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Business Roundtable

The Hedge Fund Olympians

HedgeHunters Hedge Hunters author Kathy Burton (second from left) addressed alumni and students at an event sponsored by the Alternative Investment Club (AIC), held at the Cornell Club in New York City last summer. From Left to Right: Jeff Stammen, MBA '03, director, Alternative Investments at Wachovia Capital Markets, LLC; Kathy Burton; AIC member Richard Marin '75, MBA '76, Johnson School Executive-in-Residence; and Executive MBA Class of '09 students Elie Azar, AIC President, Lynne Mazin, AIC vice president, Michael Dugan, and Chad Forrey, AIC vice president, events.

By Susan Spielberg

What makes a great hedge fund manager tick? The Johnson School's Alternative Investment Club invited Katherine Burton, reporter and author of Hedge Hunters: Hedge Fund Masters on the Rewards, the Risk, and the Reckoning, to discuss her book as well as the state of the troubled hedge fund industry at the Cornell Club in New York City.

Thanks to its reputation for achieving spectacular returns for investors, the hedge fund industry ballooned from under $500 billion in 2000 to an estimated $1.9 trillion in assets at the start of 2008, managed by a vastly larger stable of investment professionals. But 2008 has proved to be especially precarious for these fund managers, as the global credit crisis crimped borrowing capacity and market volatility went to extremes.

Even before hedge funds were gripped by these particular challenges, managers were finding it tougher to navigate the waters because the industry has gotten so large. As the space became more crowded, it got increasingly difficult to produce the outstanding investment results that attracted so many players to the field in the first place.

Despite these woes, which have been highlighted by some dramatic failures, a number of investment managers have established solid reputations in the hedge fund community. The stories behind some of these legendary figures, including how they got where they are today and their views on the ingredients for success, was the subject of the discussion led by author Katherine Burton for the Johnson School's Alternative Investment Club at the Cornell Club in July.

Burton's recently published book, Hedge Hunters: Hedge Fund Masters on the Rewards, the Risk, and the Reckoning (Bloomberg Press), is a compilation of her interviews with about two dozen pioneers and up-and-coming managers of the industry. Her profiles trace the professional development of these players and the personal and business characteristics that helped them achieve success. Included in the book are descriptions of the journeys of such widely recognized names as T. Boone Pickens, Julian Robertson, and Michael Steinhardt.

"I wanted to answer the question, 'What makes a great hedge fund manager?'" Burton told an audience of approximately 60 students and alumni.

"I was a little disappointed at first," she admitted. "I thought [some of their answers] were a little prosaic."

Nevertheless, besides expected responses such as 'you work hard 'or 'you hire smart, talented people,' most managers shared some particularly enlightening trains of thought. For instance, the people interviewed in the book tend to think more about the bets that might sink them than about the trades that can make them a lot of money.

"I am going to try to find why I could be wrong, instead of looking for evidence why I am right," describes the thought process of many successful fund managers, said Burton. The writer, who has been a reporter at Bloomberg News since 1993, shared the experience of Roberto Mignone, founder of Bridger Management in New York, as an example of how such discipline can pay off.

In 2001, one darling of Wall Street was SureBeam Corp., which sold ground beef it irradiated to kill off bacteria, such as E. coli and salmonella. The thought was that shoppers would pay one cent more per hamburger patty for the safer meat. Mignone visited the company, the irradiation centers, and the stores and found that the beef was indeed selling well, just like management and Wall Street analysts had claimed. However, by visiting the stores, he also found out that SureBeam was discounting the meat by as much as 20 percent in order to drive the sales. He then shorted the stock, which turned out to be the correct decision at the time.

"He was ready to buy it, but he looked for every reason he could be wrong," Burton observed.

While the managers Burton interviewed all seek to ensure their own survival, the way they go about making such decisions varies extensively among the group. For example, some analyze minute details of a situation, while others depend mostly on gut feel to reach their verdicts. But all the managers share the ability to be curious and skeptical, and to think independently.

Some highly accomplished professionals have also produced extraordinary results in mentoring new talent. Julian Robertson ran Tiger Management, which produced a disproportionate number of hedge fund managers — known as the "Tiger Cubs" — who have enjoyed huge successes. The better-known Tiger progeny include Lee Ainslee, founder of Maverick Capital, Stephen Mandel, who runs Lone Pine Capital, John Griffin of Blue Ridge Capital, and Andreas Halvorsen of Viking Global Investors. Ospraie Management, the investment firm run by cub Dwight Anderson, this year closed its flagship fund, once the largest commodity hedge fund.

Burton noted that in the 20 years that Robertson ran Tiger Management, the fund produced stellar returns of 25 percent a year. However, Tiger closed in 2000 after 18 months of losses prompted by the Internet bubble. Now Robertson is "still in the business of identifying talent" and has been providing seed capital to young managers, 21 of whom are housed in his New York offices; four others are in other cities in the United States, she said.

"More and more people are using seeders now" to launch funds, Burton told the audience. She also said that hedge funds like to get capital from sovereign wealth funds because they tend to be long-term investors who won't pull their money out quickly. Redemptions have been a big issue for funds this year, forcing liquidations.

With all the issues confronting the industry, Burton predicted that a lot of funds will be weeded out this year. "This is going to be a watershed year for hedge funds," she declared.

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