There's an old saying on Wall Street: Hedge fund managers either eat well or sleep well -- but they don't do both.
As overseas financial crises and the near-collapse of
Long Term Capital Management
have roiled financial markets, many young hedgies are doing neither. The men and women who left secure jobs at brokerage firms -- or those who put their freshly minted MBAs to work -- in search of the riches and glory that hedge funds offer are waking up to a brave new world. True, the volatile market and breakdown in long-trusted valuation models are adding some gray hairs to even the most distinguished salt-n-pepper heads. But younger guys and gals, many of whom have never worked in a bear market, are getting a real shock.
"These young kids are having a very hard time," says one long-time Wall Street executive. "They have hot money and they don't have the long-term relationships with their clients that will see them through.
As an investor you can live with a
," who runs the established
Tiger Capital Management
in New York. "But chances are if you're sitting with some kid, you're trying to get your money out."
As recently as this spring all kids needed were a few million dollars and a dream to open their own hedge fund.
"Three months ago, anyone could open a fund and everyone wanted to -- it was like being a rock star," says Robert Schulman, president and chief operating officer of
, a consulting firm in Rye, N.Y.
Schulman estimates that the number of hedge funds has soared from 500 in 1990 to 3,200 this year. He expects at least a few dozen hedge funds to go out of business this year, not because they've lost all their investors' money, but because poor performance will wipe out lucrative fees for managers. Hedge fund managers must make their investors money before they take home a paycheck. A fund that loses 10% in a year will have to make back that 10% the following year, plus additional returns, before the manager can take a performance fee. Zero profits make it hard for hedgies to pay research analysts and other staffers. It's easier for some to return what's left of the assets to investors, close up shop and start fresh by reopening under a different name next year.
Still, Schulman adds: "Going forward it will be harder for a 28-year-old without an extraordinary reputation and record to start a hedge fund. You'll see a shakeout. Maybe a bit of gray hair will do some people some good."
Massy Ghausi, a 26-year-old who, with three partners, launched
Flatiron Capital Management
, a New York fund specializing in government bonds and convertible arbitrage, knows that investors can turn off the spigot that ran so rich and green four months ago when the firm started.
"When we started there was a lot of capital around," Ghausi says, explaining that many established arbitrage funds had closed their coffers to investors since they'd already raised more money than they could reasonably invest.
Since the spectacular troubles of Long Term Capital became public, raising money is tougher. Ghausi says to gain investors' trust, funds must be more transparent and offer audited risk reports that outline a portfolio's leverage and exposure. Still Ghausi and his partners have managed to raise just $1 million for a government bond fund. The convertible arb fund isn't open yet for lack of capital. He says he'll give it another six months, in which time he's hoping to raise about $15 million. Otherwise he'll give up.
Equity funds, too, are feeling a backlash of ill will from the Long Term Capital debacle while reeling from a rocky stock market. Jeffrey Miller, age 27, who opened the
last February with partner Eric Jacobs, 29, knows that Wall Street fortunes can turn on a dime. In 1997, Acadia, which has $21 million under management and specializes in small banks and thrifts, returned 123% after fees. This year the fund is down 7% through September. Miller and Jacobs spent a recent weekend penning their first shareholder letter that explains why the fund, which raised a good chunk of capital from friends and family, is losing money.
"It's worse than I thought it would be," Miller says. "There's a lot of pressure on you. Investors say they're in it for the long term. But if you have a few bad quarters, they pull the money out."
Whereas last year Miller would work 12 hours a day, typical for hedge fund managers, he finds he's putting in even longer hours this year. "I'm bringing a lot more stuff home," he says. "I'm reading and worrying. What's out there that I don't know?"
The pair recently moved their offices from New York's Park Avenue to Philadelphia, where the cost of living and taxes are lower. Although Miller says with a sigh, "I don't know if there'll be anything to tax this year."
Phil Anderson, 31, along with Leonard Panzer and Matt Rich, both 29, raised $5 million and opened
Balfour Equity Partners
) on April 1 -- not long before the bull market took a breather. "I'd say it was an inopportune time," Anderson says.
Anderson, who was in college during the 1987 stock market crash, says that every day seasoned traders tell him that he "doesn't have the experience needed to manage money in this environment." Rather than taking that as an insult, Anderson says he tries to pick up tricks of the trade from players who've lived through tough times. From one veteran, Anderson recently learned that four down market days are usually followed by an up Friday, since specialists on the
New York Stock Exchange
who have been short stocks Monday through Thursday are covering those positions to end the week flat.
After watching the fund's performance slide in August, Anderson and his partners changed their strategy from a buy-and-hold stance to more active trading. Anderson says that while the fund is down several percentage points since inception, he expects to end October in the black. In the event that doesn't happen, Anderson and his partners are prepared to live without a paycheck until December 1999.
Not everyone is brooding. Steven and Leonard Schuster had been waiting for a collapse in valuations before launching
Gemina Capital Management
Sept. 30, with less than $50 million under management.
"We had delayed the opening so many times that people were asking us, 'Gee, are you still doing this?'" Steven Schuster says. "We were starting to feel like jerks. But now there are values starting to emerge and we've got to make the most of it."
Steven Schuster, with more than nine years in the business, most recently as a managing director at
in New York, is older than the average newly minted hedge fund manager. He eschews the relative value comparisons favored by bull-market players, like
is cheap relative to
. "That's not the type of thing that will save you," he says. Instead he looks for intrinsic value: "Where do they become a buyout candidate? How will I get out of this?"
Still, the majority of new managers are less sanguine. "At times like these, I wonder why I don't just go into carpentry or something and have a regular life," says Acadia's Miller.