It's not often hedge fund managers are willing to open up about their biggest successes and failures. But that's what exactly what big names like John Paulson and David Tepper do in The Alpha Masters.
In her new book out today, The Alpha Masters: Unlocking the Genius of the World's Top Hedge Fund Managers, Maneet Ahuja profiles nine of the hedge fund industry's most powerful and successful mangers including:
- Ray Dalio, Bridgewater Associates,
- Pierre LaGrange & Tim Won, MAN Group/AHL
- John Paulson, Paulson & Co.
- Marc Lasry & Sonia Gardner, Avenue Capital
- David Tepper, Appaloosa Management
- Bill Ackman, Pershing Square Capital
- Dan Loeb, Third Point
- Jim Chanos, Kynikos Associates
- Boaz Weinstein, Saba Capital Management
The book is far from just a quick look at how these managers invested their money. The Alpha Masters helps you understand who these hedge fund managers really are, what makes them tick, what motivates them and, perhaps most interestingly, how they handle failure.
In the chapter about Ackman, appropriately dubbed "Activist Investor", the New York fund managers opens up about one of his early short positions. It ended up having detrimental impacts on his first fund, Gotham Partners, which he'd opened up just out of Harvard Business School.
The short was on MBIA, one of the largest bond insurers and guarantors of muni bonds in the U.S. It was 2002, and Ackman believed MBIA, which had begun insuring exotic and risky CDOs, was over-leveraged and under-reserved despite its Triple-A rating.
As he'd done with a previous short position in a company called Farmer Mac, Ackman wrote a white paper on MBIA's inevitable demise. But MBIA's CEO got a hold of the white paper before Ackman went public with it. Here's an excerpt from The Alpha Masters on how that played out:
Jay Brown, CEO of MBIA, contacted Ackman requesting a one-on-one-meeting. A the meeting Brown discouraged Ackman from releasing his report and suggested that MBIA would use its powerful relationships as the largest guarantor of New YorkState and City bonds to cause Ackman trouble: "You are a young guy early in your career. You should think very hard before releasing that report," Brown warned.
Ackman published it nonetheless, and almost immediately, Ackman says, " a whole bunch of bad things started to happen to me."
Later that year, a New York judge prevented a merger between Gotham Golf and First Union which resulting in investors asking for their capital back.
MBIA complained to then NY state attorney general Eliot Spitzer that Gotham was spreading false and misleading information about their company. Spitzer subpoenaed Gotham and the SEC launched an investigation. Ackman testified for six days over the matter. The incident would drag on for six years.
From the book:
...Ackman had to endure embarrassing public scrutiny. At the time "there was an article in the paper seemingly everyday about Gotham or hedge funds being Spitzer's next target. "It was not fun to take my daughter to nursery school. Sometimes it seemed as though other parents would pull their children away from me when I walked in the school lobby. When you have an aggressive regulator trying to find you guilty of something, even though you know you're innocent, it's a scary time."
Ackman lost Gotham founding partner, David Berkowitz, amid the mess. Ackman tells Ahuja, "David decided he had had enough and didn't enjoy coming to the office anymore."
With the overhang of MBIA still on his shoulder and his reputation dragged through the mud, Ackman felt an obligation to the investors. He worked unpaid in 2003 dealing with issues and winding down the fund. Over the next few years, Ackman ended up returning to investors all of the liquid investments at market value and nearly three times the carrying value of the Gotham private investments.
Eventually the SEC and Spitzer found no wrong doing in Gotham's activity. Still, the damage was done as Gotham Partners was no longer active amid investor withdrawals and a government probe. But of course that wasn't the end for Ackman. He launched Pershing Square about a year later.
The Alpha Masters reveals similar trials and tribulations of the industry's most revered managers in their own words. Check out the interview below with the author Maneet Ahuja who shares her thoughts on these alpha masters and the hedge fund world they thrive in.
