Institutional Investor's Alpha Magazine - June 2008 - (Page 48)

ALPHA HALL OF FAME ment to the pursuit of truth. I’ve been pursuing the truth in my investments. Being a hedge fund manager is particularly suitable for the pursuit of truth. Do you enjoy investing as much as you used to? the industry gets bigger and bigger and takes up a larger and larger segment of the market, it renders it more difﬁcult to outperform and to justify the fees. Where do you stand on hedge fund taxation and pay? No, because my knowledge is outdated; it’s like an old man — your range of movement is constrained. The young man, he can jump and hit and skip; as an old man you can only plod along. I can use only blunt instruments, and I have only a very general understanding of what goes on. I used to have much more detailed and in-depth knowledge. Was your shorting of the British pound and nearly breaking the Bank of England your most memorable trade? Treating the incentive fee as earned income makes sense. I’m not advocating it — I’m not going that far — but I’m not opposing it either. Compensation is a much bigger issue now in the U.K. than it is in the U.S. I’m struck by how prominent it is there. The big discussion is regulating compensation, not only for hedge funds but also for investment banks. It’s a public opinion thing. Look, obviously the sums that can be earned by hedge fund managers are egregious, and that is a factor in why I’m giving away most of my money. Of course you recognize the growing tendency among institutional investors to lower their risk exposure. That’s obviously the one that’s best known. On the nega- They’re looking for lower volatility, and they are paying a very heavy price for lower volatility: They’re losing performance. What do you hope your legacy will be? My ambition is as a philosopher, and I’m more interested in whether I have some ideas that can survive me than in preserving my wealth beyond my lifetime. Explain “reﬂexivity,” as you call it, especially as it relates to your effort to spread democracy. tive side, my purchase of Svyazinvest (the regional Russian telephone company operator) is the other sort of outstanding event. I lost probably a billion dollars or something. Back in the ’60s, when you were working with the investment ﬁrm Arnhold and S. Bleichroeder Advisers, you started one of the ﬁrst hedge funds. How did you do it? In 1969 I set up a model account with $100,000 of Arnhold and S. Bleichroeder’s money, and it was matched by an Italian banking family from Milan. I divided it into 16 slots. I invested one or two slots in any one stock, and then I wrote a memo explaining why I bought that stock. I wrote sort of a monthly report as a service to institutional investors. Eventually, I separated from Arnhold and S. Bleichroeder. Can the industry continue its exponential growth? They are intimately connected. Fallibility, reﬂexivity and an open society are the three key terms for my conceptual framework. Think of it this way: There’s a fundamental difference between natural phenomena and human phenomena because natural phenomena occur without human thinking entering into the causal chain. Human thinking seeks only to understand that chain, and since it doesn’t enter into it, the events, the facts, are an independent criterion by which you can actually tell whether your understanding is true or false. That’s the success of natural science. But when it comes to human affairs, thinking has a dual function — cognitive and manipulative. Those two functions work in opposite directions, and they can interfere with each other. That’s reflexivity. So reflexivity and fallibility go together. And because you cannot attain the ultimate truth of what’s right and wrong — we don’t have the ability to actually nail it down — you need institutions that allow pursuit of the truth, critical thinking, people with different views to live together and still make decisions. That’s open society. But that just complicates things. There may be a weeding-out process, but a hedge fund is a superior way of running money — or it has been. But as 48 • INSTITUTIONAL INVESTOR’S ALPHA • JUNE 2008 Of course. That’s the problem, you see — that reality is too complicated. It’s more complicated than your understanding, and the more progress you make and the more power you have to inﬂuence reality, the more complicated the problem gets. It’s much harder to make decisions knowing that you may be wrong than acting on the belief that you’ve got the ultimate truth. — Interview by Karl Cates

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - June 2008

Investor's Alpha Magazine - June 2008 Contents Letter From the Editor Longs & Shorts Cover Story: Alpha Hall of Fame Bruce Kovner Michael Steinhardt Kenneth Griffin Louis Bacon Steven Cohen George Soros James Simons Seth Klarman Julian Robertson Jr. Jack Nash Leon Levy Paul Tudor Jones II Alfred Winslow Jones David Swensen Looking Ahead: Back to the Future Research Center: Europe Hedge Fund 50 Unhedged: Let the Sunshine In

Institutional Investor's Alpha Magazine - June 2008

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