Hedge Hogging

In the lingering hangover aftermath of the great bull market of the
1990s and the carnage of the bursting of the bubble, professional
investors are viewed with disdain.They are disparaged as overpaid
and motley crews who have promised much and delivered little.
Hedge funds in particular are shrouded in mystery and mistrust. They
are blamed for every spasm in the financial markets, and there is a perception
that they often act together in vicious conspiracies to destabilize
the world. Some see hedge funds as akin to financial pirates, preying on
the innocents, and the people who run them are regarded as greedy and
vicious hedgehogs. Recently the investment performance of hedge
funds as a class has languished.
Everyone knows hedge funds have had dramatic growth. Assets
have grown from $58 billion in 1991 to $972 billion at the end of last
year. What is not fully understood is how volatile and market sensitive
the hedge fund business really is. Morgan Stanley calculates that after
eight years of growth, in 1999, the industry had earnings (incentive
compensation plus fees) of $43 billon on assets of $456 billion or a return
of 9.4% on assets. As stocks fell, even though hedge funds performed
well, earnings shrank over the next three years to a low in 2002 of about
$8 billion or a decline of 81%. Then as stocks rallied, they soared to a
new high of $45 billion in 2003 before falling again in 2004.
I hope that these chapters, which are designed to be impressionistic
glimpses of the investment business and its professional participants,
will help others understand the intensity, stress, foibles, and
insecurities of the men and women who manage other people’s
money. I have also tried to capture the ecstasy and elation of getting
investment performance right, and to describe the agony and
despair of being wrong. However, for all its frustrations, being a professional investor is still the most intriguing, challenging, and
overcompensated occupation in the world…. …

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