Introduction: What does the lesson of the black swan mean to us?
Being called a hedge fund master generally requires several conditions: a performance record of more than ten years, a beautiful compound return rate (20%+), earning money in billions, and having experienced several classic battles.
There are probably twenty or thirty investment masters in the world who meet these conditions, all of whom are legendary figures in the investment industry. The investment journey of masters from a net worth of $1 to tens of dollars or even $40000, and the stories of earning billions of dollars, are naturally fascinating, but what we are more interested in is their step from scratch, that is, starting a business and raising their first fund.
Before becoming a master, there is no fame or historical achievements. The team is like a lone commander, and the first step in entrepreneurship is not easy, relying on personal luck or opportunities. For the masters themselves, there are countless battles of various sizes worth reminiscing about in their lives, but perhaps the most unforgettable one is the first battle – the Battle of First Recruitment, because there is a bit of excitement, longing, and sometimes regret.
Here are the entrepreneurial stories of five investment masters, from which you can experience the difficulties of private equity entrepreneurship and perhaps find the secret to selecting excellent private equity firms.
Warren Buffett
The most successful private equity firm in the world is undoubtedly the richest man, Warren Buffett (who holds 308300 Class A shares of Berkshire Hathaway, with a stock price of $235000 per share and a net worth of $72.5 billion). After 13 years in private equity, Buffett moved to Berkshire Hathaway. Buffett is one of the earliest investment masters to debut and has the longest investment career. At the age of 86, he is still striving in the forefront of investment.
Buffett was born in 1930 and entered the Wharton School of the University of Pennsylvania for his undergraduate degree in 1947. He completed his studies in three years and went on to pursue a master’s degree in finance at Columbia University in 1950, studying under his father, Ben Graham, who taught value investing.
After graduating in 1951, he hoped to work for Graham without compensation, but was politely refused, so he worked as a stockbroker in his father’s securities company for three years. During these three years, Buffett immersed himself in researching stocks, attended Carnegie lectures, and taught investment principles at the University of Omaha (the textbook was “The Intelligent Investor” written by his mentor). He also fell in love and got married. At the age of 22, he married 19-year-old Susie and had a daughter.
In 1954, Graham finally agreed to work for Buffett at his company, where Buffett worked on stock selection for two years until Graham dissolved his own company. This is Buffett’s experience before starting his business. Although Buffett was only 26 years old at the time, he was a professional investor with seven years of stock experience.
In May 1956, Buffett returned to his hometown of Omaha with his wife and two children and founded the Buffett Partnership Fund. The first fund has a size of $105000 and has 7 partners, including Buffett’s sister and brother-in-law, aunt, former roommate and mother, Buffett’s lawyer, and Buffett himself.
Among them, Buffett invested $100 (in Chinese writing, can “Snowball” be called “From $100 to $70 Billion”?), but in fact, Buffett’s net worth at this time was already $140000, so he still had confidence in starting his own business.
Buffett established two more partnership funds that year, and by the end of the year, the total net assets of the partnership funds had reached $303726. What concept is this money? Buffett’s annual salary for Graham in 1955 was $12000, and he spent $31500 on a five bedroom house he bought on Farram Street in Omaha in 1957.
Afterwards, Buffett’s private equity path was smooth sailing, with yields soaring and clients accumulating. By New Year’s Day 1962, the net assets of the partnership fund had reached $7.2 million (of which $1 million belonged to Buffett personally), and the number of investors had grown to 90. At this point, Buffett moved out of his bedroom and found an office, while also hiring his first full-time employee.
Buffett’s entrepreneurship is quite successful, partly due to the network of relationships brought by his father and mentor, but most importantly, his personal infectiousness. Buffett set his sights on becoming a millionaire before the age of 30 at the age of 12, with a strong interest and confidence in making money. In 1968, Edward Thorpe, the founder of quantitative investing, played several bridge games with Buffett and concluded that he would become the richest person in America because his investment philosophy, analytical skills, and adaptability were all top-notch.
