Michael H. Steinhardt. Investing in hedge fund style

Michael H. Steinhardt. Investing in hedge fund style

Michael Steinhardt is recognized as one of the best investors of his time. In 1995, at the time of the announcement of his resignation, the average annual return of its funds was about 24 percent. Look at it this way: one Domar invested in the initial stage s his fund in 1995 was worth 462 dollar against the 17 mosquitoes of the same investment in an index Standard & Poor's 500. Steinhardt grew up in Brooklyn, where his father was a jeweler,and first became interested in stocks when he was given a few pieces at a bar mitzvah. Soon he was to go to the local "Merrill Lynch" to check their investments and use the proceeds to buy even more shares. After high school, at age 16 went to study at Steinhardt School Wharton University of Pennsylvania, where for three years completed his undergraduate program. From there he went to s his favorite place: on Wall Street.

When he was 26 years old, he founded his company with two friends and a capital of $ 7.7 million From his experience on Wall Street, Steinhardt gives blunt advice unprofessional investors: "They must understand that they have a competitive weakness - in terms of education, experience and quality information. " He says that this is not a game. Look at his attitude: "I am very committed and tense, and I'm not easy to lose" is proof of his desk: a number of computers and phones (adno time he was in touch with a 75 trading rooms). To relieve stress, Steinhardt in 1978, took a year off, "to learn other aspects of life."

Fortunately, the management of hedge funds has given him more freedom for creativity to investment, because they are not regulated like mutual funds. In addition, due to the fact that hedge funds are private limited liability company with a number of partners 99 people who gave at least $ 1 million to join the game, he not only has serious investor, for whom he works, but he can not refuse themselves in short sales and other tricks of trade that can not afford to managers of mutual funds. In a given year, his portfolio of investments may turn out 17 times compared with one turn of standard mutual fund shares. The formula of his actions revealed in the article "Investing in hedge fund style," in which Steinhardt readily acknowledges that hedge funds are a dynamic type of funds.



The firm "Steinhardt Partners," started its activities in the late period of euphoria 19bO's, in a sense, reflecting the speculative nature of the time. It was one of many "hedge funds" - a term at a time emotionally charged. It was used to describe the dynamic nature, speculative organizations, mainly using the structure of the partnership. They are usually engaged in speculative stocks and are flexible enough to use borrowed funds and execute a short sale. At that time we were in some ways a typical example of such an organization, I am somewhat embarrassed to say that of all the shares that we sold to date, proved to be the most profitable shares in the company bankrupt within a few years after we were its owners, - "King Resources."

Years later, most hedge funds or have disappeared or diminished in size, or adopted more traditional forms of investment management. But although over the years of the "Steinhardt Partners," there have been quite significant changes in staff and our investment style at any one time often reflects the "common area" in the general investment approach, as well as in the basic structure of the firm, has been and continues to exist a sequence. The following is a summary of the properties that I find distinctive for our type of investment management. There are nine areas that I consider important.


SIZE
I believe in general that the struggle for a better investment result there is a clear negative effect of scale. This is obvious in some respects. How many dollars you are driving over a certain value, the more difficult to achieve a substantial deviation from the average market rates. More importantly, I believe that there is just mental limitations of really high quality ideas that may come to mind a man in any point in time. Whatever the negative effects of scale do not exist, it tends to be more explicit manifestation, when made the wrong decision. Sometimes when you're right, it seems that heaven is the limit in terms of size. But when you are wrong in their release to the market or stock selection, your ability to adjust the position and the market portfolio is clearly related to the volume with which you work. This is true not only in terms of liquidity, but more important, and intellectual flexibility.

Obviously, there is no perfect size: the key factor - the style of investing. I think that less than twice the amount of what we are now in control, probably will obviously limit our options. I believe that morality is - I believe.


Flexibility
Our company is structured so that we can deal with both long and short sales. We may use options and futures. We can use the leverage of stocks within prescribed by the Federal Reserve margin. We trade in securities with fixed income and moss to use borrowed money (leverage). (Our results for the first nine months of fiscal 1982 was almost entirely achieved through leveredzhnoy position in the medium-term credit cards.) In addition, we are able to concentrate much of our asset-backed securities and relatively indifferent to the idea of ??diversification.

The flexibility inherent in our structure, may cause significant deviation from our result, the average market indices, it attaches great importance to the judgment and frees the mind from the usual noise that often exist in the institutional money management. It probably also helps a person to age a little longer and a little earlier.


Risk
We use a kind of surface measure in determining our overall presence in the market, which we call our "risk factor". This is simply the ratio between the total amount of dollars invested in our long positions and the total number of dollars invested in our short positions with respect to our capital. While the typical organization may change its market share in the range between 100 percent and zero, we may risk factor, at least in theory, vary from plus 200 to minus 200 percent (taking into account the current margin requirements of the Federal Reserve System) .

This approach to measuring risk is substantially related to the volatility of individual stocks or stock selection. But it does create a broad framework for the presence in the market. Often we are "purely short", which means the amount of dollars in short sales greater than in long, I think our approach is conservative relative to most organizations, whose presence in the market or even relatively inflexible too. For more than 15 years of existence of our company's presence in the market averaged less than 50 percent of the capital, in other words, on average, less than 50 percent of the firm's capital was in the market as long positions.


