Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score

By Andy Kessler

A brilliant investor, a born raconteur and an overall smart-ass, Andy Kessler pulls back the curtain on the world of hedge funds and shows how the guys who run big money think, talk and act.

Following on the success of Wall Street Meat, his self-published book on the lives of Wall Street stock analysts, Andy Kessler recounts his years as an extraordinarily successful hedge fund manager. To run a successful hedge fund you must have an investing edge -- that special insight that allows you to reap greater returns for your clients and yourself.

A quick study, Kessler gets an education in investing from some fascinating and quirky personalities. Eventually he works out his own insight into the world economy, a powerful lens that reveals to him hidden value in seemingly negative trends. Focussing on margin surplus, Kessler comes to see that current American economy, at the apex of the information revolution, is not so different from the British economy at the height of the industrial revolution. Drawing out the parallels he develops a powerful investing tool which he shares with readers. Contrarian and confident, Kessler made a fortune applying his ideas to his hedge fund. Which only proves that they may not be as crazy as they sound.

• Language: English
• Publisher: Open Road Integrated Media
• Release date: Oct 13, 2009
• ISBN: 9780061760570

Andy Kessler

After turning $100 million into $1 billion riding the technology wave of the late 1990s, Andy Kessler recounted his experiences on Wall Street and in the trenches of the hedge fund industry in the books Wall Street Meat and Running Money (and its companion volume, How We Got Here). Though he has retired from actively managing other people's money, he remains a passionate and curious investor. Unable to keep his many opinions to himself, he contributes to the Wall Street Journal, Wired, and lots of Web sites on a variety of Wall Street and technology-related topics, and is often seen on CNBC, FOX, and CNN. He lives in Silicon Valley like all the other tech guys.

Book preview

Ssangyong Sweat

This market really sucks. It’s the fall of 1998, and things are banging around so much, my head hurts. Just like that, our gains from the last few years have vanished. Poof. You can’t ever forget how precarious and humbling running money really is.

Some funny currency crisis is going on in the Far East. I’m not sure if this makes any difference at all to Silicon Valley, where most of our investments are based. We didn’t need this shit, as we’re still scrambling around, raising money. Without decent numbers, we’re just two nobodies above an art supplies store in Palo Alto. I desperately need a day to sort out what is really going on and to figure out which way is up.

In reality, I’m looking forward to a day of doing absolutely nothing. It’s midmorning, and just as my Monday-Night-Football-at-the-Oasis-Bar–induced throbbing is beginning to fade, the phone rings, making my head hurt even more.

After fifteen years as a piece of Wall Street meat—first as a research analyst, then as a lousy investment banker—I find myself running a real live hedge fund. It has been two years since my partner, Fred Kittler, and I started scraping together a tiny sum of money, mostly from old friends and a few moneyed folks willing to take a risk on a pair of refugees from Wall Street. It’s not a lot—hardly enough to make us respectable, despite our first-year numbers being pretty good, up 50 something percent.

Until two weeks ago that is. Korea and Russia and Malaysia have just collapsed under the weight of their respective foreign debts, and they took our gains down with them. Now we’re breakeven for the year—all that hard work down the drain in a few ticks of the tape.

No wonder I’m in such a foul mood.

Can you make it down to the company for a lunch today? the voice on the phone asked. We have something of mutual interest to discuss.

Andy Rappaport was a partner at August Capital, a B+ venture firm in the valley. A few months earlier, our fund had invested in a private company where Rappaport sat on the board, keeping an eye on August’s stake. The company sold chips for $5 that cost them $1 to make in Taiwan, which allowed LCD monitors to display sharper images and disk drives to connect faster. Pretty neat stuff.

What’s it about? I asked.

I can’t tell you.

I’m kinda busy.

This is important, he said with a half-pleading, half-excited tone in his voice. Trust me.

Who’s going be there? I asked.

Myself and another board member. Just us, not management. There was that tone again. (I didn’t know him well enough—maybe he always sounded this way.) There’s an interesting opportunity here.

I happened to like the management team, a big reason why we had invested in the first place. But interesting opportunity. Hmmmm. Those are always the magic words.

OK, fine, see you at noon, I said.

I made Fred come along. We were running our fund out of a dumpy office above an arts store in Palo Alto (low overhead). Anyone who visited probably thought we were running some investment-scam bucket shop instead of a hedge fund. I dunno, some days I wondered if we weren’t. Our fund was different from most. We were buy and hold—stocks only. I’d rather eat pork bellies than trade them. We invested mostly in small public companies and a few interesting private companies.

