Hedge Fund People
Hedge Funds | Masters of the Universe?
Where are the Masters of the Universe now? As the financial tsunami rolls out across the world, crushing seemingly invincible institutions in its path and threatening the livelihoods of millions, the blame game has begun.
But there's a problem. The most obvious candidates for pillorying have disappeared. Lehman Brothers and Bear Stearns have gone up in smoke. Merrill Lynch has been consumed. Morgan Stanley and Goldman Sachs have been turned into high street banks, the kind with plastic pot plants in the corner and bowls of sweets to entice the kids. In short: how can you vent your spleen at a ghost? As Bill Clinton, out on the campaign trail for Barack Obama this week, summed up the conundrum: "The Wall Street you are mad at doesn't exist anymore. It vanished."
But there is one man who may have the answer to the riddle. Tom Wolfe is one of the shrewdest observers of the world of money. His novel, The Bonfire of the Vanities, first published in 1987, is a magnificent evocation of its era. Central character, Wall Street bond trader Sherman McCoy, personified the avariciousness and self-aggrandisement of the Reagan years. He dubbed himself a Master of the Universe, borrowing the branding from a toy he saw a child playing with. The name fitted: after all, McCoy had the power to make $50,000 in a single phone call, just like that. McCoy's self-description - alongside "greed is good", the motto of the fictitious trader Gordon Gekko from Oliver Stone's film of the same year, Wall Street - became the catchphrase of the decade.
Over the past two weeks Wolfe has been bombarded with questions: Where are the Masters of the Universe now? Who is left to take the blame? "The mood of the country is resentment," he says. "People want to gloat over the fate of the erstwhile Masters of the Universe. 'Those rascals! They did this to us! We must get them for this!'"
But Wolfe believes the revenge-seekers are looking in the wrong place. They are no longer to be found in the towering skyscrapers of Wall Street. They haven't worked for the moribund investment banks for years. If you want to find the modern Masters of the Universe you need to jump in a car, drive out of New York city, and head for the leafy suburbs of Greenwich, Connecticut.
Round Hill Road begins its snaking path into what they call the backcountry of Greenwich quite modestly, without a hint of the extravagance that lies ahead. The road passes quaint wooden cottages tucked into ancient oak woods, but as it rises so does the scale of the real estate. Lawns start to appear, perfectly groomed, behind ever taller granite walls. Wrought iron gates pop up, some bearing coats of arms and aspirational titles such as Dunnellen Hall. Farther along the road, gravel driveways make their entry, policed by security cameras and warnings to trespassers. By now the abodes have grown to the size of English manor houses. Gables, Doric columns, turrets and elaborate topiary abound. It is as if all the stately homes of Northumberland had been relocated, brick by brick, along this one road.
Round Hill Road is one of three billionaire’s rows that Wolfe has identified as being the new Centre of the Universe, with more Masters in each of its square miles than anywhere else in the world.
They are the hedge fund managers, or “hedgies,” as they are colloquially known, who run enormously lucrative private investment firms collectively handling $1.9tn of business. They are largely free of any regulation and deploy a range of financial wizardry to make their institutional and super-rich clients big returns on their money. Many used to work for the investment banks but were smart enough to get out five or six years ago and set up on their own.
Greenwich is the liver And Greenwich, Connecticut, is their capital. To quote a recent New Yorker description: “If New York city is the heart of the marketplace, Greenwich is the liver, where toxins are processed and rich bits collect.” There are thought to be about 200 major hedge funds in the area, though that’s a guestimate, as the first rule of these operators is deepest secrecy. They share some of McCoy’s attributes. They take huge risks with other people’s money, though often hedge their bets — hence the name, partly to cover themselves but more often than not to double their profits. They are hugely wealthy, with annual incomes of $500m not unusual. Nor are they averse to enjoying the fruits of such spoils.
Take the home of Paul Tudor Jones, one of the first hedge fund managers to move his residence and his business, Tudor Investment, to Greenwich in the early 1990s. He built himself a vast pile on the waterfront. It sits on top of a mound and towers over the old yacht club next door, much to its members’ discomfort.
