Confessions from the City: The hedge funderComments Off on Confessions from the City: The hedge funder
The art of hedge funds is all about one thing. You’ve got to generate the magic word: alpha.
What does that mean? Answer: beating the market by making extra returns above the run-of-the-mill, normal rise in share prices. If you make it, you’re a king. If you don’t, then you go out of business.
But what does it really mean, that magic alpha? It means expensive watches, personalised number plates, boob jobs for the missus, underwear for the mistress and some very fun weekends away.
It means plenty of tax-avoidance schemes — I’ve invested in a lot of, ahem, “film production” — not to mention the golf memberships, fine art for the office and the pilot’s licence. Hey, look at you, you big swinging, alpha-generating, flyboy.
Sound good? Just to make it more tricky, you have your homework checked every month via something called a NAV (that’s net asset value), which is a fancy way of checking how much you have made or lost during the period.
Say you bought ARM Holdings ahead of the bid, and so your performance improves. But buy something that gets a profit warning, your NAV dives, the clients scream and they move this not-very-sticky (another way of saying loyal) money to pastures new. It is all about making money, which sounds simple but could not be trickier when putting it into practice.
However, when you get it right it rains cash. In the old days, it was magic — the fabled “two and 20”. All that means is you charge the client 2% a year for the funds you’re sitting on for them, before you’ve even made them a bean, and then 20% of the profits you make on other people’s money.
In a bull market when everything is rising, this is the dream: fast cars, fast girls, life of luxury.
Every Joe Bloggs wanted to invest, make money and have their own hedge-fund investment. But since the crash, “two and 20” is long gone and in a bear market, or one going sideways, making money can be a lot tougher.
People tend be much more risk-averse, and prising money out of suspicious investors almost becomes as big an art as managing the funds.
But it comes down to timing the market. As for me, my timing was bad and I’m out of the game. No Wolf of Wall Street wild parties for me now. Boy, what a dream though. Just for a short period, I took on the world and won. Nothing beats that feeling.