I wasn’t so sure about this one. I’d had no plans to go anywhere that day, so I was wearing jeans and, I’m pretty sure, a clean shirt. Fred and I hit Sunnyvale and parked close to a nondescript steel-and-glass box like those that house every company in the Valley. We were ushered into a conference room that could probably seat 20, with the standard fare of slightly smushed multicolored tortilla wraps sitting uninvitingly on a platter. After almost 15 years in the investment business, I had learned never to trust anyone or anything (let alone eat wraps), so my cynicism was busting out today.

Rappaport didn’t waste any time. There is a group who invested in an earlier round, and they want to sell their shares.

So? I blurted out. Wouldn’t we all.

Well, there seems to be a sense of urgency here.

Now my ears perked up. Urgency? Who is it?

Well, the investor is Ssangyong…

Who? I interrupted.

The other board member, a guy from VentureStar, a fund with money mostly out of Taiwan, jumped in, Ssangyong. They are a Korean company that makes everything from diesel engines to cement. They are spending a lot on LCD monitors, and invested here, hoping to get a jump on some of the technology that could add value.

This was starting to make sense. Korea was drowning in a sea of foreign debt built up in the ’90s, but Korean companies didn’t make enough profit to pay back the debt. As other Asian countries began defaulting on their debt in ’98, investors panicked and called in Korean loans. Anything that wasn’t tied down was for sale in Korea. Ssangyong was something like the sixth largest corporation in Korea, not that I had ever heard of it.

So let me guess, I said. They need cash quickly.

I think so.

Sounds like a distressed sale. Let’s lowball them.

Well, it’s not that easy, Rappaport replied. They know things are going well here, and that CS First Boston is interested in taking this company public in the next year.

Our fund had just invested a slug of dough at $4, and if all went well, we figured an IPO run by Frank Quattrone would be priced at around $16–$18 next summer.

Ssangyong thinks the shares are worth seven or eight bucks today.

Why doesn’t August just do the whole thing itself? I asked, putting Rappaport on the spot. You guys have deep pockets. You don’t need us.

Well, um, er, we own a lot of this thing, and I’m not sure my partners want to add that much.

Now I really didn’t trust him. I didn’t want Fred and me to be the suckers here. We had invested only a few months ago, nothing had changed really and I wasn’t all that interested in getting more exposed. The company had a lot to do before CSFB would take them out—not-so-easy things like doubling their sales. If it didn’t work, we would be stuck with worthless stock. It’s the worst place you could possibly be running a hedge fund—long and wrong.

I leaned over to Fred, and before I could ask him what he thought, he whispered that we should take the stock. He thought the company was going to be a home run.

I wasn’t so sure. Fred is ten years older than I am, with light-years more market savvy. I make judgments much too quickly. But when Fred comes up against a difficult problem, he just reaches back into his long-term cranial memory storage and does a little pattern recognition until he can say, I’ve seen this before. We were the yin and the yang of rash and rational, which is why the partnership worked so well.

We’ll pay $2.50, I said with more confidence than I thought I had in me.

That’s only slightly more than what Ssangyong paid a year ago, and they know we just did a round at $4.

That’s why they call it distressed, I said.

I was in completely over my head, my hangover hurt and our fund’s performance was like an erratic yo-yo. I would have been happy to go back to my office and stare at my screen. They need the money, and they’re going to make a small profit on their investment, even at $2.50. Sounds like we are doing them a favor.

We batted it around for another 20 minutes. I watched my untouched bean sprouts and avocado wrap wilt into itself, then got up and took a nature break.

OK, so we agree on $2.50? Rappaport said as I walked back into the room.

Yes, I said, then turned to go.

Over my shoulder I added, We’ll do half of the shares, and you guys split the other half.

Great, Rappaport said, perhaps too easily. But there’s one more thing—we took a straw poll while you were in the bathroom and decided that you’ve got to tell him.

Tell who? I asked, whipping around again. I had been so close to the door and freedom.

Mr. Shim from Ssangyong. He’s in the next room.

Oh, great, I thought. I had to miss that vote. I heard myself say instead, No way.

No one else wants to.

Fine. I’ll tell him. I really didn’t care—I just wanted to get the hell out of there.