Then we take a spin past Steve Cohen’s house. The son of a dress manufacturer, he used to pore over baseball scores in the New York Post as a child, and used his lifelong love of figures to build a $16bn hedge fund, SAC Capital Advisors. In 1998 his family moved into a $15m, 30-room Greenwich mansion, then spent many more millions on renovations. Its grounds include an ice rink, a basketball court and the ubiquitous swimming pool, enclosed in a bubble.
Then there’s the home of Julius Gaudio, located at the end of a cul-de-sac. It seems to stretch on for ever, its layer upon layer of masonry giving it the look of a wedding cake. A suitable home, perhaps, for the man who once spent $780,000 on two items in a charity auction — a round of golf with Clinton and a pair of Manolo Blahniks for his wife.
More recently, a second intake of hedgies has rolled over Greenwich, causing a spate of house-building on such a gargantuan scale that it has left veteran Greenwich residents dumfounded. They call them McMansions, or, as Bernie Yudain, former editor of the local paper Greenwich Time prefers to call them, “bad manors.”
Being a dab hand at short selling does not necessarily mean you have good taste. Several of the properties we drove past can only be described as monstrosities; they had all the subtlety and lightness of touch of Gormenghast. Many owners appear to think that size is all. In recent months the town authorities have turned down permission for two new homes, one that was to be 10,000 sq. metres, the other 15,000 sq. metres.
“With each new wave of Wall Street types they demand bigger and bigger houses,” says my guide to the neighbourhood, Chris Fountain, a real estate agent who writes a wry blog deriding the excesses of the local housing market called For What It’s Worth. “It makes you wonder how many of the properties are going to turn into white elephants.”
It would be wrong to blame all of this on the hedgies. Some of the worst crimes against aesthetics have been committed by new Russian or media money. One extraordinary edifice, a pastiche of a French chateau with conical slate roofs spouting all over it like bristle, was designed for Judge Judy.
Wolfe sees an important difference between the modern Master of the Universes and the crude exhibitionism of Sherman McCoy. For a start, they are the smartest of the smart and he thinks McCoy would struggle to be a hedgie were he in the market today. Compared with the late 1980s, they are also relatively discreet about their wealth. Their homes may be the size of football stadiums, but they are at least largely hidden from view behind those high walls.
“You don’t have work in a huge glass silo like those off Wall Street to operate billion-dollar hedge funds, and there’s nothing higher than five or six storeys in Greenwich,” Wolfe says. “They have small staffs - 25 people in a huddle will do - and they dress down. One of them is known for going to meetings with investors bare-footed.”
The question now on everybody’s minds, in Greenwich and beyond, is whether these Masters of the Universe will be smart enough to ride out the crisis, or whether they will be sucked down by the collapse of their old employers, the investment banks. The answer is hard to come by. But they are certainly suffering, with 2008 their worst year in recent memory. They are recording losses - not spine-chilling ones like the banks but losses none the less - and they are being forced to make adjustments to keep their clients from bolting.
Roger Ibbotson, the chairman of the Connecticut-based hedge fund Zebra Capital and a professor at Yale School of Management, says returns are negative this year but most hedge funds’ losses are in single digits so far. “In some senses they are having a good year relative to the markets,” he says.
But these are troubled times, and change — to use an Obamaism — is in the air. Already the hedge funds have had emergency restrictions placed on them preventing them from short selling, or betting against declines, in the financial markets. Much heavier limitations are likely to follow from any new occupant of the White House. Steve Fraser, author of Wall Street: America’s Dream Palace, believes the days of largesse, which he considers America’s second Gilded Age, are coming to an end. “There’s such anger all across the country — an overwhelming sense that these people need to be reined back in. Regulation, which for decades has been a cuss word in American life, is now in good odour.”
Future looks tough So the future looks relatively tough for the new Masters of the Universe — though there is a limit to the amount of sympathy that is likely to arouse. Consider Richard Fuld, who had the distinction, and the fabulous riches that went with it, of being the longest-running CEO on Wall Street. He received a $22m bonus last year. Then Lehman Brothers went belly up. Since that day last month he has rarely been seen. Where is he? Slumming it in his Greenwich mansion.
Wolfe isn’t shedding any tears. Most of the top players, he points out, are far too smart not to have already laid down their “nut” — weather-free investments that provide enough interest on the capital to ensure their Round Hill Road lifestyles can be sustained no matter what.
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