Buffett ended the Buffett Partnership Fund in the autumn of 1969, mainly because there were too few opportunities for value investing at that time (later the US stock market entered the volatile 1970s), the fund size was too large (by the beginning of 1969, the fund size had increased to $104 million), and he did not want to be 100% busy with investments, claiming that “I am going to retire” (47 years have passed, but I have not retired yet!).
Buffett did not retire, but switched to Berkshire Hathaway. Buffett spent his entire life building Berkshire into a money making machine and became the world’s richest man himself.
Buffett’s compound annual return for the 13 years from 1957 to 1969 was 23.2%, with 1969 showing the worst performance at almost zero, followed by 1957 with a return of 9.3%. The returns for the 11 years in between were all good.
Berkshire Hathaway’s performance has been recorded since 1965. During the 51 years from 1965 to 2015, the average annual compound rate of return per share of Berkshire Hathaway’s net worth was 19.2% (since 2014, Berkshire’s stock price return rate has also been included in the “Letter to Shareholders”, and by 2015, this figure was 20.8%, which is close to the increase in net worth, but there have been many years with negative returns, especially the 48.7% decline in 1974 and the 31.8% decline in 2008). In total, it has increased by 7989 times!
If we add the achievements of the Buffett Partnership Fund from 1957 to 1964, then over a total of 59 years, the investment of $1 can grow to $40000!
Will Buffett truly retire after the 2017 shareholders’ meeting? At that time, he will have a 60 year performance record, which is unprecedented and probably unparalleled in investment history.
Soros
Soros was also born in 1930, the same age as Buffett, which is really a coincidence. However, as an immigrant from Hungary to the United States, Soros’ entrepreneurial journey is much more difficult, which can be described as a typical loser’s comeback.
Soros was fortunate enough to survive during the Nazi occupation of Hungary, and after the war ended, he left Hungary for London in 1949 to study at the London School of Economics (LSE). Soros obtained his degree in 1953, and his thesis advisor was the renowned philosopher Karl Popper. After graduation, he worked several part-time jobs in the UK, such as handbag sales, and finally found a job as a trader at SF Bank (Singer&Friedlander), doing gold and stock arbitrage trading.
In 1956, Soros came to New York with $5000 on him. With the help of colleagues in London, Soros found a job at F.M. Mayer as an arbitrage trader before becoming an analyst. In 1959, he switched to Wertheim and continued to work in European securities. In 1963, he switched to Arnold&S. Bleichroeder and was promoted to head of the research department in 1967.
In terms of daily life, Soros got married in 1961 and became a US citizen the same year. That year, Soros used his weekend time to rewrite “The Burden of Consciousness,” which he had written ten years earlier (his own comment was that, apart from the title, the entire text was unremarkable), hoping to publish it. He also sent the manuscript to his mentor Karl Popper for review, and spent three years revising it from 1963 to 1966, but it was ultimately not published.
Soros still wanted to become a philosopher at this time, but life pressure was high. After his father came to the United States five or six years later, he got cancer, and Soros had to find a surgeon who could provide free medical care. Soros ultimately put down his desire to become a philosopher and returned to his livelihood.
Soros established the first fund within the company in 1967- the First Eagle Fund, which was a long only stock fund. Soros established a second fund in 1969, called the Double Eagle Fund (later renamed Quantum Fund), which is a hedge fund that invests in stocks, bonds, forex, and commodities, and can short sell and leverage.
The Double Eagle Fund was established by Soros himself with an investment of $250000, and soon some wealthy Europeans he knew injected $4.5 million. This total of $4.75 million is Soros’ capital.
In 1970, Jim Rogers joined Soros’ team and was responsible for research, while Soros focused on trading, and the two became golden partners. In 1973, Soros established Soros Fund Management Company, which had only three rooms overlooking Central Park in New York.
