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[Music]
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[Music]
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hello I'm Jeff Brown with knowledge at
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Wharton today we're with manit Ahuja uh
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who is a producer for CNBC and more
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importantly author of a new book called
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uh the alpha Masters Unlocking The
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Genius of the world's top hedge funds so
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welcome to Wharton thanks for having me
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tell us a little what brings you here
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today well I was fortunate enough to get
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a scholarship from the South Asian
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journalism Association to attend uh
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Wharton seminar for business journalist
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so I've been here for the past couple
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days and it's been great and it's been a
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nice fall for you uh for this visit now
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uh it's a wonderful book uh I can tell
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people is very readable it's profiles of
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uh 11 hedge fund managers at nine funds
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and uh explores case histories of some
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of the uh some of the big trades they've
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made some win some lose and uh gives a
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good sense of how this industry operates
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the kind of people who who run it and
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you're quite young we can say uh and got
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into the industry very young can you
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tell us about that well sure I started
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uh on Wall Street at City group as an
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intern when I was 17 years old uh it was
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just supposed to be a semester long
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internship if you go to school in the
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city they actually they have year round
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uh positions for folks like myself uh
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after 10 months the lady I was working
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for decided not to come back after
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maternity leave and that opened up an
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opportunity cuz I was able to juggle the
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work with school and I found it really
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uh interesting and fascinating and in
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addition to CNBC you've worked for the
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Wall Street Journal at at one point uh
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so it's quite a very background for
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somebody still in her 20s oh thank you
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and uh and now a book under your belt so
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what brought you to this this book what
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was the what was the reason for doing
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this well I was fascinated by one of the
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first individuals that I met in the
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hedge fund industry David Einhorn right
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in 2007 and early 2008 as the financial
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crisis was starting to pick up I was
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fortunate enough to cover David Ein horn
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during the whole Leman Brothers analysis
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that he put out there at the irone
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conference and the value investing
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Congress and as I spent more time with
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these hedge f managers analyzing them I
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noticed that there were a a small group
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of money managers that had profound
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impacts on the market if you think about
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everyone that works on Wall Street that
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runs a mutual fund that runs a hedge
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fund that runs a private Equity shop
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there're very few people that when they
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change a stock position the market moves
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so I wanted to dig deeper and see who
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these people really were and what their
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analysis was really all about and I
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think a lot of us have seen you know
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these these multi-billion dollar trades
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that that are big enough to just move
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markets and so they draw a lot of
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attention uh when they're made when we
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find out about them which is not all the
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time it's something of a secretive
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industry they don't tip their hand for
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the most part now uh let's not assume
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that everybody watching today is uh
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familiar with hedge funds so we just
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want to run through a couple of the
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basics on what in your mind
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distinguishes a hedge fund from private
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Equity Fund a mutual fund from the other
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kinds of things we're accustomed to what
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are the key features of a hedge fund
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well a hedge fund you should think about
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a hedge fund like a startup uh
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Enterprise company or startup tech tech
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shop they're usually start out with just
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a handful of very successful money
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managers that spent a lot of time on
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Wall Street made a lot of money for
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their prior employers and are ready to
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go out on their own they're private
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investment companies so you have to be a
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qualified investor
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uh according to the SEC to be able to
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invest with them and they're very
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secretive partially because they're
