Hedge Funds: A Desperate, Frantic Adventure

The Economist /Bookreview

Hedgehogging By Barton Biggs

February 9, 2006

THREE years ago, and just two years after stating that “hedge-fund mania now grips the US and Europe” and “is rapidly assuming all the classic characteristics of a bubble”, Barton Biggs, then aged 70, started a hedge fund of his own. But if irrational exuberance finally captured Mr Biggs—who had spent the previous 30 years at Morgan Stanley, where he founded the research department and chaired the investment management division—it does not show. In “Hedgehogging”, his engaging memoir-cum-treatise on the “never-ending search for investment acorns”, Mr Biggs never lets the reader forget that even for the greatest investors, disaster may be but a trade away.

This is a book that will convince most readers that investing is best left to the professionals. It will also leave them feeling not terribly reassured by that conclusion. The professional investors, the “hedgehogs”, whom Mr Biggs describes, are by and large obsessive, intensely competitive, damaged people, albeit that the best of them are also intelligent, curious, widely-read sophisticates (like Yale-educated, wannabe-novelist Mr Biggs himself).

The book concludes with a chapter on John Maynard Keynes, whom Mr Biggs reckons was a hedge-fund pioneer long before Alfred Jones in the 1940s gave the name to the sort of fund that can both buy and sell short (selling short means selling borrowed assets in the hope of buying them back later at a lower price). Keynes made and lost a fortune three times; he suffered fits of depression and attacks of nerves; he could never resist an intriguing story about a stock. He was also someone “who sometimes walked across the Cambridge campus pumping (urinating) and who was famously gay, lecherous and notoriously promiscuous.” In case you were wondering, Mr Biggs reckons that although there “are many brilliant and bizarre characters in today's hedge-fund world, Keynes surpasses them all.”

The author's other bizarre investors are often disguised (thinly) with false names. This may be a legal or social necessity, but it makes for a less titillating read. A few years ago, Mr Biggs got into trouble for writing about a plumber who was too busy day-trading shares to fix his pipes, who turned out to be a figment of his imagination. But the characters in “Hedgehogging” seem real enough.

There is “Peter” who “has a stationary bicycle built into his limo so he can work out, read the paper, watch CNBC and get driven to work all at the same time.” Or “Vince”, who “thinks of himself as a prophet”, and believes that the “excesses of the 1990s have only begun to be purged, and that the secondary consequences will be a social and financial revolution that will destroy another huge chunk of paper wealth and transform society.”

Lady Thatcher's bad advice

Margaret Thatcher even puts in an appearance, dissuading Mr Biggs from getting out of Russian paper shortly before the market crashed in 1998 (he has forgiven her). Currently, Mr Biggs is bullish on emerging markets in Africa and the Middle East, and is not yet convinced that America is in the grip of a housing bubble. But, as he readily admits, he has been wrong before and will be wrong again. Indeed, Traxis Partners, his hedge fund, has already mistakenly shorted oil in May 2004 and the dollar in December 2004.

Working for a hedge fund is currently extremely fashionable, the top choice of graduating Harvard MBAs. Mr Biggs does a good job of revealing the reality behind the glamour. In 2004, 1,000 new hedge funds were formed and about 1,000 closed down, with a whimper. Despite his own long record, Mr Biggs struggled to raise money, and some of his initially keenest investors backed out as the time to pay up approached.

Chapter Five—“The Odyssey of Starting a Hedge Fund: A Desperate, Frantic Adventure”—should be compulsory reading for anyone contemplating forming their own fund. Mr Biggs found pitching for money at Morgan Stanley's fabled hedge-fund conference at The Breakers in Palm Beach an excruciating experience. “Vastly rich investors with private jets, homes in three climates and Botox-smoothed foreheads name-drop and talk about their golf games...Wealthy divorcées and widows with artificial brightness in their unpouched eyes and hard, chiselled faces and tucked stomachs and bottoms, work the crowd. Are they looking for a man or a hedge fund?”

Hedgehogging.
By Barton Biggs.
Wiley; 320 pages; $26.95 and £16.99