The Little Book of Hedge Funds

Chapter Two

The Parlor Cars of the Gravy Train

The Long and the Short of It

Hedge funds were the parlor cars of the new gravy train. It was fitting that their key figure was a man who had taken up stock investing as a sideline, an elegant amateur of the market who liked to think of himself as an intellectual, above and beyond the profit motive.

—John Brooks, The Go-Go Years

Think about it: If it didn’t exist somebody would have invented it. A system of money management that allows the manager and the capital to have an efficient, symbiotic, and symmetrical relationship. Here’s the deal. There are boring ways to run money, the blunt instruments of asset management—long-only mutual funds and their arch nemeses, the exchange-traded fund (ETF) and the index fund. These products have their followers, and, of course, the true believers will assert the sanctity of their respective product lines with religious ferocity and certainty. Then there are the curmudgeons of finance, the Old Salts who have been there and done that. Can’t fool them—ever—and while there is a sucker born every minute there are 10 sages born in a century, and each of them knows it all. There is no way to beat the market. There is no way to add value in the process. The laws of randomness can only fool you into thinking that you are making a contribution to the process. Yada, yada, yada.

And then came the hedge funds and the hedge fund guys and their stealth ability to iron out market inefficiencies by embracing four ...