Hedge funders are in the news. Carl Icahn tweets about his dinner with Apple’s Tim Cook. Dan Loeb tussles with George Clooney. Bill Ackman says Herbalife is a pyramid and shorts the stock; George Soros goes long. If you want to understand the guys who run hedge funds, you first have to realize that they—we—are a little nuts.
The trick to running a hedge fund is to drink from the fire hose of information, take it all in, figure out what everyone else knows and then position your portfolio to benefit when everyone else is inevitably wrong. This is no simple feat. Sleepless nights, second guessing, minds racing, almost a split personality working out both sides of all arguments. You force yourself to think like a contrarian. Actually, you become like George Costanza in the “Opposite” episode, listening when Jerry Seinfeld suggests “if every instinct you have is wrong, then the opposite would have to be right.”
Being crazy can be lucrative. But in every market cycle there are moments when hedgies run out of ideas. We’re in just such a time. Zero interest rates make it hard to read others’ sentiment, commodities have rolled over, bonds are backing up, and the Federal Reserve may or may not be tapering. No longer trusting their Costanza mindset, or maybe because of a loss of patience, they grab onto handholds—trying to tether themselves to more sure things.
When hedge-fund managers grab onto “sure things” rather than float, it’s usually a sign they’ve lost their touch. Stay thirsty, my friends.
And what’s an individual investor to do? Teach yourself how to think ahead of those who are scrambling for ideas. When everyone else is thinking short term, start thinking long term. Embrace ideas when everyone else hates them. Out-Costanza the hedgies.