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minding their own business running their
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own portfolio but also because the SEC
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requires that they not Market to the
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public because their strategies are
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typically riskier and you need a minimum
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of about $10 million on average to be
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able to invest with one now we've heard
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more in the news recently about private
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Equity Funds which are basically funds
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that for the most part buy companies
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they develop portfolios of companies and
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try to make them better hedge funds are
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more likely to be investing in
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Securities stocks bonds derivatives that
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sort of thing is that correct correct
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right now in your title you talk about
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Alpha uh what is Alpha well Alpha can
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mean just the mathematical sense just
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means excess return over the market
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Benchmark but I wanted to actually take
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it a step further and look at these
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Alpha Personalities in addition to these
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Alpha Masters in the hedge fund industry
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that were moving the market so I looked
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for people that had a long history of
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outperforming uh the SNP and and how
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they did that so in Layman turns if you
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had the S&P 500 returning 10% in a in a
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decent year right Alpha would be some
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return on top of that that they require
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uh to make this worthwhile and it's not
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every year too that's one thing that I
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noticed that it's it's a general Trend
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but there are some years where they do
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underperform I have noticed that the
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majority of the managers in the book may
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have had one or two down years or were
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minorly under the SNP but then came back
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in a really big way and sometimes over
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63% over the S&P but if you couldn't
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beat the market on average there'd be no
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point in doing it you just buy an S&P
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500 fund and forget about it go play
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golf and then there's a term beta which
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we see in here as well uh you mentioned
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a number of times in the book what is
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that about beta is just the actual
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Market return so you're always trying to
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deliver Alpha versus beta so there is a
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big debate going on in the hedge fund
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industry now about what is actually
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Alpha and what is beta some say that a
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lot of these hedge fund managers are
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just delivering beta yet charging
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exorbitant fees 2 and 20 and uh and and
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it's not making sense for investors so
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that's a part of the discussion right
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now and that fee structure is 2% of
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assets under management and 20% of
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profits correct okay and so so the idea
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is to beat the market and do it with a
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minimum amount of risk or volatility
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while you're doing it that's that's the
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basic idea which sounds very simple
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right but it's quite hard to do in
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actuality it's a bit tougher now one one
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of your chapur talks about Paulson and
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Company and John Paulson is is one of
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the most well-known Hedge fund managers
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especially because he managed to make
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$15 billion in 2007 when everyone else
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was losing their shirts and I wonder if
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you could sort of take us through that
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chapter and describe what it was he did
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as an example of how a hedge fund
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operates well I would say that there is
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no one example of how a hedge fund is
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supposed to operate it was interesting
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to go through uh the 11 different
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personalities in the book they all had
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some similarities but were incredibly
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different I found what I found to be
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inspiring about Paulson's story uh at
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least in the beginning is that he didn't
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start his hedge fund until he was you
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know looking at 40 he got passed up for
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promotions he was a good merger
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Arbitrage analyst and was doing fairly
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decent but he was running a pretty small
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fund until around 2006 2007 where he was
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able to identify this trade with a
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handful
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of employees that worked for him at
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Paulson and Co and the big winning bet
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on on the subprime morgage market how
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did that work well basically Paulson uh
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was able to identify and predict the
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housing bubble bursting and so he
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purchased something called credit
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default swaps which is kind of like
