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Smart Money, R.I.P.
by Megan Barnett
Dec 23 2008
Dec 23 2008
Why so many good investors made some very bad decisions.
Hedge funds. Private equity. Bill Miller. Yale. Ken Griffin. Stephen Feinberg. Harvard. Palm Beach wealth. Goldman Sachs. Sam Zell.
The ninth year of the 21st century officially marked the end of this era's "smart money." Every cycle has its winners and losers, but this global economic retraction has left the two columns decidedly lopsided.
While 2007 officially ushered in the subprime crisis and the U.S. economic recession, it was 2008 that chewed up the smartest investors and spat them out with glee. Beginning with the collapse of Bear Stearns in March and ending with the Bernard Madoff scandal in December, almost no billionaire investor survived this ruthless year unscathed.
What drove the smart money to the top of their game is ultimately what pushed them down: their committed drive for alpha, or greater returns relative to the risk taken. Hedge funds were supposed to outperform any market by hedging their bets. Private equity practically guaranteed returns by taking on significant leverage at discounted prices. Investment banks were going to profit by spreading subprime risk around with their mortgage securitizations. Warren Buffett was going to profit by investing when the market signaled a bottom.
Nothing doing. Turns out you have to be more than just "in it" to "win it."
While the cruel market of 2008 clobbered even the least risky investors, it is the most spectacular collapses that never cease to amaze. Even the managers of endowments at Harvard and Yale, long considered pillars of wisdom among the investing elite, have come clean with strategies that now no one wants to replicate.
Bill Miller, formerly known as a masterful value investor who produces steady, consistent gains in his popular Legg Mason mutual funds, made a series of near fatal investment decisions in 2008. By buying more and more shares of battered financial stocks like American International Group, Wachovia, and Freddie Mac as they fell from the sky, Miller's definition of "cheap stock" took on a whole new meaning. "I was naïve," he now acknowledges.
The carnage goes on and on. Citadel's Ken Griffin was once known as "the most feared man on Wall Street" with his multi-billion dollar payday and the constant speculation that his firm would soon go public. In 2008, he was forced to halt withdrawals at his two biggest funds after they fell by 50 percent. Citadel also shuttered its Tokyo office and laid off half the staff in its Hong Kong operations.
Other investors who were aggressively climbing their way up the smart money ladder had their knuckles pounded so relentlessly that they had no choice but fall to the ground. No matter what he does in the future, Sam Zell will always be remembered for his foolish and tragic Tribune deal. And Eddie Lampert? No one will ever make the mistake of comparing him to Warren Buffett again. And speaking of the Oracle of Omaha, even he made enough minor missteps in 2008 that the annual Berkshire Hathaway shareholders meeting next year may feature just a bite or two of humble pie.
And Cerberus! Oh, Cerberus. Your three-headed dog did nothing to scare off the demons on Wall Street this year. Between your ownership of nearly bankrupt Chrysler and your majority ownership of G.M.A.C., things really couldn't have been much worse in 2008. In fact, your portfolio is so rotten, the media hardly made note of the fact that the Japanese lender you own, Aozora Bank, may have lost $137 million in the Madoff scheme.
Hedge funds generally took a beating this year, with the Marc Dreier and Bernard Madoff scandals producing a swift, one-two kick out the door. Private equity may have fared a bit better in 2008, but that's only because it takes so long to destroy assets that are locked up for many years.
Of course, average investors also took it on the chin by the vicious oh-eight, but it was the smart money that was supposed to consistently perform well in both good times and bad.
Perhaps it's fitting that the gigantic Madoff unraveling took place at the end of the year, as if to remind everyone that it really is okay to lose money every now and again. Just imagine the skepticism if Yale and Harvard had produced their typically magical 25 percent returns this year.
Smart money fails, but it will inevitably rise again with new names in the marquee lights. And when it does, the ninth year of the 21st century will no doubt be a distant memory in investors' minds.
The ninth year of the 21st century officially marked the end of this era's "smart money." Every cycle has its winners and losers, but this global economic retraction has left the two columns decidedly lopsided.
While 2007 officially ushered in the subprime crisis and the U.S. economic recession, it was 2008 that chewed up the smartest investors and spat them out with glee. Beginning with the collapse of Bear Stearns in March and ending with the Bernard Madoff scandal in December, almost no billionaire investor survived this ruthless year unscathed.
What drove the smart money to the top of their game is ultimately what pushed them down: their committed drive for alpha, or greater returns relative to the risk taken. Hedge funds were supposed to outperform any market by hedging their bets. Private equity practically guaranteed returns by taking on significant leverage at discounted prices. Investment banks were going to profit by spreading subprime risk around with their mortgage securitizations. Warren Buffett was going to profit by investing when the market signaled a bottom.
Nothing doing. Turns out you have to be more than just "in it" to "win it."
While the cruel market of 2008 clobbered even the least risky investors, it is the most spectacular collapses that never cease to amaze. Even the managers of endowments at Harvard and Yale, long considered pillars of wisdom among the investing elite, have come clean with strategies that now no one wants to replicate.
Bill Miller, formerly known as a masterful value investor who produces steady, consistent gains in his popular Legg Mason mutual funds, made a series of near fatal investment decisions in 2008. By buying more and more shares of battered financial stocks like American International Group, Wachovia, and Freddie Mac as they fell from the sky, Miller's definition of "cheap stock" took on a whole new meaning. "I was naïve," he now acknowledges.
The carnage goes on and on. Citadel's Ken Griffin was once known as "the most feared man on Wall Street" with his multi-billion dollar payday and the constant speculation that his firm would soon go public. In 2008, he was forced to halt withdrawals at his two biggest funds after they fell by 50 percent. Citadel also shuttered its Tokyo office and laid off half the staff in its Hong Kong operations.
Other investors who were aggressively climbing their way up the smart money ladder had their knuckles pounded so relentlessly that they had no choice but fall to the ground. No matter what he does in the future, Sam Zell will always be remembered for his foolish and tragic Tribune deal. And Eddie Lampert? No one will ever make the mistake of comparing him to Warren Buffett again. And speaking of the Oracle of Omaha, even he made enough minor missteps in 2008 that the annual Berkshire Hathaway shareholders meeting next year may feature just a bite or two of humble pie.
And Cerberus! Oh, Cerberus. Your three-headed dog did nothing to scare off the demons on Wall Street this year. Between your ownership of nearly bankrupt Chrysler and your majority ownership of G.M.A.C., things really couldn't have been much worse in 2008. In fact, your portfolio is so rotten, the media hardly made note of the fact that the Japanese lender you own, Aozora Bank, may have lost $137 million in the Madoff scheme.
Hedge funds generally took a beating this year, with the Marc Dreier and Bernard Madoff scandals producing a swift, one-two kick out the door. Private equity may have fared a bit better in 2008, but that's only because it takes so long to destroy assets that are locked up for many years.
Of course, average investors also took it on the chin by the vicious oh-eight, but it was the smart money that was supposed to consistently perform well in both good times and bad.
Perhaps it's fitting that the gigantic Madoff unraveling took place at the end of the year, as if to remind everyone that it really is okay to lose money every now and again. Just imagine the skepticism if Yale and Harvard had produced their typically magical 25 percent returns this year.
Smart money fails, but it will inevitably rise again with new names in the marquee lights. And when it does, the ninth year of the 21st century will no doubt be a distant memory in investors' minds.
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