On cue, the CEO of the company whose shares are being sold by Ssangyong walked into the conference room, looked at me and asked, Ready?

I followed him into a smaller conference room where a short man was sitting alone at a table for five, thankfully without wilting wraps. The CEO introduced me to Sang Win Shim, a Korean gentleman in an ill-fitting off-the-rack brown suit, white over-starched shirt and cheap tie, who was nervously sucking on a lit cigarette like it was connected to his air supply.

When the CEO left, Mr. Shim stared at me with one eyebrow arched in anticipation of bad news. I also noted a few beads of sweat above his lip. He surveyed me, unshaven, wearing a short-sleeve polo shirt, Wrangler jeans and slightly used ASICS sneakers that were made in Korea, probably in the next town over. He must have thought, What the fuck is it with these silly Americans? Can’t they even wear a suit?

Neither of us spoke for a minute or two, so I decided to break the ice.

I understand you have some shares of the company you would like to sell.

Yes, yes, he said, and his arched eyebrow eased slightly.

Well, we met in the other room and discussed your situation, and we would like to buy your shares.

A crooked smile came over his face, as if I had made his day. He asked, Yoda-like, Yes, yes. How much pay you for shares?

We are prepared to pay you $2.50 for your shares.

I watched as his lips parted, his teeth clenched and he sucked in what seemed like all the air in the room in this reverse hissing sound that could be heard for blocks. The sweat spread to his forehead, sideburns and shirt. He lit another Marlboro and dragged on it so many times, so quickly, that the room became a thick cloud of smoke. I thought I was in a police interrogation scene from a bad black-and-white movie.

No, no, not enough. We pay that before—stock now eight dolla.

Well, that is all we are willing to offer. There’s a lot of uncertainty, your shares have less rights and based on our risk discount calculations—I didn’t know where that line came from—we can only offer you $2.50.

A few more giant sucking sounds and Bogart cigarette-sucking imitations and his sweat grew so heavy he looked like I had pushed him into the Pacific Ocean. Perhaps I had. He kept muttering, No, no. No good. I need much more. People want more.

Sorry, that’s all we can do.

Finally, shaking his head so hard that the conference table was getting soaked, he mumbled almost under his breath, I no able to accept. I must talk with my chief.

I suppose I knew the negotiations were over and he was just saving face, even to a sloppily dressed bozo like me. I just said, OK, just let us know, thanks.

I ran out of the building as if I had seen a ghost. I told Fred on the drive back to our office that these guys didn’t have any other buyers and my guess was we would get a call tomorrow saying that we could have the shares for $2.50.

And sure enough, the next morning, we did.

Part I

Raising Funds

No Homa

KOWLOON, HONG KONG—EARLY 1996

The doors of the marble-lined elevator opened on the 32nd floor. I walked out, looking for a receptionist to direct me to William Kaye, a money manager I was set to meet at 10:00 a.m. Back in 1986, Kaye ran the deal arbitrage desk at PaineWebber. Now, 10 years later, he is running money out of Hong Kong, and I was trying to get him to invest in our fund or point me to others in Asia who might be interested.

But something wasn’t right. There was no receptionist, just a giant room filled with Chinese men and women bustling about, jabbering away, passing pieces of yellow and red and orange plastic around the room. Boxes filled with wires and screws and nuts and bolts were on every table. Against the wall, a stack of shrink-wrapped boxes looked ready to ship out. This was all very odd for a classy office building in Kowloon. I made eye contact with a woman scurrying by.

William Kaye? I asked.

No homa.

He’s not in?

No, he homa.

So he is in?

No. Homa. Homa Sim-san. She pointed to the finished boxes.

She was right. The boxes were of Homer Simpson figures. A giant arrow on the box told me to push his exposed belly, which I did and heard, D’oh!

I checked my calendar. William Kaye was on the 33rd floor. D’oh.

I rode the elevator up one more floor, and the doors opened to a completely different world. Cherry wood–lined walls, modern furniture, a sign that said Pacific Group, under which sat a blond receptionist who greeted me by name.

Mr. Kessler, Mr. Kaye will be with you in a moment. He is on a conference call with the management of a Thai cement company. May I invite you to wait in our conference room? Tea for you?

I stood and stared in amazement out the conference room window overlooking Kowloon and Hong Kong Island and the port of Hong Kong. What seemed like hundreds of container ships stacked high with, well, probably with Homer Simpson figures, shuffled along, while a few junk ships and motorboats darted in and out.

