I had the pleasure of sharing lunch today with one of the men who literally wrote the book on hedge fund investing. A 40 year veteran of Wall Street, Eldon Mayer is the founder and CIO of Mayer-Cap LLC, a fund of hedge funds, and author of “The Investor’s Guide to Hedge Funds” (click here to view a recent interview he gave CNBC).
A relaxed and casual yet intellectually energetic man, Mayer is an avid student of several disciplines. A former marine with a degree from Princeton, he jumps seamlessly between such disparate topics as 1950’s Ivy League football teams, sailing, hedge fund alpha, and the pros and cons of farmed vs. wild salmon (which impressed Alpha Male since his sister is actually a leading salmon researcher).
But as I later discovered from his book, Mayer is also an avid student of life. In fact, he leverages his considerable perspective as a (young-looking) 71 year-old to draw an interesting analogy between the hedge fund industry and the various phases of an individual’s life.
Now in its second print, “The Investor’s Guide to Hedge Funds” (review) is a comprehensive overview of the industry that covers all of the major hedge fund strategy categories. But don’t just take my word for it. The book’s sleeve contains endorsements from Barton Biggs and Julian Robertson (who says “…he is a wonderful investor and a good raconteur.”)
In an interesting chapter entitled, “What’s Ahead for Hedge Funds?”, he compares the industry to an adolescent growing up:
“…we have seen it go through three broad phases as it evolved from childhood through adolescence into what we now see as a critical part of early adulthood.”
The first phase of growth for the hedge fund industry, “Childhood and Adolescence” began with Alfred Jones and progressed along an equity long/short path at first. Soon the likes of George Soros ushered in the age of global macro strategies, and by the time this phase of development ended, that strategy accounted for around 70 percent of the 200 hedge funds in existence. Mayer draws on the childhood development analogy again:
“While childhood and adolescence of hedge funds may stir feelings of nostalgia and remembrances of novelty and excitement, it was also a chaotic period of tremendous experimentation that lacked rules or structure.”
Mayer refers to the second phase of development for the hedge fund industry as “the transition phase into early adulthood”. He says this phase “fostered the further maturation and independence of hedge funds as a distinct asset class”. In other words, hedge funds picked up and moved away from home.
As hedge funds “explored every conceivable strategy”, databases and academic research encouraged previously hesitant institutions to invest. Continues Mayer:
“But there were also growing pains consistent with young adulthood. Funds like Askin and Long Term Capital Management blew up while others were discovered to be frauds…Through a process of self-reflection, the industry began to take itself more seriously and made the choices that are consistent with this phase of development. Hedge funds acted more like adults (traditional asset classes) by being more structured, more dependable, and less secretive and rebellious.”
After experiencing what Mayer calls the “Age 30 Transition”, the hedge fund industry is now firmly in the “Settling Down phase.”
“…young adults face a crisis around age 30 or so as they examine the choices they’ve made in the previous phase of early adulthood: career choices, lovers, friends, religion and so on. Perhaps the structures they have established are not the right ones for them. Perhaps they are inconsistent with their dreams and aspirations. But whatever the case, navigating through this transition is a necessary step on the way to the next phase, that of settling down and becoming a full-fledged adult with a seat at the table. In our view, the hedge fund industry is facing its own transition phase.”
But what of the joie de vive that characterized the industry’s youth? Mayer says the hedge fund industry is at a critical juncture where it will likely bifurcate into two streams, those that “continue down the road to conformity” and those that “veer off, pushing for performance that defined the character of the industry’s youth.”
Whatever happens, Julian Robertson is right. Eldon Mayer is indeed a good raconteur. So our advice is: if you’re in the market for a straight-shooting overview of hedge funds that doesn’t waste too much time explaining the basics, this one’s a winner. (and some bonus advice: when at the Princeton Club, order the poached salmon. It’s tasty – and definitely wild).