The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds Read Free Page B

subprime housing market from 2006 to 2008.
     
    The Framework
     
    My goal became to tell their stories with the active and aspiring investors in mind. This book is aimed at those who want to understand the anatomy of a great trade, the analysis for a sound framework, and the sense of self to strike out on their own and stand by their convictions. For two years I was fortunate enough to have hundreds of hours of unprecedented access inside these managers’ offices while they told me their stories.
     
    All of the subjects of my book were generous enough to speak with me candidly, on the record, and many times on topics well beyond the scope of investment. I was privileged enough to see them during periods of stress, moments of reflection, and flashes of sheer genius.
     
    I traveled with some, heard vivid recounts of memorable travels from others, and perhaps unexpected but most valuable of all, I got to see them as human beings—and could share in their successes and failures equally. I was privileged to be able to experience that intriguing journey, and I hope I have been able to accurately transmit these feelings to the reader.
     
    The “Hedge Fund” Misnomer
     
    My research led to another important question, which was: what is, in fact, a hedge fund? I posed the question to Ray Dalio, the 62-year-old founder of the world’s largest hedge fund, Bridgewater Associates, which has $120 billion in assets under management.
     
    “I don’t even know what a hedge fund is!” he exclaimed, half-jokingly as we sat in his glass office surrounded by forest and a lake in Westport, Connecticut.
     
    “What we’re called and how we’re categorized, by our basic structure, doesn’t capture the essence of what we are,” he quipped. “I trade long and short,” he continued. “Does that make me a hedge fund?” he asks rhetorically.
     
    “No. I consider myself a financial engineer. I started trading commodities. Then commodities became various futures, which evolved into various swaps and derivatives. I could separate things in a way that was unique. I evolved.”
     
    These elements are not exactly encompassed by the definition of a hedge fund, which, at its core, groups many of the world’s most sophisticated investors by nothing more than a compensation structure. As Dalio said to me, “I likely have nothing in common with the other managers in the book except for the fact that we are a unique group of good investors doing unique things.”
     
    2011’s Mixed Signals
     
    When I met with the subjects of this book, they were in the middle of steering their ships through stormy markets. We had just emerged from the worst recession since the Great Depression, and the U.S. markets, still smarting from their own severe crisis, were then paralyzed with fear about the voraciously eroding crisis in Europe. The year 2011 represented a time where many managers were defensive for the first half of the year and slowly began to wade back into the markets toward the third and fourth quarters.
     
    It was one of the most tumultuous years the U.S markets had seen following the financial crisis. Markets suffered a high degree of pressure from a high degree of global economic uncertainty, the subsequent downgrade of the U.S. credit rating below “AAA” for the first time in history , and Europe’s increasing debt woes. Yet, for all its volatility, the market ended the year pretty much exactly where it started, with the S&P 500 Index closing within a tenth of a point of its starting place and the Dow up 5.5 percent.
     
    Hedge funds saw more mixed performance, closing the year down 5.13 percent, according to industry data provider Hedge Fund Research. It was only the third calendar-year decline since 1990.
     
    Spending time with the managers during such a tumultuous period was difficult but also very reflective. The managers had no choice but to sit back and really think about the answers they gave. Many had to admit