Interview With An Anonymous Hedge Fund Manager

n+1 magazine has an incredible interview with an anonymous hedge fund manager. The HFM discusses everything from our weak currency to the lazy bond rating agencies who are, in their own way, complicit in the subprime meltdown:

n+1: What’s a paradigm shift in finance?

HFM: Well, a paradigm shift in finance is maybe what we’ve gone through in the sub-prime market and the spillover that’s had in a lot of other markets where there were really basic assumptions that people made that, you know what?, they were wrong.

The thing is that nobody has enough brain power to question every assumption, to think about every single facet of an investment. There are certain things you need to take for granted. And people would take for granted the idea that, “OK, something that Moody’s rates triple-A must be money-good, so I’m going to worry about the other things I’m investing in, but when it comes time to say, ‘Where am I going to put my cash?,’ I’ll just leave it in triple-A commercial paper, I don’t have time to think about everything.” It could be the case that, yeah, the power’s going to fail in my office, and maybe the water supply is going to fail, and I should plan for that, but you only have so much brain power, so you think about what you think are the relevant factors, the factors that are likely to change. But often some of those assumptions that you make are wrong.

n+1: So the Moody’s ratings were like the water running…

HFM: Exactly. Triple-A is triple-A. But there were people who made a ton of money in the sub-prime crisis because they looked at the collateral that underlay a lot of these CDOs [collateralized debt obligations] and commercial paper programs that were highly rated and they said, “Wait a second. What’s underlying this are loans that have been made to people who really shouldn’t own houses–they’re not financially prepared to own houses. The underwriting standards are materially worse than they’ve been in previous years; the amount of construction that’s going on in particular markets is just totally out of proportion with the sort of household formation that’s going on; the rating agencies are kind of asleep at the switch, they’re not changing their assumptions and therefore, OK, notwithstanding something may be rated triple-A, I can come up with what I think is a realistic scenario where those securities are impaired.”

Much more good stuff over there. Why are hedge fund managers so fascinating?

Interview with a Hedge Fund Manager [n +1 via Kottke]


Edit Your Comment

  1. savvy999 says:

    Why are hedge fund managers so fascinating?

    Because they’ve figured out a way to make millions off of other people’s money– and at times, misery– without an ounce of risk to themselves. They are the most brilliant of bookies.

  2. Dead Wrestlers Society says:

    Hey, it’s the banker from Deal No Deal !

  3. darkened says:

    @savvy999: To me because they have a job I dream of. And I just like the person interviewed would’ve shorted the sub prime loans and made millions. Sadly I don’t have millions to toss around in investments to do this for myself yet.

  4. rhombopteryx says:


    And (even better) without actually performing better than any other Joe Blow in most cases, even. It’s a dream situation – get a big salary (2% of assets/yr.) no matter how you perform, and then 20% of any appreciation IF inflation happens or you do happen to get lucky with your guesses.

  5. kantwait says:

    Hedge fund managers are assholes (I’ve been close to 2 very profitable ones *ahem*). All they care about is money and they act like they’re the end-all, be-all of the financial sector. The one hedge fund manager I dated for quite a while and he would make $10-20 million a year just in fees from clients. That’s $$ he would get no matter how well the fund performed or didn’t. It’s ridiculous.

  6. El_Guapo says:

    That was a fantastic article.

  7. JustAGuy2 says:


    But when would you have shorted them? If you felt the same way in 2006, you would have lost your shirt.

  8. m4ximusprim3 says:

    @El_Guapo: Agreed. Very good read.

    And he makes an overlords joke- definitely a patron of the internets.

  9. artki says:

    Great interview. I’ll point out that you can find stories like this in Adam Smith’s “The Money Game” and “Super Money” which talk about stock wheeling and dealing in the 1960s.

    Back then it was all TelStar and Student Loan Marketing*. Now it’s CDOs.

    *Before credit cards were popular. They got the idea to loan money to college students. What could possibly go wrong?

  10. NotATool says:

    ..and so we just ignored the elephant in the room and his 800-pound gorilla friend, because, hey, we were all making money. And Moody’s said it was OK.

  11. Prosumerist says:

    He works hard for the money! So hard honey honey!

  12. shoegazer says:

    why are hedge fund managers so fascinating? they’re not, generally speaking. But this guy they interviewed, definitely up there.

  13. Ghede says:

    So… The whole reason behind the investments and resulting collapse was a rating system that decided “Let’s not use A as the highest, that is too scholastic, let us use triple-A.” Sheesh. We have maestros running the orchestra that don’t know the next note, and players who don’t know what they are playing. The entire brass section is drunk and the percussionists have a nasty habit of overextending metaphors.

  14. m4ximusprim3 says:

    @Ghede: so you’re a percussionist then?

  15. redx says:

    If he doesnt know how mortgages are underwritten then he doesnt deserve to be a HFM. Managing other people’s money is a very serious business.

  16. Smackdown says:

    What an amazing interview. Really outstanding.

  17. Haltingpoint says:

    @darkened: I’m curious to know your definition of a dream job. Hedge fund managers have incredibly stressful work lives and work LONG hours. Yes, they could most likely retire in luxury after working for a year or two but those would be two VERY long years.

    • JollyJumjuck says:

      @Haltingpoint: There are many other careers where you have an incredibly stressful life and LONG hours, and work MANY more than one or two years, and only make a small fraction of what a hedge fund manager makes (note that I didn’t say “earns”). Retiring after those one or two successful years would be like winning the lottery, with the added bonus of having a huge sense of entitlement because you *think* you earned the life of luxury.