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shorting the housing market so prior to
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these instruments being available there
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was no way to do that and it was a
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highly contrarian bet to make cuz
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everyone prior to that time mostly
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believed that real estate was a fairly
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safe asset there were a lot of subprime
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mortgages being sold and Banks were
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getting in on many of the trades so
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there was a lot of collusion on Wall
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Street no one really understood who was
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a counterparty and what the risk could
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entail if the entire system fell apart
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so Paulson was able to identify that
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through his funds research and made very
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heavy bets in in credit default swaps
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and ended up netting $15 billion on the
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subprime trade he was also one of the
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first interestingly enough to start to
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go long on housing in about two in 2009
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way earlier than the rest of the street
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so up until about 2011 pulson was doing
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extremely well things have obviously
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changed so subprime mortgages like other
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mortgages are bundled into Securities
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that are kind of like bonds correct and
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the credit default swaps are sort of an
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insurance policy that pays off if the
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security Falls in value and that's what
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he was betting on and I guess also using
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a lot of Leverage borrowing a lot of
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money so that his wins were Amplified
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definitely now his genius seems to have
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been that uh he spotted something that
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other people didn't spot that there was
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a bubble that was going to burst on the
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other hand it wasn't a total secret
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everybody knew that housing prices had
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been going up faster than wages which
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clearly can't happen forever what do you
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think it was about his approach that
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allowed him to take that gamble when
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other people were all getting a little
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bit nervous about what was going on with
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the housing market so there are always
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economists that predict Market activity
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in the economy and there are a lot of
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analysts on Wall Street that would agree
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with what you said I think the main
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difference was that he was seeing a high
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inflow of assets and he was able to
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convince a couple of other friend on
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Wall Street and counterparties to help
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him get the assets to make the trade in
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a very big way he was willing to bet the
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farm as they say on this one trade and
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very few people very few others had the
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assets and the liquidity to be able to
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do that at that time or had you know
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were willing to take that risk it takes
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a lot of nerve to do it does yeah and
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one of the things I I I noticed in
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reading the book is that Paulson for
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example he really started hustling very
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young I think he was selling candy at
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school at one point and trading in
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stocks when he was still a teenager and
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uh and you get a lot of little stories
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like that throughout the Book of people
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who were just really uh work very hard
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uh seem to be very smart ahead of the
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game usually in school U not all always
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though I was wondering what what were
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there were there individuals you
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interviewed who really surprised you
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that just didn't seem like the sort of
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master of the universe stereotype that
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we think of right well I think that
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that's a very interesting question and I
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would say that there were a couple of
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very key examples uh of situations
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across the board that surprised me I was
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interested to know I we've been I've
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been covering hedge funds for the past
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couple of years and we as an industry
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talk about the latest trades going on
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with these managers and that's our job
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but going back to their history I was I
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was fascinated to find out that the
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majority of the these billionaire money
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managers all started out with very
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humble beginnings and if you're looking
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for a corollary and I myself started out
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with very humble beginnings I know that
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that's a motivator to succeed so it was
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interesting to see the stories of them
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hustling from a very young age the other
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interesting thing that I noticed is that
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they continued hustling it didn't add
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one at the point where they were all