Starting from $4.75 million in early 1969, Soros worked hard for 16 years to increase its value to $449 million by the end of 1984.
In these 16 years, the total external capital inflow was -16 million, mainly due to Soros’ loss of 22.9% in 1981, when clients withdrew $100 million, and a total inflow of 84 million in the remaining years. Soros’ average annual compound return over the past 16 years has been 30.89% (compared to Buffett’s 23.41% during the same period). Despite such good performance, the fund size has not grown rapidly due to this, and has been relying on internal returns for growth, which is really incomparable to Buffett’s.
The performance of Soros Fund was even better from 1985 to 1999, pushing the annual compound return of Soros Fund to 32.49% (compared to Buffett’s 24.93% during the same period). Soros Fund also experienced rapid growth in scale, reaching $1.46 billion by the end of 1986 and $5.3 billion by the end of 1991.
After attacking the pound in 1992, Soros became famous and gained worldwide recognition. By the end of 1993, Soros’ fund size had grown to $11.4 billion, and by the end of 1999, it had reached a peak of $21 billion.
Soros Fund lost 15.5% in the burst of the Internet foam in 2000, which was the second loss only after 1981. However, it recovered 13.8% in 2001. The income in the following years was fair, but after all, it was in a semi retirement state, not as good as the early years.
In the 2007-2009 subprime mortgage crisis, Soros once again turned the tide, making profits of 32%, 8%, and 28% respectively, once again proving his outstanding global macro trading ability.
Tiger Fund Robertson
Julian Robertson of Tiger Fund is a legendary figure in the hedge fund industry, alongside Soros and Steinhardt, known as one of the three giants of hedge funds. However, Robertson achieved great success late and was already 48 years old when he founded the Tiger Fund.
Robertson was born in 1932, only two years younger than Soros. When he was young, he enjoyed sports and played baseball and rugby very well. After completing North Carolina State University in 1955, he joined the Navy and was promoted to lieutenant upon completion of his two-year service. In 1957, he went to New York and joined Kidder Peabody&Co., where he stayed for 22 years.
Robertson worked in sales at Kidel Peabody, promoting stocks and bonds to both individual and institutional investors. He held various positions and eventually became the head of the fund management subsidiary. Compared to sales, Robertson prefers fund management and manages personal stock accounts for some friends and colleagues in his spare time, achieving good results. Robertson adopts a value investment strategy, selecting stocks by mining fundamental information and evaluating their value, with a relatively long holding period.
Robertson had a friend named Robert Bocci, who became the son-in-law of Alfred Jones in 1970. Jones is widely recognized as the inventor of hedge funds. Jones was originally a journalist who conducted some research on the stock market while writing an article for Fortune and found that long short pairs in stocks can eliminate systemic risk, thus making profits in both bull and bear markets. With this secret, Jones established a hedge fund and made a fortune. Robertson often communicated with Boqi and Jones, and also realized the charm of hedging, combining long short hedging with value investing to form his own model.
In 1978, Robertson took his whole family to New Zealand for a long vacation and wanted to write a novel about how a Southerner in the United States successfully established himself on Wall Street. Unfortunately, a few weeks later, he grew tired of writing this book. Finally, the beautiful scenery, golf, and tennis in New Zealand couldn’t hold his heart because he was going to start his own business.
In May 1980, Robertson and his friend Thorpe McKenzie raised a total of $8 million to establish the Tiger Fund. The name ‘Tiger’ was suggested by Robertson’s seven year old son, who had previously gone to great lengths to come up with a pleasant name.
Robertson is a sociable person (he has thousands of business cards in his business card box), has many friends, and has extensive business relationships. He was expected to raise $100 million, but was greatly disappointed and only achieved 8% of the fundraising target! This includes Jones’ fund, which transitioned from self operated to FOF form after being taken over by his son-in-law, Boqi.