SHORT SALES
Short selling is causing all kinds of derogatory conclusions, and sometimes they are perceived unpatriotic. Psychologically they are deprived of courage and discipline require a higher than necessary for the purchase of shares. Sometimes the background looms the cliche that short sales can only be 100 percent, while long shopping has no limits.

The criteria for a good short sale, in a sense opposite to the criteria of a good buy - deteriorating the fundamental parameters, the possibility of obtaining substantial premium, high P / E ratio, low yield. Having said all that, I must admit: the short side portfolio firms are often reminiscent of "Who's Who of corporate America." We pay great attention to the relative price behavior and, therefore, often the most powerful short stock - institutional favorites. At least, this approach is not conducive to a quiet life.


Trafficking
In terms of relative turnover, we just go beyond. "We manage about 185 million dollars and, although the rates of commission paid to us are low, cranking some 15 million dollars of commissions per year. From time to time, in an attempt to justify what looks like a feverish career, I was thinking about the theory of closure, if you - the main client brokerage, you get the best results of the research, the biggest and greatest liquidity share of underwriting, so that there is greater flexibility in responding to the nuances of making judgments based on incomplete data - around which, in essence, turns the whole business.

Moreover, through active trade you achieve a sense of the market, which can not come any other way. Operating in this framework, our traders have considerable freedom of choice. As I often do this work myself, I like to think of some intellectual superiority relative to our competitors.

When all is said and done, I'll admit some uncertainty about the usefulness of all this activity. Anyway, I think it's pertinent part of the process - at least for us.


RESEARCH AND LONG-TERM INVESTMENTS
At present, our company employs three people. All their efforts are directed to study economics and individual stocks. They are well versed in the various sectors of the economy and spend considerable time meeting with the leadership of various companies and attending seminars to become truly competitive in the intellectual sense. In one year we have to do 70 to 80 brokerage firms. Most of them provide us with some research services.

The main purpose of our efforts to obtain long-term understanding of what happens at the micro-and macro-economic scene. Sometimes this knowledge translates into long-term assets in equities and the concentration of various companies and industry groups. However, the results of this work is often used for short-term transactions. This can happen when long-term trade gets excessive short-term impact, or when for reasons of calculation time, we sort of market, our portfolio to reflect the changed view on market direction.


DEFINITION time to market and stock selection
I admit that for many years we have had much less "double and triple" in our portfolio of shares than other investment companies for which there was not even part of our historical growth intensity. Perhaps because of our efforts to measure the time to market, our comparative stock selection is probably no better than average. On the other hand, had a tremendous relationship between our two largest positions, and their success, reflecting, perhaps, our ability to match our own level of confidence with maximum efficiency of the market.

Sure, a lot of attention is paid to the definition of time to market. Here there is no magic formula. Like our yunkurenty, we focus on a wider range of economic variables, including interest rates, currently we have a large long position in the medium-term bonds, while the stock market we are in total short position. We believe that this creates a natural hedge, but we hope to actually make money on both ends of our portfolio. This may seem simplistic, but I believe that a significant reduction in interest rates necessary precondition for significant growth in the stock market. A significant portion of our portfolio is justification of this concept, and we are putting it into practice in a wider sense, yet the selection of individual stocks, long or short. Currently, we seek to take long position in high-quality high-yield stocks, we have a short position in shares of "growth", or experiencing, we believe, will experience a cyclical downturn. We strive very actively traded briefly, bearing in mind that, when the Dow of 800 or so would be an important period for purchases in the not too distant future, and therefore should be resourceful.


Compensation
Remuneration main partners of the firm and largely valuable employees of the company, with slight variations on the subject, based solely on the firm's investment results for each year. As a rule, we get a 20 percent net profit. If there is no profit, the main partners are paid nothing - no salary, no reward, nothing, absolute ego principle, even if lack of income for the year and a relatively good result, compensation still not paid.

It is difficult to judge, if at all possible, how the reward system affects the long-term results of the company. However, it really tends to create the intensity and commitment, which I think is very positive qualities, for better or worse, it further reinforces the concentration on short-selling, in part because of the annual tabulation of results.


CONSISTENT with interest INVESTORS
Perhaps most importantly, the reward system gives everyone - both those who work in the firm, and those who invest with the firm, and those who deal with the brokerage firm in the field of activity - the dedication. Ego, I think stunning quality. No embellishment. The figures on individual transactions as well as on the annual operating results should speak for themselves.

No decision-maker in the firm can not invest in common shares on their own, except through funds. Capital general partners run the same way as the capital of limited partners or investors. There is no conventional marketing efforts, as the fees and asset growth are achieved through the result when it turns out, all this leads to a wonderful and delightful results.

The goal is simple - the largest capital increase with an acceptable risk. This objective is our constant desire to honor. We have benefited from a large investor loyalty, and that concerns me over these 15 years, it gave a real sense of personal satisfaction.