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multi-millionaires they didn't stop I
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spoke to one had fund manager Bill Amman
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and I said what motivates you to
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continue to outperform year and year
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again and he said well every year I
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start again from zero investors look at
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every year as on a singular level and it
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was interesting to know that you can
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have 10 15 years of good performance but
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investors don't care even though they
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may be committed for two to three years
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at a time uh the hedge fund industry is
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looked at month to month and then on a
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year-to-year basis so uh a lot of these
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managers constantly feel the pressure in
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their small community to outdo each
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other and to continue to outdo
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themselves so it's really the same
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process you see with you know great
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athletes like Roger feder you could ask
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well why do you do it you're rich you've
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won all these titles why bother they're
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still just very competitive and they
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love the game right and I don't think
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that it's about the money I think that
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it's a rewarding experience for them I
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did notice that their personalities are
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they're
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very they're very strong personalities
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as you would expect and that wasn't so
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much of a surprise but they're willing
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to take big risks even and and bet large
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portions of the funds Capital to single
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trades including again I would mention
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Bill Amman just getting a 1% stake in
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Proctor and Gamble it's a $1. billion
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position his fund is only about 10
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billion so relative to the size of his
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fund that's a huge position to take on
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one bet so these managers all have a
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very strong conviction in their analysis
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and I noticed that they were able to
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take the emotion out of the investing
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process which they all cited as highly
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highly important and key and that
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actually helped them to be able to pair
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back on positions because they all do
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have at one point made big mistakes I
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also noticed that many of the managers
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had several scenarios where they almost
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risk losing the fund on a single bet and
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they learned from those mistakes earlier
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in their career or and some had to just
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close their fund and start
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again and they called on that in the
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recent financial crisis and because of
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that most of them were very profitable
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during that time so they're very
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intellectually curious as well one of
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the things that comes through and in in
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a lot of the quotes is that that they
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really just love detecting some new
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truth or what they believe may be some
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new insight that they don't think anyone
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else has and that seems to drive them
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forward right now
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um when you look at the kind of
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educations they've got that seem to also
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wander sort of over the lot a lot of
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them do have have a kind of a na
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mathematical skill it seems like an
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analytical skill but there any common
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denominators in the kind of education
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that seem to lead to success or be key
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or necessary to success in this industry
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well I would say I would be about 50/50
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there were some people that had the
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education of actually just investing
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from a very young age taking bets on
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themselves people like David terer who
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went to Carnegie melon and before that
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to the University of Pittsburgh and he
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never really had really good grades in
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school he was a crd student he would
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skip class to go hang out with the nuns
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across the street even though he was
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Jewish because they had free pancakes so
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I would say that about half of them
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really excelled at school and folks like
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Ray Doo as well never really adjusted to
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the school environment didn't really
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Excel until a bit later in life so once
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they were able to focus in on what they
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like to do and you're motivated by
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something you enjoy you tend to devote a
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lot of energy and become really good at
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that skill I would say folks like David
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Einhorn uh did he did go to Cornell but
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he doesn't have an NBA or a CFA and I
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personally asked him if that's something
