1) Hedges funds share 4 common characteristics: 1) they target positive absolute return; 2) they have access to a wide range of investment tools and instruments; 3) They can apply large leverage; 4) 2/20 structure usually. The best hedge fund managers are self-confident, innovative and intellectually curious. The author interviewed many famous hedge fund managers and did her own research. Ray Dalio from Bridgewater Associates was a guy who could think independently. He wrote ‘Principles’. He was intrigued since young about the financial markets. He also emphasized on the need to reflect after failure so that one can learn from his mistakes. Ray also studied history, including the Weimar Republic. Bridgewater specialized in macro research. The concept of an ‘All-Weather Portfolio’, portfolio beta and stress testing were unique to the hedge fund industry then. Ray was very determined to learn from his mistakes and exercise independent thinking. Pierre Lagrange and Tim Wong were the founders of GLG/AHL respectively. There was a friendly culture in AHL where everyone would help one another. It was also a long term macro fund. Risk management was very developed in these funds. They also invested in China and poached some of the top traders from investment banks at that time. John Paulson was the founder of Paulson & Co. His firm specializes in event investing, such as during mergers, bankruptcies, corporate restructuring etc. It was all about risk arbitrage. He took much effort to build up his skills in this area. Marc Lasry & Sonia Gardner from Avenue Capital Group were specialists in distressed debt investing. This is very different from normal value investing and involves picking debt/stocks when the market is at the bottom. Their firm had a great infrastructure in place to support the front office. David Tepper from Appaloosa Management was a fearless first mover. He paid for his own education in the past. They were often the first to enter an investment in a particular industry/country etc. His firm is quite risk-seeking and not afraid to deploy large amounts of capital on attractive investments. He also gave away his money to charity etc. Bill Ackman from Pershing Square Capital Management specializes in changing management and influencing them in order to improve performance. He liked raising funds from the public to blind dating. He was intrigued with the franchisor business model and invested in McDonalds. He was a contrarian who didn’t care about what others taught. Daniel Loeb from Third Point has a fairly event-driven style of investing. The fund also entered into a lot of short positions. He was excellent at pattern recognition and identifying trends. James Chanos from Kyniko Associates LP was an expert short-seller. He loved to solve puzzles and figure out what is wrong with a company. Boaz Weinstein from Saba Capital Management was looking for asymmetrical investments. He was heavy in the use of derivatives.
2) Lessons learnt: 1) Persistence in achieving their goals is a common story among all the successful hedge fund managers; 2) Learning is extremely important; 3) Trust your own intuition and be willing to make and learn from mistakes; 4) Take a longer-term perspective, realizing that the best strategies might take many years to come to fruition; 5) Handle risk aversion unemotionally; 6) Take aggressive postures in combination with protecting the downside; 7) Invest with those who have their own money on the line and assign backup information gathering to the team; 8) Work with the numbers to calculate values and test ideas.