Taming the Beast: Wall Street's Imperfect Answers to Making Money

Summary

• Hedge funds trade stocks and other instruments using supposedly sophisticated strategies, juiced with leverage. They have much to teach us about investing—it pays to be diligent, knowledgeable, and sometimes daring. Most hedge funds beat the market, an achievement that should establish their bona fides. The 2008 market swoon wasn’t their fault, and the average hedge fund had half the loss of the S&P 500 that year.
• Hedge funds are lightly regulated pools of money, provided by institutions and wealthy people. To be an accredited investor allowed into the pool, you need $1 million in investable assets and $200,000 in yearly income. Managers have their own capital tied up in their funds, so they possess a personal interest in doing well. They also are well paid, charging 2 percent of assets in fees and 20 percent of the profits.
• PE funds, like Kohlberg Kravis Roberts, are the hedgies’ cousins. PE firms buy whole companies, seek to turn them around, then sell them off at a nice markup. Studies show that the overall record of their deals, once known as leveraged buyouts, is mixed. KKR broke even, at best, with its takeover of RJR Nabisco, and has scored well with Toys “R” Us.
• The father of hedge funds, Alfred Winslow Jones, was a former Marxist spy who converted to capitalism and opened shop after World War II. He originated many hedge hallmarks: the strategy of paired long and short sales, the fee structure, and the penchant for secrecy. Icons like Michael Steinhardt, George Soros, ...