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. Incidentally, professional investors, or hedgehogs, are avaricious about making money and getting compensated, but they are extraordinarily generous in giving it away for a diverse assortment of charitable and political causes. Furthermore many contribute not just money but huge hunks of time, which is an even more precious currency. In many ways they have become the new eleemosynary class. To protect and to avoid offending or embarrassing the innocent and unwary?and to foil those who are intrigued with deducing who did what to whom?many names, places, and dates in the narrative have been altered. In this process, some of the people described have become almost composites, as characteristics of firms and individuals were mixed and blended. On the one hand, I hope my disguises are effective. On the other hand, many of the events I have written about actually happened. There is much to be said for the old adage, truth is often stranger than fiction. Why did I write this book? Because I love the business and am fascinated by its citizens. For many years I have found that the act of writing regularly, keeping a diary so to speak, not only helps crystallize my own investment thinking but also provides a record of right and wrong calculations, which is very instructive on future review. A diary helps you to learn where your thinking about people and events was right and where it went wrong. Just as some investors shape and sort their calculus by talking, I get the same effect from writing. For me writing is a crucial investment and personal discipline. This book is a collection of disparate reflections and anecdotes. Some are related to events and sagas that occurred during my time at Morgan Stanley. Others are of more recent vintage and related to the creation of the hedge fund of which I am a managing partner and of one of its subsequent investment misadventures.Then there are portraits of investment friends and acquaintances.
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