It's a Hedge Fund Life: Investing Billions Takes a Toll on Star Managers

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Hedge Fund Management Takes a TollIs it really such awful work to be a billionaire hedge fund manager? And why are they having such a hard time this year?

Just last week, Stanley Druckenmiller, who ran Duquesne Capital Management, a $12 billion fund, told investors that he was closing his firm and quitting after 30 years in the business. A few days later, Paolo Pellegrini, who ran the PSQR fund, believed to have under $1 billion in assets, announced that he was returning his investors money, though he said he wasn't closing the fund but would manage only his own capital.

Both funds have suffered losses this year. Druckenmiller's fund is down about 5% -- after years of spectacular gains -- and Pellegrini's fund had lost about 11% so far.

Druckenmiller, whose net worth is estimated at $2.8 billion by Forbes magazine, sounded contrite.

"For me the disappointment of each interim drawdown over the years has taken a cumulative toll that I cannot continue to sustain," he wrote to his fund's investors. A drawdown is the loss measured quarter to quarter.

Pellegrini was even more regretful. "I've concluded that substantial additional work is required to position the fund to profit consistently," he told his investors.

A Paradigm Shift in the Hedge Fund Business?


Despite the two bad performances, hedge funds on the whole aren't doing so badly this year. While they were down 19% in 2008, they were up 1.34% in the first seven months of the year, according to a weighted composite index by Hedge Fund Research Inc. That compares with a small decline in the S&P 500 stock index.

But those results pale in comparison to the often spectacular returns hedge funds have notched up in recent years. Hedge fund managers normally charge "2 and 20": 2% of the fund's assets as a management fee, and 20% of the profits they earn as a performance bonus.

"There was an extraordinary growth in these markets over the last decade," says Terrence Martell, a professor of finance at the Zicklin School of Business at Baruch College, part of the City University of New York. "It isn't clear to me that all of the people who got involved in the business are going to survive, and this could be part of that shakeout process."

Martell says that as a result of the global financial crisis, there's great uncertainty in most financial markets, including equities and commodities, two areas hedge funds often make bets on. "The real question is whether we are having a paradigm shift," Martell says. "Is there something structurally that is going on right now and the historical models need to be modified?"

For example, a number of major hedge funds that normally take bets on currencies are now piling into gold investments. The Wall Street Journal reported last week that hedge fund stars like George Soros and John Paulson had taken huge positions in an exchange-traded fund that holds gold bullion. Soros has $600 million in the fund and Paulson has $4 billion, the newspaper said.

The Best Fund Managers Are a Bit Crazy

Sebastian Mallaby, who has written a bestselling book about the hedge fund industry, More Money than God: Hedge Funds and the Making of a New Elite, said the industry went from about $2 trillion in assets at the start of 2008 to just over $1 trillion by the end of 2008, a huge decline caused by market losses and withdrawals of investments.

But Mallaby says he thinks they will grow "massively" again because institutional investors such as pension funds and college endowments have come to realize that hedge funds offer investments that often aren't correlated to the stock market. When equities are way down, hedge funds often move in the other direction, balancing risk.

Mallaby spent long periods with Druckenmiller in the reporting for his book, and says that the fund manager was obsessive about making profits.

"He was addicted to watching his numbers: Was he up or was he down, and if he was down, he was incredibly depressed, and if he was up, he felt that was a high," Mallaby says.

He quoted David Swenson, the manager of the Yale endowment, as saying the personality types of best hedge fund managers were a bit crazed.

"Without it, you can't be that vigilant and that obsessive and compulsive, watching all the markets all the time, switching large amounts of money on a dime if you feel that things have changed," Mallaby says. 'Druckenmiller has that personality, but it's a pretty draining thing to do it over a long time."

Quitting While They're Behind


Druckenmiller famously made $1 billion when he worked for Soros' Quantum Fund when he bet against the British pound in 1992.

He left Quantum in 2000 and took his family on a planned long vacation to Africa. But he was soon back at his own firm, Duquesne, obsessively running the numbers.

According to Mallaby, the 57-year-old Druckenmiller speaks often about wanting to concentrate on his golf game and spend more time with his family, though his children have already reached adulthood.

Mallaby says Druckenmiller was probably not affected, as some reports have suggested, by efforts in Congress to tax hedge fund managers at a higher rate: "He's worth more than $2 billion: If you took half his money away, it wouldn't make a difference to his life."

He noted that Julian Robertson, who closed his Tiger Management hedge fund business after suffering big losses in the dot.com implosion of 2000, returned to the business by providing seed capital to 38 former protégés who run hedge funds of their own. Forbes says Robertson's wealth has grown from $400 million in 2003 to $2.2 billion last year.

Martell believes most of the recent departures are due to bad market performance, not other factors. "If you sit and talk to some of these people and you ask them about fund performance, they realize that they are managing other people's money and it's not fun to have to call a customer and say 'You're down 6% for the month.' These are conversations most people don't like to have," he says.