Fortunately, the timing in 1980 was very good, coinciding with the beginning of the 20-year bull market in the US stock market. Tiger Fund achieved a 54.9% post fee return that year, marking a successful start. In the following six years, it also achieved an average high return of 32.7%.
Robertson perfectly combines value investing and stock long short strategies by recruiting a large number of smart and athletic young people to dig deep into fundamentals. He has done well in internal talent cultivation and management, as well as external marketing, and has been able to rapidly expand his scale.
In 1991, Tiger Fund became the third hedge fund to manage a scale of over $1 billion, and by the end of 1993, it had reached $7 billion, more than Steinhardt and only slightly less than Soros (it should be noted that Tiger Fund started 11 years later than Soros). The fund size reached its peak of $21 billion in August 1998, with over 210 company members.
However, after expanding to billions of dollars, Robertson was constrained by stock market liquidity and had to expand his investment portfolio from stocks to markets such as bonds, foreign exchange, and commodities, known as the global macro market. Robertson’s value investing style is not very suitable for global macro investment. Although he initially made a lot of money in bonds, foreign exchange, palladium, and copper, he ultimately suffered a huge loss of over 4 billion yuan in 1998 due to short selling the Japanese yen against the US dollar. The fund suffered a heavy blow and went from prosperity to decline.
House leakage happens every night. At the end of the 1990s, the Internet stocks of Nasdaq soared all the way from overvaluation to higher overvaluation. Tiger Fund’s strategy was to long traditional value stocks and short Internet stocks. As a result, both sides suffered setbacks. The fund fell 19% in 1999, down 43% from the peak in 1998, while the S&P 500 rose 35% over the same period.
The Tiger Fund fell another 13% in the first quarter of 2000, with a surge of redemptions. Robertson could no longer hold on and eventually closed the Tiger series funds in March 2000. At the same time, Nasdaq peaked on March 10, 2000 and then collapsed.
Although it continued to decline in the last three years, the 21 year compound return rate of Tiger Fund since its establishment is still as high as 23.37%, and the initial investment of $1 has increased to $82.32.
The ending of Tiger Fund is regrettable, and a legend has come to an end. However, Robertson’s story did not end there. He later invested in and supported many young fund managers who started their own businesses from tiger funds, totaling over 40 people. They managed about 10% of the entire hedge fund industry and 20% of stock long short strategy funds, becoming an influential group in the hedge fund industry.
Robertson ranks among the top hedge fund masters because he has cultivated a large number of small tigers, which other masters cannot achieve. Whether it is Buffett or Soros, it is difficult to find a satisfactory successor.
Green Light Capital Einhorn
Eindhoven is a rising star in the hedge fund industry, a renowned value investor and short seller, and is referred to by some as the “next Buffett”.
Eindhoven was born in 1968 and enjoyed mathematics and debate in high school. He studied government management at Cornell University for his undergraduate thesis, which discussed the cyclical regulatory issues in the American aviation industry. The conclusion was not to invest in the aviation industry, as Buffett put it, “investors should have shot down the Wright brothers’ planes from the sky.
After graduating from undergraduate studies in 1991, I worked as an investment banking analyst at DLJ for two years, working over 100 hours per week. After two years of unbearable pain, Eindhoven did not go to business school as usual, but instead worked as a buy side analyst at hedge fund Sigurd Coleridge Fund Company. Within three years, he had learned investment and investment research quite well.
In early 1996, Eindhoven and his colleague Jeff resigned to start their own business. Because his wife gave the green light, they named the company Green Light Capital Fund Company. Eindhoven and Jeff thought they could raise $10 million, but in May they only managed to raise $900000, of which $500000 came from Eindhoven’s parents, and Eindhoven and his partners each invested $10000.
