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The Slime and Grime of Hedge Funds
At the mention of the name Barton Biggs, my first recollection is the cover of the Forbes magazine of July 1993. He posed in it dramatically, dour-faced and wearing the attire of a bear, complete with paws from which nails stuck out. The cover theme was how Biggs was bearish on the US economy and markets under the presidency of Bill Clinton. He was quoted as saying: “We want to get our clients’ money as far away from Bill and Hillary Clinton as we can. The President is a negative for the US market. I’m embarrassed that I voted for him and contributed money to his campaign.” The S&P500 was 450 at that time. By March 2000, after Clinton’s two terms were over, it was over 1,500.
The second recollection I have of Biggs was an article in Fortune (possibly) where he was quoted recounting how he romped across China and India to discover that these were absolutely fantastic growth markets to invest in. He had led Morgan Stanley to a major expansion in emerging markets in the early 1980s. When Morgan Stanley became the first foreign company in January 1994 to launch a fund in India, Biggs was roped in for a teleconference (a novelty at that time) with the press at the office of the Videsh Sanchar Nigam Ltd. In September, the Sensex was over 4,400. By 2003, it was 2,900. Morgan Stanley’s fund became a poster boy for all that’s wrong with the fund business – more hype and overselling than performance. Morgan Stanley did not launch a fund for 14 years after that – until 2008. The monster bull market of 2003-08 eventually salvaged the performance of the first fund.
These two events play on my mind when I hear the name Barton Biggs, though these may have been isolated occurrences. After all, he has worked for 30 years at Morgan Stanley, where he started the research department and chaired the investment management division for years. His later years in the firm were spent as the chief strategist. In fact, at various times between 1996 and 2003, the Institutional Investor magazine ranked Biggs as the top US investment strategist and then global strategist. Interestingly, in 2001, he pronounced that “hedge-fund mania now grips the US and Europe” and “is rapidly assuming all the classic characteristics of a bubble.” But, in 2003, Biggs retired from Morgan and launched his own hedge fund, Traxis Partners, with Madhav Dhar also of Morgan. In 2006, he wrote Hedgehogging, his memoir-cum-treatise on the “never-ending search for investment acorns.” This is a new edition of that book.
It is hard to categorise this work. It is mostly an endless whine about how institutional investors behave (rude, short-term, ruthless and often mindless). The same litany – of how it is so hard to raise money and how it is so hard to keep, whether you have had a few down years or a few great years – appears repeatedly throughout the book. The rest of the book is a mish-mash of history (Bismark’s astute timberland investment was a new thing for me), investment concepts (value vs growth, features of asset classes, behavioural finance) and short sketches of many hedge fund managers. Several of them are obsessive, fiercely competitive, somewhat deranged while the best ones are wise, well-read and well-travelled. Biggs has substituted their real names to avoid legal and social awkwardness, but that leaves you dissatisfied. A few years ago, Biggs wrote about a plumber who was too busy day-trading shares to fix his pipes. It turned out that Biggs had invented the story!
Hedge funds are a fashionable idea now and are the most favoured destination for finance students, never mind that, in 2004, 1,000 new hedge funds were formed and about 1,000 closed. Besides, every few years some star or the other ‘blows up’. Biggs reveals the intellectual slime and commercial grime behind their high-profile hedge funds. Biggs struggled to raise money for his fund, narrating his harrowing experience at Morgan Stanley’s famous hedge-fund conference at The Breakers in Palm Beach. He found “Germans with bulging eurobellies… mingle with bloated Arabs in pale suits and white shirts, their handshakes as cool and clammy as snakeskin. Former investment bankers exchange distinguished lies with portly ex-diplomats, permanently deformed by self-importance…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? They have smiles for you like cold leftovers.”
Biggs and Dhar faced a series of rejections in their appeal to raise money and Biggs appears more like a bewildered and anguished philosopher in search of fairness in a wild, winner-take-all contest. This is more surprising because he was born with a silver investment spoon – his father was a wealthy investor who gave Biggs and his brothers an early start with a generous bunch of shares. This book is a good read for those keen to know how hedge funds work, but Biggs surely had observed much more in his 50 years on the Wall Street, the bulk of which was spent at a mainline financial firm with its own large share of scandals and funny actions all over the world, including India. Pity he has not written a book about them. – Debashis Basu