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14 Comments

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estrellafin

Too much "government interferance". That means the government is looking over your shoulder as to the amount of money the fund makes, earns, or distributes. It also means that the government competes with the Hedges to support the company with its hand out. It may charge less but you end up unionized, prepaid pensioned, czar managed, and unable to expand into new markets. Any good idea will make money if agressively sold, carefully managed, and able to grow; the American Way!! Sorry to see these talented folks close up shop. Maybe Austrailia, China, or some other place will the fruitful ground.

August 24 2010 at 2:25 PM Report abuse rate up rate down Reply
Joe

So if a hedge fund is up 1.7% this year, do they still charge 2% management fee???

August 24 2010 at 2:10 AM Report abuse +1 rate up rate down Reply
goldaxe

This market is illogical,thats why.You have a business that has record profits and earnings,and it tanks. While another business misses on profits and earnings,and it soars.Not to mention all the bubbles that always pop.

August 24 2010 at 1:14 AM Report abuse rate up rate down Reply
aaveilab

The true reason is they have no idea where the market is going!!!!!! The goverment is "helping" too much, and now its impossible to predict which way the winds will start blowing.

August 23 2010 at 10:37 PM Report abuse +1 rate up rate down Reply
velociwrangler

pgrlights 9:22 PM Aug 23, 2010 • "May they all suffer a slow and painful death."......Isn't Chelsea Clinton a hedge fund manager. This article is kinda sad, really. Where oh where will all of those filthy rich Democrats place their sons and daughters upon graduation? Oh the humanity!

August 23 2010 at 10:19 PM Report abuse -1 rate up rate down Reply
BT's Voice

And let's not forget about the so-called "death tax". The wealthy would have you believe that somehow the income received by their children (or other relatives)as inheritance should not be taxed at all. Imagine, one person earns $100 million and another inherits the same, but only the former should have to pay taxes. Oh, but what about all the farmers that would be put out of business? Well the 2% of the people that would be affected by this that are farmers would be protected by tax laws that would be written as such (to prevent this). Finally, I have had people tell me that taxes have already been paid on this money and that taxing it would be double taxation. I say BS! This may have been taxed when it was income for the original earner, but now it is INCOME for the people who inherit it even if it wasn't earned. Don't take my word for it, see what Warren Buffet has to say about it: “Tax law changes have benefited this group, including me, in a huge way,” he said. “During that time the average American went exactly nowhere on the economic scale: he’s been on a treadmill while the superrich have been on a spaceship.” Multibillionaire Warren Buffett believes the estate tax is a necessity to prevent the U.S. from becoming another "dynastic plutocracy," according to the New York Times via Bloomberg News.

August 23 2010 at 10:14 PM Report abuse rate up rate down Reply
Mike

And you wonder what is wrong here? Several trillion stolen here and there- 2% (jews)control 98% of us money-but 50% of the poor control guns and ammo-see you soon on main street and wall street-looking forward to it. Michael Young

August 23 2010 at 9:35 PM Report abuse rate up rate down Reply
Jackson

The truth of the matter is that hedge and mutual funds have been experiencing serious and unabated capital draw-downs since 2008; today's smart money is going into bonds in all world markets. I think these greedy Wall Street banksters and gangsters have finally manged to kill the goose that laid the golden eggs. It's that pesky cutthroat desert bedouin gene pool again at it's thieving best: Hate your customers, hate your employees, steel the money and betray the trust. Every time these cutthroats get close to big money, something always goes haywire in their brain cases. The latest meltdown exposed the Big Bedouin Crooks; just think of how much the Lesser Bedouin crooks have stolen without ever being noticed or caught! Only fools who can't read the news would think about investing anything with these greedy arrogant bastards ever again. It turns out that Ali Baba was a lucky man indeed; he only had forty thieves to worry about! For the Republic! John George North Carolina

August 23 2010 at 9:14 PM Report abuse +1 rate up rate down Reply
BT's Voice

"He's worth more than $2 billion: If you took half his money away, it wouldn't make a difference to his life." I love this line, and yet, there are some who would argue that if you added 2-3 percent to their already low taxes (most are from capital gains) they would all just throw their hands up in the air and say "I quit". Well I know one who did, just as Bush's economic policies began to bear its bitter fruit, and the poor guy just bought his second (and even bigger) airplane so he can fly back and forth to his various homes. Not bad for 10 years work. All you sucke...........I mean fine folk who trudge off to work on Monday, get your paycheck on Friday with the taxes already deducted, and fill out a simple 1040 Form at the end of the year, repeat after me: Baaahhh, baaahhh. Tired of the shearing yet?

August 23 2010 at 9:02 PM Report abuse rate up rate down Reply
plewis213

So be it..like they say..hit the road Jack and don't you come back no more ...no more....

August 23 2010 at 7:44 PM Report abuse +1 rate up rate down Reply