The strategy of Green Light Capital is the same as that of Tiger Fund, combining long and short positions in stocks with value investing, and conducting in-depth fundamental research. The difference is that its long and short positions are not matched one by one, but rather searched for long positions and short positions worth shorting, and matched overall positions. The holding period is generally over 1 year, with concentrated holdings, typically investing 30% -60% of capital into the top 5 long positions. Funds pursue absolute return goals, which means striving to achieve positive returns regardless of market conditions.
An interesting incident occurred during the fundraising process. A wealthy friend introduced by a partner gave Eindhoven a poker card intelligence test question. The question was: Take out cards of the same suit from a deck of cards, arrange the order of the cards so that the top card is flipped upside down, the next card is placed at the bottom, and then flip another card upside down, placing the next card at the bottom. Repeat this process until all cards are arranged in numerical order. Eindhoven answered incorrectly and missed out on this investment. (I really wish someone could give me this kind of question too!)
Green Light Capital achieved a high return of 37.1% in 1996 after May, without a single month of negative returns, and managed assets quickly reached $13 million. To celebrate the first year’s victory, Eindhoven invited 25 investors, including his parents, to have a meal of Italian cuisine on a winter night and reported on their results!
In 1997, Green Light Capital made a profit of 57.9% and managed assets of $75 million by the end of the year. In 1998, Green Light Capital’s performance was average, only 10%, but its scale increased to $165 million. In 1999, the fund achieved a return rate of 39.7% and managed assets grew to $250 million. In 2000, which was the fifth year, the fund’s return rate was 13.6%, while the Nasdaq index plummeted by 39%, and the fund size grew to $440 million. In 2001, Nasdaq plummeted by another 20%, while Green Light Capital achieved a 31.6% return and managed assets of $825 million.
In the 1990s, the US stock market skyrocketed, and a large amount of funds continued to pour into the hedge fund industry. Eindhoven was a bold and daring investor, much luckier compared to tiger funds with the same investment style. Its performance was surprisingly good, and it enjoyed several wonderful years.
Eindhoven’s breakthrough was short selling Lehman Brothers in 2008, which earned him over $1 billion. At present, he is still active in the front line and has a great influence in the market.
Michael Bury
Michael Burley may not be considered a big shot in terms of scale and years of experience, but his story is quite inspiring and his battle for fame is quite thrilling. Moreover, his way of running hedge funds has been widely promoted in China, so let’s take a look at his story as well.
Berli was born in 1971 and at the age of 2, his left eyeball was removed due to a retinal glioma and replaced with a glass fake eyeball. When Burley was in elementary school, his IQ test was surprisingly high, but he had few friends.
When he was in fifth grade, his parents divorced, and Burley and his younger brother lived with their father. During weekends and holidays, they worked as laborers in the IBM laboratory where their father worked, and used the money they earned to invest in mutual funds.
In high school, when his parents remarried, Berli’s confidence grew stronger and his grades improved. However, upon graduation, he was rejected by his favorite Harvard University due to the negligence of his English teacher and enrolled in a medical preparatory program at the University of California, Los Angeles.
Berli had poor relationships with people around him and was later diagnosed with Asperger’s syndrome, a type of autism that can cause social difficulties. Naturally, Berle shifted his interest back to stocks. In 1991, Berle was admitted to Vanderbilt University School of Medicine, but his father passed away in his third year of study.
In 1996, Berle founded a personal website for discussing stocks http://valuestocks.net Publish several long articles every week. Probably because there were too few websites on the Internet at that time, a few months later, the director of MSN browsed the website of Burley and invited him to become a MSN columnist at $1 per word. Berli readily agreed and took on a pen name called “The Value Doc”. He started discussing stocks on MSN and quickly gained a lot of readers.
In 1997, he graduated from Berklee College of Medicine, owed $150000 in student loans, and found a resident physician job in pathology research at Stanford University Hospital. That autumn, he was on a marriage website http://Match.com She released a notice of marriage seeking (the first generation of netizens! Why not devote herself to the Internet!), fell in love with a Chinese woman Li Deying, and became engaged three weeks later. Being a doctor is very hard, and in order to do well in the stock market, Berli often has to work late at night, using his evenings to publish articles and update his website.