EXCERPT
Miles Moreland is an Englishman who is probably in his mid-50s. He has the horsey, aristocratic good looks and speech of someone who went to Cambridge, as he did. I first knew him when once, long ago, he labored gracefully as an institutional salesman for Morgan Stanley in New York. Rejecting this as an inferior cultural experience, he matriculated to write a charming book about walking across Europe. Subsequently he founded Blakeney Management, an investment company that focuses exclusively on Africa. Miles is a charming, very bright, unconventional man. His firm is located in London, where he lives in a houseboat on the Thames and drives a motorcycle. Miles’ theory is that the African and Middle Eastern emerging markets are the last undiscovered investment frontier, and that, if you know a great deal about what everyone else ignores, you should be able to find some amazing values.

The Washington Post called it one of the 10 best investment books of all time and the Businessweek calls it a must-read for investors. The first edition of this book (Stocks for the Long Run, Jeremy J Siegel, Tata McGraw-Hill, 380p; Rs495) came out in 1994 and the fourth edition was released late last year. It is the most eloquent argument to buy stocks to create long-term wealth. Jeremy Siegel, professor of finance at the Wharton School, University of Pennsylvania, has aggregated really long-term data from the US market, starting 1802, and used empirical analysis to settle some major investing questions. Siegel argues that stocks have earned an average 6.5%-7% per year after inflation over the past 200 years. He expects returns to be somewhat lower in the coming years. He also proves that, over a long period, stocks are less risky than bonds. In his new edition, Siegel has added a chapter on globalisation which argues that the emerging world will soon overtake the developed world. The Indian edition is reasonably priced and is an essential read for any serious investor. – D.B.

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Time to Go Neutral
In our last issue, we had said that the market was headed for more gains. This did not happen. Forecasts can work only when there are no freak, unexpected events -- like a third-world country conducting a nuclear test. One such event over the past two weeks was the parabolic rise in the price of crude oil. Just when it seemed that world markets and economies have put the effects of the US credit crisis behind and have to deal only with rising inflation, crude oil price leapt up like a flame. For the week ended 16th May, light sweet crude futures on the New York Mercantile Exchange for June were trading completely flat in the narrow band of $123-$126. Beginning 19th May, crude futures simply took off -- shooting up to $135 with experts raising the prospect of oil to $150. An almost $10 rise in just five days, coming after a $25 rise between 1st April and 15th May, created a huge scare scenario. To get a better perspective, consider the fact that from January this year crude has gone up by $35, of which a $10 rise came on those five fateful days.

Markets all over the world reeled. Indian oil-refining companies have run short of cash and there are actual cases of petrol rationing. If the market collapses from the current level, those five days in the third week of May would go down in history as the straw that broke the camel’s back. Crude futures have declined at the time of writing and are poised to retrace some of the $35 rally that started in April (partly because the world simply panicked). Meanwhile, the damage has been done.

The near-term sentiment has been badly hit and we think the market will have to do a lot of hard work to keep climbing against all odds. Inflation has taken firm hold of everybody’s mind as the most critical factor in the world economy now and nobody has any clue on how to bring it down. The answer is more supplies but we were so busy gloating about the how we will grow at 9% no matter what, that we forgot that a combination of venal politicians, anti-enterprise attitude of the State and virtually no new reforms under the great troika of reformists -- Dr Manmohan Singh, P Chidambaram and Dr Montek Singh Ahluwalia -- cannot act as the bulwark when the tide turns. We don’t know whether the tide has turned. But, in case it has, this government certainly has done nothing to prepare for it. Higher inflation will be tackled by bleating, moaning, higher government expenditure and lots of hot air.

There is a lot going for India still. The billions of rupees of income in the hands of employees in sectors like software, call centres, retail and finance have not reduced at all. So, a minimum amount of growth in consumption is guaranteed. But it is also true that five years of frenetic growth had meant ridiculous prices for very average quality of real estate and human resources and lots of wastage. Flab will have to be cut everywhere. It means adjustment at all levels. That does not make for a great mood for stock buying. Unless, of course, a wave of speculative money again hits emerging markets. -- D.B.

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