Sunday, February 03, 2008

Book Review: Hedge Hunters

Hedge Hunters was written by Katherine Burton, a reporter for Bloomberg News. The book is essentially a series of interviews with the current (or in one case the past) mangers of eighteen succesful hedge funds.

The hedge fund managers interviewed included familiar names such as Julian Robertson, Michael Steinhardt, Richard Perry and Boone Pickens. However, most of the names were not familar to me which added an element of interest to the book.

In terms of insight into what makes a successful hedge fund manager or a successful investment strategy, a few common (but not universal) themes emerged from the various interviews:

1. while all of them had some grounding in the financial services industry before starting or joing a hedge fund, the range of university degrees and backgrounds was suprisingly diverse;

2. all of these investors, without exception, did not employ strategies that involved long term holding of investments. For many of the managers who claimed to prefer longer term investments, their idea of longer term was two or three years at most. When an investment reached the point where they did not believe it would continue to appreciate at an acceptable rate, it would be cut from the portfolio. This is a far cry from the Warren Buffett style;

3. most of them were quite ruthless about cutting losing positions early. Those that did not automatically cut losing positions used a rigerous review process that appeared to favour cutting losses unless they had a very strong case for continuing with a position;

4. down side protection was as important as winning on the upside. A combination of diversification with position limits, loss cutting and (for many) long short strategies were all designed to limit losses. Use of derivatives to limit risk was variable - some managers used options to hedge exposure, others did not;

5. return expectations were far more modest than is commonly believed for hedge funds. Where target returns (net of fees) were quoted they were surprisingly low (in one case 10-12%). Although a number of managers have acheived average annual returns of more than 20%, numbers around 12-15% were more common. The key for many, is to avoid or minimise losing years rather than emphasising winning years;

6. there was a fair amount of disdain for noise (general chatter about the market, sell side analysis etc). On the contrary, there was a clear preference for doing their own research (in huge detail) and, above all, their own thinking. A couple made comments about avoiding crowded investment ideas.

All in all an easy read which provided some useful (though limited) insights into the world of hedge funds. Although lacking depth or detail (possibly difficult to provide in a book of this nature), it was clearly written and easy to read.

No comments: