Hedge Hunters | Katherine Burton

Summary of: Hedge Hunters: After the Credit Crisis, How Hedge Fund Masters Survived
By: Katherine Burton

Introduction

Step into the world of successful hedge fund managers as ‘Hedge Hunters: After the Credit Crisis, How Hedge Fund Masters Survived’ takes you on a journey exploring the traits and strategies of some of the most prominent figures in hedge funds. From the ‘grandfather of commodities trading,’ Boone Pickens, to short-selling wizard Jim Chanos, this book summary offers a glimpse into their investment styles and their secrets to success. Learn how the market veterans adapt to the ever-evolving financial landscape, the importance of intensive research, and how hedge funds recover from major setbacks.

Qualities of a Successful Hedge Fund Manager

Mark Yusko has outlined essential qualities for a great hedge fund manager, including independence, guts, humility, intellectual honesty, connections, ambition, smarts, respect for employees, and integrity. While managers have unique personal styles, these traits contribute to their success.

The Legendary Boone Pickens

Boone Pickens, the “grandfather of commodities trading,” founded BP Capital Management with $4.3 billion assets under management, including $1.6 billion of his personal wealth. Pickens’ squad of 11 managers forecast directions in oil and natural gas and invests in futures markets accordingly, taking long-term positions in energy stocks without hedging. With more than 50 years of experience as an operator and trader in oil and gas, Pickens believes in the “peak oil” theory, which he uses to inform his investments. Despite losing almost 90% of his commodities fund in 1998, his funds have not had a losing year since then. Pickens attributes his success to his team approach, referring to his investment committee as his “team.”

Avenue Capital’s Distressed Debt Investment Strategy

Avenue Capital Group, a New York-based fund managed by Marc Lasry, focuses on distressed debt investment strategies that prioritize downside protection. Avenue Capital trades in senior loans and securities of companies close to bankruptcy, producing returns similar to equity investments. The hedge fund has $14.5 billion in assets under management, with conservative clients such as state pension funds. Lasry’s successful investment strategy is attributed to his ability to identify opportunities where other hedge fund managers do not and his emphasis on selectively covering only 10 companies. He sold a $280 million stake in the firm to Morgan Stanley in 2006 and employs Chelsea Clinton. Lasry recommends working under a mentor to succeed in the portfolio management industry, as much of what is crucial for success is innate.

The Canyon Way

Former Harvard classmates, Josh Friedman and Mitch Julis run Canyon Partners, a successful investment company in Los Angeles. They opened Canyon in 1990 with a focus on intensive research and a multistrategy approach that invests in a range of instruments. Their portfolio is well diversified with low volatility, placing a premium on situations where a company’s stock or bonds are undervalued but are about to move up. Canyon also provides private-equity firms with the cash to implement buyouts, managing about $2.5 billion in collateralized debt and loan obligations. Clients have the flexibility to withdraw money quarterly from its offshore fund and annually from its large domestic fund. Canyon has four other portfolio managers and more than 30 analysts. Friedman focuses on leveraged buy-out and private equity, while Julis works more with mutual-fund portfolio managers. Canyon’s only losing year was in 1998 when Russia’s currency was devalued, causing their flagship fund to fall. To enhance their business, they hedge their portfolio when they suspect that markets may be about to decline.

Jim Chanos and the Art of Short Selling

Jim Chanos, founder of Kynikos Associates, is a short seller who manages about $4 billion, making his firm the largest fund focused on short selling. Chanos targets consumer fads, accounting issues, and existing industries hindered by new technology. He has the ability to predict problems before they arise, which he applied while warning about Enron a year before it went bankrupt. Although short selling is risky, the strategy is beneficial for tax-exempt investors as it is treated as ordinary income. Chanos’s unusual organizational approach, which relies solely on him and his five partners for ideas, has kept the firm’s turnover rate relatively low.

Jim Chanos, founder of Kynikos Associates, is a short seller who manages about $4 billion, making his firm the largest fund focused on short selling. The article explains how Chanos has a rare skill of predicting problems before they arise. This skill is something Chanos applied while warning about Enron a year before it went bankrupt. Chanos targets companies associated with consumer fads and “booms that go bust” for short selling, along with companies with accounting problems. One unique aspect of his firm is that almost all the ideas come from Chanos and his five partners, not from analysts, as at other firms.

Short selling is highly risky, but beneficial for tax-exempt investors. Chanos’s unusual organizational approach, which relies solely on him and his five partners for ideas, has maintained a relatively low turnover rate at the firm. Pension fund managers initially regarded short selling as too risky. Still, Chanos argues that it is good for tax-exempt investors because the profits are treated as ordinary income.

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