I guess you can run a hedge fund anywhere—they come in lots of different flavors. Some come up with complicated strategies to speculate on the rise of Malaysian currencies versus pork belly futures. Or to take down the Bank of England.

In 1949, a guy named Alfred Winslow Jones figured out he could improve his investment returns by simultaneously borrowing money to buy stocks with one hand and selling stocks he didn’t actually own with the other hand. If he constructed the right transaction, he could make money in a rising or falling market. That’s how Jones discovered a hedge. Ever since, smart guys who wanted to be rich began creating complicated hedges and getting rich people who weren’t as smart to invest in them. How do I know this? I tripped across the name A. W. Jones on a door at One Rockefeller Plaza in New York years back and asked.

A few years into the evolution of hedge funds, in the late 1960s, you started to recognize the names. Guys like George Soros and Michael Steinhardt and even Warren Buffet ran some of the 200 hedge funds that popped up. You must be a millionaire to invest in a hedge fund—an accredited investor, in regulator-speak. The Feds, focused on the downside, figure it’s OK to let rich people be stupid—after all, they can afford to lose it all. But all that really does is keep ordinary folks from getting great returns.

By the 1990s, a couple hundred funds had become thousands, most of them fast-money operations eking out tiny returns on each trade but buying and selling so much stuff day in and day out that it eventually added up to real money. That’s what Julian Robertson at Tiger and the Nobel laureates at Long Term Capital Management did. They ran huge pots of capital through monster trading floors filled with computer monitors covered in dancing green and red prices. These folks hedged anything that moved. I was trying to raise money to get in the game.

You Andy? Yeah, I remember you. Chips or something like that. You sat back there with Jack Grubman.

Seeing Kaye brought the ’80s flying back. I had spent five years at PaineWebber and another five years at Morgan Stanley as a semiconductor analyst. I was the poor slob that had to say Buy or Sell on stocks like Intel and Motorola and Texas Instruments. These stocks loved to bob when everyone else weaved.

Technology was volatile, but stocks of companies that made chips were like hyperactive kids munching on cotton candy: they’d fly high until they crashed hard, and my job was to figure out when the sugar high would begin and end. I always figured I would end up with gray hair and ulcers. My clients were big money firms—Fidelity, JP Morgan and increasingly lots of fast-money hedge funds that liked to play where things were moving.

I had hopped off that roller coaster still sporting a head of dark brown hair, but now I was getting into running money or at least I hoped I could if someone like William Kaye would give us enough money.

Kaye was a reasonably slight, very New York–looking guy, with black hair and eyes set a little close together, which gave him both a serious and mysterious, almost sinister look at the same time. He was also smart as shit. At PaineWebber, he had made the firm and its clients tons of money (I assume he did well himself too). Courtesy of Michael Milken and Drexel Burnham and hot money in junk bonds, the late ’80s saw mergers announced almost daily. If a stock was trading at $45 and a deal was announced at $60, the stock might jump to $57. You could still make $3, not much, but in only three months, which was a 21% return, even higher if you borrowed money. Kaye and his team would figure out how solid the deal was, chase down deal documents, figure out if the price might even go up and then put the arb on.

That’s me, nice to see you again. I ended my sightseeing and leaned over to shake his hand.

Please sit.

Thanks. I’m out raising money for a fund to invest in communications technology companies, public and private. I figure there might be interest from folks out here in the Far East. I started to give him the pitch, but he waved me off.

I’ve got a couple of guys in New York who might be interested. Out here, we are still in the industrial age.

What do you mean? I asked.

Look, you guys in Silicon Valley are so far ahead of the curve, you have no idea. The Industrial Revolution is just hitting around here. It’s decades behind you, maybe more.

Are you really investing in cement companies? Not only was I curious, but I still had 50 minutes to kill until my next meeting. He’d turned down my pitch to invest in our fund pretty quickly, and it wasn’t like I was coming back to Hong Kong anytime soon, so I might as well learn something.

Investing in the U.S. is so advanced, Kaye went on. There’s technology and biotech and all this highly valued stuff. Around here, they are still building roads and putting in telephone wires and putting up office buildings and chemical plants and factories. I can just look at what worked in the U.S. 30 years ago or 80 years ago and then go find similar industries and companies around here.

Really? I asked.

Yeah sure, I’ve been in more lumberyards and ethylene plants and shoe assemblers than I care to remember. But that’s the easy part.