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that he thinks that U people who want to
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emulate him should try to achieve and he
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said no the best education is actually
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just being a very diligent investor and
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studying your Investments and the
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companies and balance sheets and
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financial statements and learning that
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way so I wouldn't necessarily say that
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getting an MBA from Harvard or Wharton
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guarantees you to be a great investor
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but being intellectually curious and
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working hard and studying constantly
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always learning that was another thing
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that comes through these guys are always
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learning and looking for the next
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Insight they're into their 50s and 60s
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and they're constantly looking for ways
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to do their job better even if it means
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risking having investors pull out of the
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fund people like Ray Doo he was at one
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point over $160 billion
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and today he's at 120 he's still the
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world's largest hedge fund manager but
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when he was at $160 billion he figured
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out a way to manage risk better and many
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investors didn't want to conform to that
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way it was his pure Alpha strategy they
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didn't want change and he he basically
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said that's too bad if you want to stay
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in the fund we're changing how we do
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things he went all the way down to 90
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billion lost about 70 billion million
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dollars of investors money but now
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has been a model for the industry and
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outperformed over the last couple years
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and has has people dying to get back
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into the fund uh well I also noticed
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that uh almost all of your subjects I
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think except for one We're Men and I I
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think the public has this view that this
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is sort of a men's club a male dominated
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industry is that true and is that
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changing well I would say that there
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needs to be more women in senior your
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roles across the workforce and in Wall
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Street I would say that we are seeing a
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lot more you know successful female
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investors but I was looking for the top
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performers right now who had been
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managing large sums of money for over 10
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years and on that scale Sonia Gardner
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was definitely in that realm and are
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there other great female investors will
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there in the next five years hopefully
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be women that are alpha Masters I would
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hope so I would say definitely I do see
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more women entering into the hedge fund
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industry and Wall Street in general uh
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but I think overall it's still an uphill
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battle for women across the workforce to
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get into senior positions and in terms
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of strategy and and and investing Styles
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I know they vary radically but I wonder
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if if from your research you see any
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Trends over the last decade or so that
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they're they're emphasizing different
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types of things than they used to and
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and is that just due to the
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opportunities that are available or is
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it due to an advance in their thinking
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well there's two different things that
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I'm noticing right now number one would
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be that I'm seeing a lot of Pension
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funds and endowments and uh get
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interested in the activist investing
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space H also Sovereign wealth funds but
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there's less information publicly
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available about them because they choose
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to stay behind the curtain so to speak
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Pension funds and endowments too but on
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the long term we're trying to find Alpha
00:20:04
in this market seeing a lot of
00:20:07
Institutions institutional investors get
00:20:10
interested in the activist space number
00:20:12
two I'm seeing that a lot of managers
00:20:15
and at least the I would say the top 10%
00:20:19
are using credit default swaps not just
00:20:22
as a way to get higher returns but to
00:20:25
manage risk so I would say that I would
00:20:28
predict that it would it should become a
00:20:30
more standard practice across the
00:20:33
industry I was actually just in class
00:20:35
yesterday with one Professor that cited
00:20:38
that uh that observation as well now the
00:20:42
industry certainly has its critics uh
00:20:44
all the alternate investment uh field
00:20:47
does including the the the the private
00:20:50
Equity Funds and other forms of funds
00:20:52
and and one of the crit criticisms is
00:20:54
that a lot of this is
00:20:57
not creating anything or making anything
00:21:00
they're not starting a new car company
00:21:02
and and hiring thousands of people to do
00:21:04
it they have their own employees but a
00:21:06
lot of these bets are sort of Zero Sum
00:21:08
games a credit default swaps you make
00:21:10
money but somebody else lost it for
00:21:12
society as a whole there's not really
00:21:14
any change and I'm wondering whether you
00:21:16
have a sense of of whether their role in
00:21:19
society is it a positive role or
00:21:21
negative as as some critics claim you
00:21:24
know what is the social benefit of
00:21:26
having it what if the Hedge fund
00:21:28
industry were to disappear overnight is
00:21:30
there any reason why those of us who are
00:21:31
