Roughing it... http://www.nytimes.com/2005/12/22/business/22hedge.html December 22, 2005 Want to Start a Hedge Fund? First, Read This Book By RIVA D. ATLAS Ah, the grand life of the hedge fund manager: the annual paychecks in the tens, if not the hundreds, of millions; the mansions in Greenwich; and the ski vacations in Aspen. But there is another other side of the business, one examined by Barton M. Biggs, the former Morgan Stanley strategist and now a hedge fund manager himself, in a soon-to-be published book. He writes about stressed-out managers struggling to maintain their lavish lifestyles as their funds suffer losses. One manager, identified as "Ian," would grind his teeth at night, according to an advance copy of the book; he shut his hedge fund after only three years, having suffered losses of more than 16 percent. "The pressure of living so intimately, so intensely with his portfolio (and dying a little on the bad days) has become intolerable," Mr. Biggs writes in "Hedge Hogging," (Wiley), which will be published on Jan. 6. Another trader was stung by losses after moving into a Greenwich estate with $20,000 trees, a two-story screening room and a wine cellar that could hold 5,000 bottles. "The straws were mounting on the camel's back even as dark clouds were gathering," Mr. Biggs writes. With losses approaching 30 percent, the manager had a breakdown and would not get out of bed, so his wife abruptly closed the fund. Mr. Biggs's empathy toward the hedge fund managers could stem from his own bumpy experiences as a manager, which he describes in the book. The book offers a rare peek inside a world that thrives on secrecy and the promise of outsize returns. A mystique has developed around hedge fund managers as they have become Wall Street's biggest clients and challenge some of the biggest companies - witness Carl C. Icahn and Time Warner. There is a perception that hedge fund managers are swimming in money; last year, a cover of New York magazine portrayed a manager in a bathtub full of dollar bills. They are spending tens of millions of dollars on the choicest artwork and real estate. Yet the average investor understands very little about how hedge funds - lightly regulated private investment partnerships - operate and how they make money. Mr. Biggs disguises the unfortunate managers in narratives he describes as "composites," or "impressionistic glimpses." The traders profiled in "Hedge Hogging" have made-up first names or nicknames like the Hot Young Tech Guy, Grinning Gilbert and the Trigger. Yet to those who know the business, it seems clear in some cases who is who in Mr. Biggs's exposÃ©. The experiences of Ian, for example resemble those of one former Morgan Stanley trader turned hedge fund manager. That manager did not return calls seeking to confirm his identity. The book is a return to Mr. Biggs's role as a Wall Street commentator, recalling his days at Morgan Stanley when his literate essays on the markets were well circulated among investors. To the bafflement of his friends and peers, Mr. Biggs decided three years ago to leave his perch as one of Wall Street's elder statesmen and, at the age of 70, together with two partners, cast his lot with the high-strung traders, many of them half his age. He now runs a $1.5 billion hedge fund firm called Traxis Partners. "It is a young man's game," said Julian H. Robertson Jr., the hedge fund manager who shut his firm, Tiger Management, in 2000 after 20 years in the business. Mr. Robertson said that he enjoyed being free of the daily stresses of the money management business, but that Mr. Biggs, a longtime friend of his, thrives on being part of the fray. "Barton is in it for the love of the game; he loves the action," Mr. Robertson said. Byron Wien, another former Morgan Stanley strategist who recently joined Pequot Capital, a hedge fund, said of Mr. Biggs: "He is not constitutionally capable of choosing a passive life. He likes interacting with young people and other money managers." Mr. Biggs's track record at Traxis has been mixed. After a strong start in the second half of 2003, Traxis faltered in 2004, after making a giant, disastrous bet against oil. After losses of more than 7 percent by last summer, its flagship fund ended the year down 0.5 percent. This year, according to a letter to its investors, Traxis is up 13.3 percent before fees through November, partly because of a gamble on United States stocks. That compares with a total return of 4.9 percent for the Standard & Poor's 500 index for the period. Mr. Biggs declined to comment about his fund or his forthcoming book, citing Securities and Exchange Commission rules that restrict hedge funds from promoting their results. In his book, Mr. Biggs acknowledges the excesses of the hedge fund business but also sympathizes with those determined to beat the odds and challenge the markets. The stresses that Mr. Biggs describes have to do with the unique way that hedge fund managers are compensated. At the end of each year, these managers calculate their gains, and typically take a 20 percent cut of any profits, known as an incentive fee. In a good year, that can be highly lucrative, with managers of the largest funds earning several hundred million dollars. The largest hedge funds, with $1 billion or more under management, also make money from a 1 percent to 2 percent management fee they receive in good and bad years. But these riches accrue only to a small fraction of the 6,000 or so hedge funds in existence. The average hedge fund start-up has less than $200 million under management, and hefty overhead, including salaries for analysts and traders, as well as computers and rent. Mr. Biggs describes the Darwinian process under which thousands of hedge funds start, and then swiftly disappear, every year. "If the fund does well, the partners earn the 20 percent, get more money and wear smiles to bed," he writes. "If they really blow it in the first year, everybody redeems their money and they're gone with barely a ripple." Still, unlike many of the other funds described in "Hedge Hogging," Traxis was large enough to survive its losses. Assets are down from a peak of $2 billion, but the firm still has about $1.5 billion under management. Mr. Biggs' return to the hedge fund fray was particularly surprising given that he suffered his share of bruises during an early foray into the business. A hedge fund firm he helped found, Fairfield Partners, suffered some rough months during the bear market of the early 1970's. Mr. Biggs writes in "Hedge Hogging" that Fairfield rebounded from those losses, but he remains haunted by memories of that fund's struggles. "I remember waking up every night like clockwork at 3 a.m., literally in a cold sweat," he writes. More recently, Mr. Biggs expressed anxiety about a hedge fund bubble. "The hedge fund mania that now grips the U.S. and Europe is rapidly assuming all the classic characteristics of a bubble," Biggs wrote to Morgan Stanley clients in 2001. He went on to describe how certain investment strategies were being overwhelmed by too much money chasing opportunities. But less than two years later, Mr. Biggs decided to join the crowd and start his own hedge fund. People who know Mr. Biggs say he had a sweet deal when he set up Traxis. Morgan Stanley's investment management division sponsored the fund, which meant that the investment bank covered the costs of raising its capital and handles the ongoing legal, accounting and trade processing functions for Mr. Biggs, leaving him free to focus on investing. Morgan Stanley gets a share of the profits earned by the hedge funds and is also a prime broker for Traxis. A spokeswoman for Morgan Stanley declined to comment on the relationship. Even with Morgan Stanley's backing, Mr. Biggs faced an uphill march as he began raising money in early 2003, holding numerous meetings with skeptical investors. "I was a little disconcerted to be in Palm Beach grubbing for money with all the other twerps," Mr. Biggs writes. Then there was last year's disastrous bet against oil. The losses Traxis suffered led some long-term associates to withdraw their money. "Thirty years of confidence went down the drain in a couple of months," he writes. Mr. Biggs is both gratified, and a little anxious, about his comeback this year, according to a letter he wrote to Traxis investors describing last month's performance. He has made bold bets on emerging markets including Taiwan and Brazil. Closer to home, Traxis has invested in the NASDAQ 100 index as well as Internet companies like eBay, Google, and Amazon, according to the letter and Securities and Exchange Commission filings. For now, Mr. Biggs remains bullish on the stock market, even as he acknowledges a long list of risks in his letter to investors, including rising rates, an end to the housing bubble and overcapacity in China. "We ride the tiger with our fingers crossed," Mr. Biggs wrote.