't mean anything after a couple of years of losses.

Of course, that's just the internal struggle. Outside, the investors who love you when you are hot, desert you just as fast when your hand grows cold. I was struck when I read one of the articles about how a couple of angry investors had harangued Julian at some conference. I can imagine the withdrawals he must have had. I saw them, massively, when I failed to make much money in 1998. People who had been with me for 15 years pulled out in a flash. High and dry. Overnight.

Although I have since rebuilt the capital and exceeded the highest levels of that bad year, I can tell you that every withdrawal stung like wiping your eyes with a washcloth dipped in Habernas A No. 1 hot chili peppers.

In the end, the withdrawals on the outside and the departures on the inside take their tolls. Neither of these would have mattered, of course, if Julian had been willing to play the game, the momentum game, the game he had no stomach for. If I were 67, maybe I couldn't switch either. I don't know. When I adopted momentum in 1998, after fighting it for years, I did so extremely reluctantly with full knowledge that I would be finished as a money manager if momentum suddenly flamed out.

But if I had stuck with value, I know the withdrawals and defections would have wiped me out anyway. So I made the change, brought in the young guys, gave Jeff Berkowitz the recognition and equity he so richly deserved and we prospered.

We prospered because I knew what the Trading Goddess has told me from day one about our business: "To your investors you are only as good as your last trade." And the last trade had to be tech, not value.

Random musings: "Doctor, this man has losses coming out of the wazoo," a line many of you wrote to tell me you liked very much, was not of my own creation. Jeff Berkowitz suggested it. Credit him, not me.