Institutional Investor's Alpha Magazine - June 2008 - (Page 56)

ALPHA HALL OF FAME What were some of your best value investments? Distressed-debt investments where we owned the senior debt. That is a favorable place for a value investor. You have a margin of safety since, as things go bad, people who are junior to you are the ones who lose value before you do. Second, the bankruptcy process itself is a catalyst. A cheap stock can stay cheap forever, but if you own a bankrupt bond, the process of emerging from bankruptcy and distributing new securities offers a practical catalyst to realize the value. Back in 2001, 2002, we successfully invested in the debt of funeral home companies like Service Corp. International and Stewart Enterprises. We were investors in Xerox Credit Corp. debt. Biggest mistakes? no overlap of positions. Probably ever. So are there too many? No. It’s not competition for us, but yes, more and more money has gone into the kinds of strategies many hedge funds follow. On the other hand, there are also some bad hedge funds — overleveraged hedge funds — and those are the causes of tremendous selling opportunities. When they get in trouble, they may be forced to sell at bargain prices. Is it getting more difﬁcult to ﬁnd value? There are too many examples that we could say, “Ah, that was right in our sweet spot, and we should have had it.” All investors need to learn how to be at peace with their decisions. We as a ﬁrm are always going to buy too soon and sell too soon. And I’m very at peace with that. If we wait for the absolute bottom, we won’t buy very much. And when everybody’s selling, there tends to be tremendous dislocation in the markets. What’s the secret to success? Sure, but I can’t worry too much about things I can’t control. If suddenly tomorrow I got the conviction that all securities were efﬁciently priced, that nothing was dropping to levels where I cared about it, I would be happy to close up shop. But human nature makes it hard for the markets to be efﬁcient. As recently as earlier this year, there were days when it felt to a lot of people like the world was ending, that we were staring into some kind of abyss of ﬁnancial distress, and a lot of buyers weren’t buying. Those were interesting days. We were looking for bargains, and the Fed massively intervened, and people decided it was safe to invest again, and the markets worked out. So the question is not, Are people smart, are people sophisticated, do they have clever ways of looking at things, are they looking in the right areas? The question is, Are there periods when none of that matters because their human natures get the best of them? What’s your opinion on hedge funds going public? Every manager should be able to answer the question, “What’s your edge?” This isn’t the 1950s, when all you had to do was buy a corner lot and build a small drugstore and it gradually became incredibly valuable land or you owned a skyscraper or you built a small shopping center and it became the big regional mall. The market’s very competitive; there are a lot of smart, talented people, a lot of money chasing opportunity. If you don’t have an edge and can’t articulate it, you probably aren’t going to outperform. Why do some hedge fund managers fail? It’s a terrible mistake. One of the worst days for the hedge fund industry was the day the ﬁrst one became public. As an investor, you do best when you think about what’s in your client’s interest, which is managing a reasonable amount of money that will earn a good return with limited risk. When you go public, you change that risk-return equation and start thinking about how much money you can make. It becomes a business where the client relationships don’t have to be longer than the next quarter and the talent can leave and the clients can leave. Name one of the most pressing issues the world faces today. Their clients are pressuring them for short-term results, or they think their clients want short-term results. That’s probably the biggest problem for professional money managers. It makes it very, very hard for an investor to hold a stock that’s going down, to take a contrary viewpoint. I also think leverage is a great risk. If you look at hedge fund failures, virtually all of them were on the back of excess leverage. Are you worried about the hedge fund industry becoming too crowded? It would be great if we got a long-term energy policy in this country, because if we could put a ﬂoor under the price of oil, we could enable alternatives to spring up. We can’t risk oil going back to $40, and we’re just so shortsighted and stupid about that. We could have a global war over energy if we’re not careful. What’s your philosophy when it comes to philanthropy? If you took some of the people in your [Hall of Fame] group and compare what they do with what we do, there would be 56 • INSTITUTIONAL INVESTOR’S ALPHA • JUNE 2008 I’m not a big fan of giving to endowments, because people in endowment situations tend to give away the minimum. I believe problems are compounding faster than the money, so spending more money sooner rather than later is more likely to address a problem. I’m interested in situations where you get a sizable bang for the buck, where it’s proven that intervention is effective and where even a relatively small amount of money or a relatively targeted amount of money can change the game. — Interview by Stephen Taub

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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