The Little Book of Hedge Funds

Chapter One

What Is a Hedge Fund?

The Traditional Long-Only Portfolio versus the Alternative Hedge Fund Portfolio

Hedge funds are generally perceived to be the investment of choice of the rich and the informed, and they are more interesting and fun to discuss than your Vanguard index fund.

—Cliff Asness, AQR Capital Management

The year was 1989. I had just started working at Goldman Sachs in the world of investment banking—the industry adored by many Ivy League students and business school graduates. A few floors up, legendary research director Lee Cooperman was asked by Goldman Sachs to create a mutual fund and lead the Asset Management Division. This long-only equity mutual fund was called GS Capital Growth.

Although Cooperman was extremely successful at picking stocks and examining company income statements and balance sheets, he was intrigued by the opportunity of starting a hedge fund, as he saw its potential to profit from smart stock picking even if the market seemed overvalued at times. And so, he approached the head honchos at Goldman, trying to convince them to start a fund. At the time, they passed as they were concerned over the consequences of shorting the stock of one of their investment clients. After all, no investment bank would want to put a sell recommendation in writing for fear of losing its relationship with the companies it covered . . . especially when there were advisory fees on the line. The thought of shorting a client company’s stock back then was unthinkable. ...