not investors or employees would care
00:21:35
sure well I think that that's again a
00:21:37
very interesting question and I would
00:21:40
say that hedge funds most retail
00:21:43
investors aren't really aware but hedge
00:21:45
funds really do a great part to make the
00:21:47
markets way more efficient for the basic
00:21:50
reason that they're willing to take risk
00:21:52
that many other investors aren't and so
00:21:54
there are very often the counterparties
00:21:56
to banks on transaction actions that
00:21:58
have become the norm on Wall Street now
00:22:00
one could argue that Wall Street itself
00:22:02
is a zero sum game and part of the
00:22:05
problem with the financial crisis was
00:22:06
that the banks were behaving like hedge
00:22:08
funds when they had a fiduciary
00:22:10
responsibility to their depositors and
00:22:12
investors and clients to behave like a
00:22:14
bank so um I would say that when people
00:22:19
and institutions and organizations do
00:22:22
what the government wants them to do and
00:22:25
has said is legal for them to do then
00:22:27
they're doing their part to provide
00:22:29
efficiency to the markets now on a
00:22:32
second note retail investors actually do
00:22:35
benefit from hedge funds even if they're
00:22:37
not directly invested many hedge fund
00:22:40
managers or many of the managers
00:22:42
profiled in my book I should correct had
00:22:44
a big part in unveiling frauds these
00:22:48
short sellers like Jim chos was the one
00:22:51
behind uncovering en Enron Worldcom and
00:22:54
Tao now they choose to speak to journal
00:22:58
when the time is appropriate and we
00:23:00
follow the normal protocols to be able
00:23:02
to bring this fraud these accounting
00:23:04
frauds to the market and I know for a
00:23:07
fact that they are trying to have a more
00:23:10
active discussion to work with the SEC
00:23:13
so that instead of being more reactive
00:23:15
we can be more
00:23:16
proactive number two I do think that
00:23:20
um activist investors specifically
00:23:24
although it's 50/50 in many cases
00:23:27
there's an up side with when an activist
00:23:29
makes a big change in a company like JC
00:23:32
Penney as Bill Amman has committed to
00:23:35
doing and all the improvements that are
00:23:38
expected to come through in the next
00:23:39
year or two makes the shopping
00:23:41
experience a better experience the same
00:23:43
can be said to Burger King um and also
00:23:47
companies like Target there are some
00:23:50
examples of successes and some examples
00:23:52
of failures of course but again to draw
00:23:55
uh back to Bill Amman with General
00:23:57
growth partners he saw over a 200%
00:24:00
return on that investment and I know for
00:24:03
a fact and I had heard at investment
00:24:06
conferences that other retail investors
00:24:09
got in on that trade right after it got
00:24:11
back into the market and became
00:24:13
millionaires just writing out what these
00:24:16
hedge fund managers were doing on the
00:24:17
long side I think the public has a hard
00:24:20
time understanding processes like short
00:24:22
selling and the sort of things that
00:24:24
sound like a betting on disaster but in
00:24:28
they're providing Insight that uh is
00:24:30
just as useful as the insight for those
00:24:32
who are betting on the upside right So
00:24:34
eventually you know some frauds come to
00:24:36
light and some don't but many investors
00:24:40
and stockholders lost their entire net
00:24:43
worth by being invested in companies
00:24:45
like Enron so it's better to bring that
00:24:48
to the market rather than risk the
00:24:52
general public losing their life savings
00:24:55
so short sellers you always you know
00:24:57
everyone has a motive for everything
00:24:59
that they do and short sellers are no
00:25:01
different they're investing on the
00:25:03
market on the downside when a CEO comes
00:25:06
on uh a business news channel to talk
00:25:09
about their company they're trying to
00:25:11
push the stock up and have a vested
00:25:14
interest in doing so on the long side
00:25:16
every time anyone speaks publicly about
00:25:19
a company there's an interest for why
00:25:22
they're doing so unless you're a
00:25:24
journalist like us now before we finish
00:25:26
I want you to take out your crystal ball
00:25:28
and say what do you think will happen
00:25:29
with this industry in the next say 5 or
00:25:31
10 years is going to grow has it reached
00:25:34
a sort of saturation point or will it
00:25:36
shrink what do you think well i' would
00:25:38
say it's a it's a Tipping Point for the
00:25:40
hedge fund industry right now you're
00:25:42
seeing a lot of uh Legends in the Hedge
00:25:45
fun industry retire like leis bacon
00:25:48
Stanley dren Miller Carl icon turning
00:25:51
into family offices and basically
00:25:53
shuttering their doors for investors and
00:25:56
citing difficult market and environment
00:25:58
so I think investing today is definitely
00:26:02
much harder than it was 20 years ago you
00:26:05
can't really be the value investor just
00:26:08
the sole value investor that you
00:26:11
were back then following the buffet
00:26:14
model because you basically need to have
00:26:17
a minor or degree in economics and
00:26:20
understand how different economies in
00:26:23
the world are infecting are affecting
00:26:26
our markets here in us I'd say things
00:26:28
are more interconnected than ever before
00:26:31
and that's making a lot of the older
00:26:34
legendary hedge fund managers retire and
00:26:36
it's also making a lot of the startup
00:26:38
funds close their doors as well people
00:26:41
who thought that they can be like a
00:26:44
David Tepper or Dan lobe deciding to go
00:26:47
out on their own raising money and after
00:26:49
a year or two very preemptively just
00:26:51
shutting their doors so I feel like the
00:26:53
industry is getting more and more
00:26:55
competitive and I would say it
00:26:58
definitely is and it's it breeds more
00:27:02
competition as we're seeing across Wall
00:27:04
Street so I wouldn't say that I see the
00:27:06
hedge fund industry expanding but I
00:27:08
would say I would probably see it
00:27:10
evolving into uh a better oiled machine
00:27:14
and lastly uh you're in a sort of unique
00:27:17
position having having gotten exposed to
00:27:19
some of these things at a very young age
00:27:21
and we have certainly students at
00:27:23
Wharton and we also have at knowledge at
00:27:25
Wharton uh some products for high school
00:27:27
students so I'm wondering what advice
00:27:28
you'd give somebody who is just
00:27:30
intrigued about this business and would
00:27:32
like to get into it what but still has
00:27:35
years of education ahead of them what
00:27:36
should they be thinking about doing well
00:27:38
I would say one of the most important
00:27:40
things to do is to try to get an
00:27:41
internship during your summer break or
00:27:44
if you're based in New York try to get a
00:27:46
year round position because that will
00:27:48
give you hands-on experience even at a
00:27:50
low level the first few days I was at
00:27:52
City Group I was filing papers and by
00:27:55
proving your commitment there's no no
00:27:58
there's no shortcut to hard work it's a
00:28:00
long process to build up a reputation
00:28:03
and I think just knowing that there are
00:28:07
certain steps that you need to take to
00:28:09
be patient to be hardworking and to be
00:28:11
aggressive in a respectful way about
00:28:14
seeking out those positions is highly
00:28:17
important I would contact alumni of you
00:28:20
know Wharton alumni are very prominent
00:28:22
on Wall Street as are um from other
00:28:25
business schools I would try to get a
00:28:27
day where could Shadow them in the
00:28:28
office and I would think about
00:28:30
connections as um similar to Google+ or
00:28:34
other social networks you have your
00:28:36
friends acquaintances professors family
00:28:40
professional Associates and look into
00:28:42
your network and see who might be
00:28:44
connected to a manager that you would
00:28:47
like to try to emulate that you would
00:28:48
just like to try to meet another
00:28:50
important suggestion that I would make
00:28:53
is to try to attend industry conferences
00:28:55
for students many of those conferences
00:28:58
are free um a and you get higher
00:29:02
visibility because you're embraced uh
00:29:04
within the finance industry coming from
00:29:07
a prominent school like Wharton I know
00:29:09
Wharton is planning to have it's so an
00:29:11
investment conference in New York City
00:29:13
in the winter and I would definitely
00:29:15
suggest that students try to take
00:29:17
advantage of that well that's great
00:29:19
advice and uh you have a long career
00:29:20
ahead of you we'll be watching it and
00:29:23
congratulations about your book it's a
00:29:25
very good read I can recommend it and
00:29:27
we'll hope to see you again thank you so
00:29:33
[Music]
00:29:52
much
