End of Bull Market is Near? Barron's(4/30)
Michael Steinhardt, who launched his hedge-fund firm 40 years ago and quickly
became an industry giant, doesn't think much of some of the people making huge
fortunes in the business today.
Back when he started, he says, hedge-fund chiefs were members of "a very
limited, elite group that had mystery and excitement and elan. Now, it's all
about making money for the managers." Steinhardt, who routinely made 20%-plus
annually for his investors, adds that a lot of his modern counterparts are far
better at gathering assets -- a key factor for their pay -- than they are at
generating investment gains. "If I made 11% in a year, I'd be committing
hara-kiri. These guys make 11% in a year and they are overjoyed."
He's even more critical of mutual funds, whose collective performance he
denounces as a "disgrace."
Currently, there are more than 9,000 hedge funds, with some $1.4 trillion of
assets and a raft of hotshot MBAs salivating over staff openings. In contrast,
"we were not a mainstream institution," says Steinhardt, who recalls there
being just a handful of hedge-fund managers when he set up shop in 1967. "We
were viewed askance by almost everybody. We were the gunslingers, the wise
guys, the people who screwed up markets" -- second-class citizens in the
then-clubby world of investment management.
There was nothing second-class about the results generated by Steinhardt's
rapid-fire trading. Over the next 28 years, his firm earned a compound annual
return of 24.2%, net of fees. It lost money in only three fiscal years -- 1969,
1972 and 1994, which saw a brutal downswing of nearly 34%.
Steinhardt, 66, who spoke with Barron's in his Madison Avenue office in
Manhattan, now devotes much of his time to philanthropy. He retired from active
money management in 1995. But he still cuts a big figure in hedge-fund circles,
partly because he was a pioneer.
One of his first institutional clients was the Common Fund, set up in 1971,
mainly for college endowments. "He recognized early the advantage of having
good short positions, as well as long positions," says George Keane, who helped
to organize the Common Fund, which allocated money to Steinhardt in the early
1980s. "His edge was his research and understanding the large U.S. companies
inside and out." One of Steinhardt's investment precepts, Keane recalls, was
that interest rates would fall, as they did eventually.
With managers now collecting management fees of 1% to 2% -- or even higher --
on billions of dollars, "they are extraordinarily well-compensated," says
Steinhardt. "I used to say that I should not make a dime unless my investors
made a dime, and the 1% [management fee] was supposed to be enough just to pay
expenses." However, he adds, "This is a free market" and investors sign up "of
their own free will. So one shouldn't feel sorry for them."
Oscar Schafer, a Barron's Roundtable member and hedge-fund manager who worked
for Steinhardt in the 1970s and early 1980s, says that his old boss brought to
the office "an intensity and a desire to win every day."
In fact, Steinhardt's combative personality was legendary on Wall Street. He
didn't suffer fools gladly, and he didn't hesitate to tear apart an analyst's
thesis on a stock. "He had a special feel for what really made a stock go up
and down," Schafer relates. "He reduced me to tears several times, [but] he was
as hard on himself as he was on everyone else."
Says Tony Cilluffo, who worked on Steinhardt's trading desk in the 1970s:
"Michael was basically a skeptic from day one. He did not buy the BS that the
Street used to peddle." Aspiring hedgies take note: Steinhardt doesn't think
superior portfolio management can be taught. "The greatest teacher is
experience," he says, noting that his own stock-trading days began at 13 when
his father gave him more than $5,000 in shares of two companies. "By the time I
graduated from Wharton [the University of Pennsylvania's finance school] at the
age of 19, I had more trading experience than most people have at the age of 30
or 35," he says. "I made more mistakes by the age of 19 than most people make
10 or 20 years later into their lives."
It's important for a hedge-fund manager "to really feel miserable" for their
mistakes and to be galvanized by "the sense that their own personal security is
at risk. I felt that more than once," he adds, implying that these factors are
missing in today's more comfortable and well-compensated hedge-fund world.
Steinhardt's biggest investing regrets include not preparing his portfolio
better for the October 1987 market crash, even though he had written to his
investors earlier that year that the market looked overextended. The big hit he
took in 1994 also was a result of inaction."Without knowing it, our confidence
had lured us into becoming too big" in the international bond markets,"
Steinhardt wrote in his book No Bull: My Life In and Out of Markets.
The early days of Steinhardt's career were spent working at New York
brokerages, including Loeb Rhoades, where he learned about fundamental stock
research. Confident in his own stock-picking abilities, he opened his own firm,
Steinhardt, Fine, Berkowitz & Co., at age 27. It was a small shop with eight
employees and $7.7 million under management. Even though he traded
aggressively, Steinhardt emphasized to his charges that fundamental research
was king, regardless of whether they were making short- or long-term bets.
"He came into the office every day expecting to make money," says John
Lattanzio, who was Steinhardt's head trader for many years.
Steinhardt liked to make contrarian calls and to invest in just a small
number of stocks, especially those not well-covered on Wall Street. "You're not
going to bring anything to the party on IBM," says Lattanzio. "They will tell
the same thing to everybody. It doesn't mean it's a bad investment. But he
liked to find things that were different." And, he adds, Steinhardt "was very
good at understanding if there was an edge there."
Steinhardt typically would work out his macro view, and then build up his
stock positions. There were times he instructed Lattanzio to liquidate the
entire portfolio, and then they would start over. Over time, Steinhardt added
Steinhardt still keeps his hand in investment management, though he's now
focused on exchange-traded funds. In 2004, he led a group that backed a
fledgling venture called WisdomTree, which has rolled out a series of ETFs
weighted by fundamental factors like dividends and earnings. In contrast, many
index funds are weighted by market capitalization.
Steinhardt says he "was attracted to the idea of an investment product that
would be superior in its performance and have at the same time low cost, great
liquidity and total transparency." What also made these ETFs appealing is that
they offered a good product to average investors, which in his view have not
been well-served by mutual funds. "Mutual funds have been a disgrace, and if
they were really measured in terms of their real performance, the disgrace
would be much bigger," he says.
Steinhardt has a range of interests, from horticulture to collecting ancient
art. Nowadays, he spends a lot of time on philanthropy. The Steinhardt School
of Culture, Education, and Human Development at New York University bears his
name. One of his pet projects is Birthright Israel, which pays for young Jewish
people to visit Israel. He is particularly interested in Judaism's history and
culture. He wants, as he puts it, to help "create a Jewish future that is
exciting and vibrant and will capture the values that have made Judaism so
What's his take on today's stock market? "The bell is beginning to ring," he
says. "We're not too far from the end of the bull market."
Investors, take note. It's probably not a good idea to bet against this guy.