In June 2000, at the age of 29, Berle finished his job at Stanford University Hospital and no longer wanted to pursue a career in medicine. He believed that he should study Buffett’s major in investment. With the support of his wife and family, he opened an account at Bank of America and began his hedge fund career. Berle was ambitious and set the minimum net worth requirement for investors at $15 million, essentially excluding everyone he knew.
Fortunately, a few weeks later, the author and hedge fund manager of the bestselling book “You Can Be a Stock Market Genius”, Greene Brett, came over and spent $1 million to buy 22.5% of the shares of Burley Corporation. Greene Brett is also a fan of Burley and has been waiting for him to leave the medical industry. Bo used this money to repay his student loan and named the company Scion Capital. He rented a small office a few blocks away from Apple’s headquarters, which was previously owned by Apple co-founder Steve Wozniak.
Berli’s private equity journey has been quite smooth. In 2001, the S&P 500 index fell 11.88%, while the net worth of Sunac Capital increased by 55%. In 2002, S&P fell again by 22.1%, while Berle made a profit of 16%. In 2003, the stock market rebounded and Berle’s portfolio surged by 50%. In 2003, Berle’s assets under management reached $250 million, and by the end of 2004, they had reached $600 million, so he no longer accepted new investments.
In 2003, Berle’s annual income exceeded $5 million, so he spent $3.8 million to buy a six bedroom house in Saratoga, California for a family of four to live in.
While buying a house, Burley felt that the house price was a bit foam, so he made an in-depth study of the housing market and MBS (mortgage-backed securities). The conclusion was amazing. He thought that the housing crisis would break out sooner or later, and that short MBS was a big opportunity, his “Soros Trade”.
His discovery was one year earlier than the big bear Paulson and several years earlier than Soros himself. So from 2003 to 2006, he conducted his “Soros Trade” for four consecutive years, short selling some financial stocks and continuously buying CDS contracts, and the CDS positions were always floating losses during these four years.
Despite the immense pressure, Berle still had confidence in his judgment, but investors gradually lost faith. Even though Berle had earned 242% for investors in the past five years, investors still strongly opposed Berle’s “Soros Trade”. Berle’s attempt to launch a new fund failed, and his relationship with clients became strained. By October 2006, even Greenblatt, who had initially appreciated him, couldn’t take it anymore and flew to San Jose. The two had a heated argument and parted ways. This year, the client withdrew $150 million, and Berle had to bear the loss and sell half of his CDS position.
It wasn’t until August 2007 that Berle began to achieve victory. By the end of that year, the company had made a profit of 150%, earning $700 million, and Berle had personally earned $70 million. Berle planned to continue moving forward in 2008, but clients kept withdrawing their funds. In the second half of 2008, the managed funds were only $450 million, a significant decrease from the $650 million managed at the beginning of 2005. Berle could no longer bear it and closed his company in early 2009.
Michael Bury’s entrepreneurial journey in private equity funds has countless imitators in China ten years later. There are a large number of private traders in China who gain fans by writing articles on forums and blogs, or by showcasing trading results, participating in stock trading competitions or futures competitions to make a name for themselves. Overall, the entrepreneurial journey of such grassroots funds is extremely difficult, and their scale cannot compete with that of fund managers from public and other investment institutions. The final performance is also uneven.
From Zero to One
The above masters are all relatively successful cases, from zero to one, and then to legends. But there are also numerous failed cases, and many hedge funds that started at the 1 billion level often end up in failure, such as Long Term Capital Management (LTCM), which is the pinnacle.
Of course, this is not an inevitable law. It is difficult to predict the future path of fund managers through the initial fundraising of private equity funds. Predicting is difficult, especially predicting the future, which is true for financial investment and selecting fund managers.