Kroijer - Money mavericks : confessions of a hedge fund manager

As a first time author I probably needed more help than the journalists and professors that often write about finance, and I am thrilled that such an insightful and helpful group of people helped me to finish the book. In particular I want to thank my wife Puk Kroijer and good friend James Hoffman for their unwavering support throughout this project. Also, I would like to thank the team at Pearson Education for taking on the book and helping to shape it into what it has become: my editor (and fellow QPR supporter) Rupert Morris who wielded the knife gently, but also Chris Cudmore, Eloise Cook, Melanie Carter, Jane Hammett and Anna Jackson.

A number of finance and non-finance friends read through early drafts of the book as I stumbled towards a coherent story, and gave great and astute feedback: former officemate Edwin Datson, former colleagues Brian OCallaghan and Sam Morland, but also early backer Martin Byman, and Christina Type, Oliver Emanuel, Curt Peters, Robert Sherer, Chris Rossbach, Tets Ishikawa, Marc Sharpe and Martin Escobari. Also, particularly in the early stages of the project while I was still debating if there was a story here to tell, I found the encouragement and direction from author friends invaluable, in particular Jeremy Dann, Kaleil Isaza Tuzman, Nalini Kotamraju and Kambiz Foroohar.

Finally, I would like to thank all those in and around the hedge-fund industry who consistently encouraged me to write about my experiences, even if those often included themselves. Most were content for me to use their real names, but some preferred to remain anonymous with the result that some names and exact circumstances have been changed. The general feeling was that the world could do with a better understanding of what really happens inside hedge funds (and perhaps, just as importantly, what doesnt). Any industry that is this consistently open and encouraging of an introspective story about it can surely not consist only of locusts and speculatory leeches on society.

Lars Kroijer

Money Mavericks was originally published in autumn 2010 as a record of my experiences in the hedge-fund industry. I wrote the book to dispel many of the myths and misunderstandings surrounding the industry and because I thought I was in a great position to give a first-hand account of the full life cycle of a hedge fund from the entrepreneurs perspective.

When approaching the second edition, I realised that although my thoughts and feeling on the industry had not changed materially, I did have the benefit of a little more hindsight. And so, while the majority of the text remains unchanged, I have added new passages to my story, and also more detailed information on some trades. Most importantly, Ive adapted the final chapter to speak more generally about investments from the perspective of an investor without great investment insights or knowledge.

At the time of writing late 2011 hedge funds remain an integral yet often poorly understood part of the worlds financial landscape. With assets near or at an all-time high of around $2 trillion, the industry is thriving and those in charge of the large successful funds continue to make telephone-number-sized annual gains; still much to the dismay of some people. Hedge funds continue to attract some of the best minds of finance in a ruthless meritocratic marketplace where those with skills and talent thrive and imposters tend to be exposed.

This is the story of the life of a hedge fund. I started Holte Capital in 2002 and returned all the external capital to the remaining investors in February 2008. Those six years tested my sanity and resilience to their limits. In this book I want to explain what it was like to run a hedge fund during a period when the industry went from relative obscurity to something everyones aunt or uncle would discuss.

When I set out to write this book it was mainly because I felt the inner workings of the hedge funds were poorly understood by outsiders. Having grown from a small and mainly US investment activity to become a global trillion-dollar circus, the industry is often unfairly portrayed as a fee-charging gambling den populated by dart-throwing chancers and Bernie Madoffs evil twin. This was nothing like the industry I had been a part of for a decade, and I recognised little of my time at Holte Capital in many of the accounts. The industry I had known largely involved highly intelligent people who were passionate about the world of investing. They would spend endless hours engaging in complex financial analysis to find angles from which their investors might profit. If they failed, the repercussions would be swift and severe. If they succeeded, the rewards would be massive by any normal standard probably too big. It was certainly exciting, but not in the way most people seemed to think.

The term hedge fund is often thrown around as if we all know what it is, or are meant to know. To me, hedge funds constitute investment funds that invest in a very broad array of assets classes, often across multiple geographies, and with very different risk profiles. Sometimes hedge-funds are extremely narrow in their strategy while many engage in multiple strategies within the same fund. Like a mutual fund, the hedge-fund manager charges an annual management fee, but in addition charges a performance fee on profits. The performance fee is typically where the really big bucks are made. The investors in hedge funds may be wealthy individuals, but more often they are institutions such as banks, endowments, insurance companies, or funds of funds, all trying to capture returns that are not dependent on market movements (funds of funds are exactly that: funds that invest in hedge funds). In the media, hedge funds are often made out to be recklessly risky ventures that day-trade stocks, and while some are undoubtedly just that, more are in fact much lower risk than the general stock market, and frequently hold securities for years. As you would have guessed, a hedge fund uses hedges such as selling borrowed shares or buying protection to guard against things like stock market declines, credit defaults, or similar thus hedge funds. Wikipedia does a good job of describing hedge funds if you want to dig deeper.

My own introduction to hedge funds came while I was at Harvard Business School. Up to that point Id been following a well-trodden finance path: a major in economics at Harvard University followed by a hard apprenticeship with Lazard Frres working in investment banking in New York. It was an unusual experience for a Danish boy from north of Copenhagen but, in general, the rules, process and path of a banking career were well understood and somewhat predictable. Hedge funds, it seemed, were very different. I attended classes by Robert Merton, who had just won the Nobel Prize in economics for his work in options. Merton was already famous for developing the BlackScholesMerton option-pricing formula and was getting even more attention for the phenomenal returns of Long Term Capital Management (LTCM) where he was a partner. I knew him well enough to go to his office and ask him about hedge funds. The meeting was inconsequential, as he could only vouch for LTCM, and they were not hiring at the time. LTCM collapsed soon afterwards with multi-billion dollar losses (described in Lowensteins excellent book When Genius Failed ) and Merton was widely derided as the public face of the failed hedge fund, even though his day-to-day involvement had been limited.