After he closed down his hedge fund early in 2008 after an approximately five-year run, Lars Kroijer, his wife, and their young twin daughters traveled on and off for two years. Having been immersed in the markets for most of the preceding decade, it was a strange time for Kroijer to be on the outside looking in. The financial crisis was in full swing, and the hedge-fund industry was being decimated. “It was really interesting to be out of the market and see all your friends just wanting to throw themselves off buildings, but not be part of it yourself,” he jokes.
Part of him wanted to be in the fray. “I like to think we would have done okay,” he says of the fund he liquidated before the markets started to completely fall apart, although he concedes, laughing, that anyone could say that and he had “absolutely zero evidence to back that up.”
Kroijer tells the story of his fund, Holte Capital, in Money Mavericks: Confessions of a Hedge Fund Manager (2010, Financial Times Prentice Hall). Despite the implications of its title, the book is not an exposé of billions lost or made, financial chicanery, or personal excess during the hedge-fund boom of the mid-2000s. Nonetheless, it is a rather remarkable tale: A little less than four years after exiting Harvard’s graduate business school, a 30-year-old with no public track record strikes out on his own to launch a hedge fund and, despite some touch-and-go moments early on, has $100 million under management in less than a year. The allocations keep rolling in until his fund is soon managing around $300 million.
At this point in the book, most readers would understandably be primed for the inevitable train wreck — excessive risk, revelations of back-alley financial dealings, faked trading results, maybe some substance abuse thrown in for good measure. Collapse and shame.
But that’s not what happens. Instead, the fund does its job, generating modest, uncorrelated profits (around 8 percent annually, with 3- to 4-percent volatility) for the next five years or so until its founder decides to close up shop and return capital to its investors — just before the 2008 market collapse.
In the end, Kroijer’s “confession” might be that his story lacks the sordid underbelly that might have potentially made it a mainstream best-seller in the aftermath of the 2008 financial collapse, when publishers and the public were hungry for tales of financial malfeasance and reckless greed.
“The point of the book is not that Holte Capital was a significant hedge fund,” Kroijer says. “It was a good-sized hedge fund and it did a good job, but there was no fraud committed by us or to us, no one got killed, and there’s no sex, drugs, or rock’n’roll.”
Kroijer recounts a frustrating conversation he had with a journalist who hadn’t read the book, and who, when he found out there was no dirt or huge profits or losses to discuss, adopted a ‘Then what’s the point?’ attitude — “as if I’d been pitched as some kind of hedge-fund guru or master,” Kroijer recalls. “And I was saying, no, that’s not what I’m claiming — I would never say that. That’s not why the story is supposed to be interesting.”
Kroijer doesn’t want to come off as too humble, though, since his fund was a success, and he made a great deal of money. “It would be fake modesty if [the book denied that],” he says. “But I certainly would never purport we were a big industry story.”
While the book will interest anyone curious about professional trading or the pre-2008 hedge-fund world, it should be required reading for anyone gearing themselves up to become a money manager. Would-be hedge-fund Masters of the Universe would do well to carefully read the sections detailing the arduous process of raising capital and the fickleness of investors, and to keep in mind these episodes occurred during a hedge-fund boom, not in today’s more shackled investment environment.
Thankfully foregoing tales of trading brilliance and big-risk bravado, Kroijer focuses on the challenges of launching a start-up, the gap between expectations and reality, and the countless administrative details — staffing, office space, equipment, compliance — any hedge fund must address, and which seemed to occupy so much of his time. Even more so, the book highlights the difficulties of raising investment capital, and the razor’s edge a new fund often walks as it waits for the early make-or-break allocations that will determine if it dies a quick death or survives long enough to find its legs. Such success, we learn, often has little to do with a fund’s trading acumen.
Kroijer is frank and often self-deprecating about his experiences, and especially his naiveté about his firm’s early prospects. (“The one thing I always thought about the book was that if I couldn’t be completely honest, I didn’t want to write it.”) Early in the book, he outlines the process of starting up a fund as: 1) get a team, 2) get a prime broker, 3) raise money, 4) launch fund, 5) buy securities that go up and sell those that go down and, finally, 6) “be rich, popular, and happy.” Although from a certain perspective that is all there is to it, this obviously downplays the great challenge of “buying securities that go up and selling those that go down” and the aforementioned capital-raising hurdles. Creating initial business projections based on a “conservative” estimate of acquiring $45 to 50 million in start-up investment, he eventually launches the fund with approximately $3.5 million — an amount that will likely strike most individual traders as an ample grubstake, but in reality not enough to cover the fund’s unexpectedly high operating expenses in the initial months.
Those having read a 30-year-old first-time hedge-fund manager built a $100 million portfolio in less than a year may be inclined to take with a grain of salt that manager’s claims about the difficulty of raising cash, but it is well to remember that while it was less than a decade ago, the environment in which Kroijer started his fund is light years removed from today’s post-crash money management world. The years from 2003 to 2007 represented a nearly uninterrupted global financial-market boom, and the explosion in the number of hedge funds and their assets under management (AUM) epitomized that gold rush. Kroijer readily admits the timing of his entry into the industry was fortuitous, but he also points out his fund had staked out an underserved niche (“European market-neutral special situations,” essentially a European equity event-driven approach), and although he lacked a formally audited track record, he was not without experience that would make him attractive to hedge-fund investors.
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