A Walk on the Wild Side of Money Management

Hedgehogging
By Barton Biggs
John Wiley, 2006.

This book is about a breed of money managers who are at the cutting edge of an industry that even in its bloated mainstream compensates its members supremely well.  Hedge fund managers, or hedgehogs – prickly beings as we discover in the account of Barton Biggs, himself the former Chief Investment Officer of Morgan Stanley, can earn obscene amounts of money if they are successful.  ‘Hedge fund’ is a term that covers a multitude of fund types.  Their commonalities are the fee structure (1% - 2% management fees and 20% of returns), and their commitment to absolute rather than relative returns.  Thus, good hedge funds should not suffer negative returns and should provide positive returns above that of the market.  These returns above the market are, in industry parlance, the alpha.  Every pension fund, endowment, and wealthy investor is in search of alpha – that extra performance wholly attributable to the money manager.  The term is fitting because, according to Biggs, almost all hedgehogs are intense, obsessive males driven to be Number One. 

Biggs joins the alphas in 2003, although he had been a renowned market strategist and investor at Morgan Stanley for 30 years.  His book is an entertaining and illuminating look at hedge fund managers – their investment styles, and lavish lifestyles.  Hedgehogs talk of their own and others net worth in terms of units: one unit is $100 million dollars.  To be successful is to have at least five units.  He exercises discretion, although somewhat cheekily, when he gives pseudo-names to the odd characters (who really exist) that populate his book.  Wall Street and Greenwich, Connecticut (the inhabitants of which have, apparently, little to do save for showing off their riches, status, and pedigrees) will be guessing in the short term about the true identities of quirky individuals such as Grinning Gilbert, who took to his bed one lunchtime and stayed there, paralyzed by the dismal performance of his hedge fund.  His status-conscious wife ends up liquidating the fund. 

Biggs sprinkles his book with vignettes of hedgehogs and their triumphs or failures.  The stories elicit a chuckle and sometimes even a guffaw.  Yet, one cannot help but feel the characters are a little pathetic and largely superficial in their seemingly unquestioned pursuit of accumulating money.  Biggs is quick to point out hedgehogs also are generous with their money and are the new eleemosynary class.  However, for many, starting a charitable trust is yet another sign of economic status.  Like the Ferrari in the five-car garage, one must have an eponymous charitable trust if one is to be considered truly successful.  Disciples of the German philosopher Immanuel Kant will argue this self-interested motivation that lies behind the act of giving does not qualify the act as a morally good one.

Part of the book describes Biggs’ own experience with opening and marketing a hedge fund.  By all accounts, it is grueling and demeaning trying to sell one’s hedge fund services to wealthy individuals and people who are responsible for institutional money.  The former are vain and unashamedly seek the famous, while the latter are cuttingly cynical and slaves of the short-term.  Wannabe hedgehogs must be thick-skinned, glib, and exude supernatural self-confidence. We have the impression that Biggs is not comfortable in the crowd at the Breakers, Florida where one of the biggest hedge fund marketing events happens.  Perhaps he has enough depth to sound out the greed and rationally unguided desires that the people who attend these conferences possess.  Yet, his own attraction to the money management business overpowers his wisdom and insight.  Redolent of an F. Scott Fitzgerald character, he admits he does not retire because he loves the business, warts, and all.
 
Biggs gives a useful beginners guide to investing in stock markets and describes with clarity the three main investment styles.  He explains what short selling is about and gives us an honest, first-hand account of how it feels to be on the wrong-end of a short sale.  Biggs writes clearly and without unnecessary jargon.  It is obvious he has read widely and ruminated deeply on finance.  He is comfortable discussing economic and financial history.  Those who are interested in fund management in general, and in hedge funds in particular, will find this book deftly written, insightful, humorous, and informative.