What do you mean? I asked.

Accounting is a joke. I don’t trust anyone. The Japanese are the worst. They say they make money, but they really don’t. Almost every Chinese company I know is a not-for-profit entity. In other countries, like, I don’t know, Singapore maybe, they say they don’t make money, but really do.

I take it they don’t do 10-Q filings like they do in the U.S.

"You’d be lucky to get some of these companies to say anything. I’m on a plane most of the time, visiting management to figure out how much money they are making. Then I’ve got to figure out what they are going to tell everyone else who doesn’t visit. The banks are mostly crooked, the governments not much better. You’ve got to watch them both as closely as the companies, make sure the whole damn system is solvent. The biggest question is how the U.S. trade deficit is going to work out. But I love it."

Why? It sounds hard.

Not really. It’s like living in 18th-and 19th-century England and knowing ahead of time how the whole Industrial Revolution ends up. You guys have to sit in Silicon Valley and try to figure out what the world is going to look like in 20 years. Good luck. Around here, I’ve seen this movie already. I get to cheat. I know how it ends.

Isn’t it maturing faster than the West did?

You’d think. But they do all the same stupid things—bad laws, protectionist policies, full employment instead of quality employment. When I do find someone making money, I’ve got to worry about banks in the country overlending.

Why does that matter? I asked.

The U.S. trade deficit means dollars pile up around here. If the banks lend too much, foreign money pulls out, the currency starts dropping, interest rates go up to keep money in the country and my little moneymaker gets sucked into a nasty depression and becomes worthless.

Wow.

To be honest, it’s a lot like the deal arb days back at PaineWebber. You try to figure out if management is honest. Most governments aren’t. Their central banks use dollars instead of gold, but they still make bad loans like banks for all time have done, and then they cover it up. But if you find anything that smells like an American or British model, you can make lots of money. That’s why I’m here.

I took one last glance at his spectacular view of Hong Kong harbor, thanked him for his time and headed back into the swamp of Hong Kong. I always hated meetings like that, hearing from someone who actually knew what he was doing. The future was a giant fog bank to me, and here is a guy who has a spectacular view and a script to follow. I made a note to buy a Homer Simpson doll at the airport.

You Need an Edge

NEW YORK, NEW YORK—EARLY 1996

Let me show you into the conference room. Mr. Nash will be with you in one moment.

Thank you so much, I said.

The receptionist led me and Fred Kittler into your standard-issue New York City conference room—a round table with six chairs, a leafy green potted plant in the corner and cheap blotchy nondescript prints that was some office manager’s attempt at soothing art. The only difference from every other conference room I had ever been in was a giant monitor, maybe a 50-inch diagonal screen, looming over the conference room table.

Mr. Nash has just one request. He would like you two to sit in these two seats. She pointed to two chairs directly under the massive monitor. He will sit over here. He does this every meeting, don’t worry about it.

My partner and I exchanged a that’s-weird glance.

OK, got it.

Jack Nash was a Wall Street legend. He was on the top five list of greatest hedge fund managers along with George Soros, Julian Robertson and I’m not sure who the other two might be. I think I remember seeing him on the Forbes billionaire list.

Fred and I were out raising money for our fund, and one of our investors, Jim Torrey, mentioned that Jack Nash was liquidating his Odyssey Partners hedge fund. Something like $3 billion was going back to investors, and a lot of that was Jack’s personal dough. He was hanging up his cleats and looking for others to manage some of his fortune. Torrey set up this meeting, and despite working on Wall Street for almost 15 years, I was intimidated as hell to meet and pitch a living legend. We had a few small investors in our fund, but nailing Jack Nash would be big, I figured, since everyone he knew would then call us begging to invest in our fund. (I could be quite delusional when I put my mind to it.)

OK, hello there, please sit down, Jack Nash said as he waddled in. He looked like a classic aging New Yorker, short, slightly stooped over, a white mop of hair straggling from his head. He gave us a half smile and waved us to be seated.

Thanks for meeting with us, I

Reviews for Running Money

[khaoula · Rating: 5 out of 5 stars]

Great book about investing in tech at the end of the 90s. Lots of detail about different companies and espesially interesting to read about the evolution of the different technologies that brought us the internett and new companies related to that. Lots of historical references to the industrial revolution and technologies developed then and the relevance for how technologies are developed and fortunes created.