Barton Biggs

Barton Biggs passed away on July 14, 2012. He was a hedge fund manager whose attention to emerging markets. Prior to founding Traxis Partners, he was an investment strategist at Morgan Stanley. After his death, a fund under his sole management was liquidated to return funds to investors.

Even though Biggs was a frequent commentator on financial media, his book actually is more interesting. He kept a journal on some of the indignities of being in the hedge fund business as well as its "very brilliant and often eccentric and obsessive people". This results in Hedgehogging, a book on hedge fund world.


Biggs knows how to write. Instead of giving birdview of the enclosed business, he used smaller pieces rich with conversations and figurative expression. With these small pieces, he fills in his investment theories and explains the hedge fund world. I read through his book and found it is very readable, entertained to some extend. In some sense, his books (he authored two books) are more easily to memorize than theories.

I put in part of the first chapter of Hedgehogging to spike some interests.

The members of the Triangle, opinionated veterans of the investment wars, are not shy about expressing their opinions, and we are all have known each other for years. The insults flew like shrapnel on a bad day in Baghdad. It began when someone remarked that there are now 8,000 hedge funds in the United States, and that hedge fund capital has exploded from $36B as recently as 1990 to probably around $1T today. A long-only manager sourly said something along the lines of the following: “the golden age for hedge fund is about over, and it will end with a bang, not a whimper. The larger capital and the bigger talent pool now being deployed by hedge funds mean that the pricing of everything from asset classes to individual securities is under intense scrutiny by manic investors, who stare at screens all day, have massive databases, and swing large amounts of money with lightning speed. This has the effect of bidding up the prices and reducing the returns of all mispriced investments. Obvious anomalies now disappear, almost instantly. In effect, the alpha available for capture by hedge funds has to be spread over more funds with bigger money, resulting in lower returns on invested capital for hedge funds as an asset class. Risks will also rise as hedge funds have to take larger, more concentrated positions. You greedy hogs are in the process of killing your own golden goose. It’s not only endangered, it is about to die”.

“Don’t you wish,” one of the hedge-fund guys replied from the bottom of his brandy glass, “The golden goose was plumper and sturdier than you think.”

“Global macro is headed for a bust,” another guy said, looking at me. “Too much rookie money. You had better make it quick.” I just stared at him.

“It’s a jungle out there in macro now,” he went on. “There are so many macro players and momentum investors, they’re bumping into each other. There must be a couple hundred new macro hedge funds formed in the  last six months by guys are so green, they can confuse you with their stupidity, and they are big and clumsy, so they can hurt you if you bump into them. And then, stumbling around are the proprietary trading desks of all the big investment banks, plus various rogue central banks like Bank Negara and the Nigerians. Last week, I got crunched between an Asian central bank and some rookie hedge fund guy who panicked on his first macro trip. It’s all very disorienting!” The guy, despite his alleged bruises, looked tanned and rested, so I ignored him.

“It’s like the money game; our nice old game is being played at faster and faster speed by bigger and rougher guys, so it’s getting rougher and more dangerous all the time,” another hedge fund guy said glumly. “Everybody is on steriods. The violence level is soaring. It is like the NFL.”

“As more and more funds are unable to earn sufficient excess returns to justify their fees,” another guy said, “the love affair with hedge fund is bound to cool. But not before all that excess capital takes its toll on the performance record and exalted reputations of the big stars. The alpha pool of the whole hedge fund industry is not growing, but the number of guys trying to drink from it is. Ask not for whom the bell tolls; it tolls for thee.”

“I’m not so sure the alpha pool isn’t growing,” I argued, “As all these new, naive, trigger-happy crazies, long on aspiration and short on experience, enter the business, a lot of them will get creamed. Then their losses will expand the alpha pool for the rest of us.” I noticed one of the veterans was looking at me kind of funny, as though he was thinking, “Who are you, punk, to go talking about naive talent?”

“Leverage, leverage, leverage --- that is what is going to wreck you guys eventually,” said the long-only guy. “Actually since LTCM with its huge balance sheet and various forms of tail optionality (whatever that means) blew up, hedge funds have been reducing leverage. Instead of them, it’s their investors, both individuals and the fund of funds, who are putting on the leverage. The clients of the fund of funds are unhappy with the meager returns they are getting, so the fund of funds goes to the bank and borrows. And the banks, particularly the European ones, are falling all over themselves to offer credit to their wealthy individual clients to leverage up their hedge-fund holdings. Theorectically, it makes sense. A basket of diversified hedge funds has lower volatility than one fund, so why not leverage it up to magnify the returns?”

“Yeah,” said somebody else. “It makes sense until a bolt from the blue, a tsunami wave, a two- or even three-standard-deviation event happens, and then the you-know-what hits the fan. The hedge fund basket has a 10% drawdown not in a year but in a month, and a big leverage fund of funds could be down 15% in a flash. What happens to the whole hedge fund universe then? I will tell you what. The frightened fund of funds clients redeem, the fund of funds in return have to redeem from their hedge funds, and the whole asset class does an extreme shrink. Furhtermore, there are no safe heavens. The long-short market neutral funds get killed, too, because when they have forced liquidations, their longs go down and their shorts go up.”

“Meltdown,” said the long-only guy, “not just for you perps but for everyone else and me too.” The evening was over.