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Matt Levine

Hedge Fund Manager Wants to Be on TV

There are two main ways to make money as a hedge fund manager:

  1. Buy things that go up, take a cut of the profits.
  2. Amass assets under management, take a cut of the assets.

It's hard though not impossible to do much of No. 2 without a track record of No. 1, but once you have that track record all the obvious incentive problems apply. If you run a small hedge fund, your incentive fees pay for your vacations and your kitchen renovations and maybe your lunch, so you are very very focused on maximizing returns. If you run a big hedge fund, your management fees pay for everything your heart desires. So why stress yourself out pushing for returns? Just be average, avoid big losses, clip your 2 percent, and go on TV a lot to make sure the money keeps rolling in.

Obviously, many investors are aware of this problem, but it is a hard one to avoid. One way is to only invest with small, scrappy hedge funds. Small hedge funds tend to outperform, but big ones are in other ways more attractive to investors: You can put more money to work, due diligence is easier, and if you're an institution there's the nobody-ever-got-fired-for-investing-with-Bridgewater thing.

Anyway, even if you stick with small, scrappy hedge funds, the good ones will face overwhelming temptations to grow. Ideally you'd want to put your money with a fund that credibly commits to focus on investing intelligently even if it multiplies in size. This is hard thing to achieve. One obvious possibility -- charge only an incentive fee, not a fee based on assets under management -- is, hahahahaha, not so popular among hedge fund managers, who tend to like eating lunch and stuff. Other possibilities are second-best.*

One distinctly suboptimal commitment strategy is having Kevin Roose write a profile of your hedge fund in New York magazine that contains stuff like this:

[Kerrisdale Capital founder Sahm] Adrangi is curious. … He’s been rewatching the YouTube video of a splenetic CNBC fight between Icahn and Ackman over nutrition-products company Herbalife­. (Icahn called Ackman a “major loser.”) Adrangi took a small stake in Herbalife -- choosing Icahn’s long thesis over Ackman’s short -- a shrewd move that got him name-checked in a Vanity Fair article about the episode. ...

“That’s where we’re trying to get to,” he says. “We’re building credibility in the marketplace, and so, over time, we’re going to get to the point where we have a great investment and are ready to pound the table, and we’ll get that Icahn effect.”
And if becoming an investing legend requires acting like more of a jerk? Well, it’s something Adrangi’s willing to consider. After the closing bell rings and the trading day comes to an end, we head to dinner at a nearby steakhouse, where he tells me that while he still likes the research part of investing -- the long nights hunched over 8-Ks and 10-Qs, the digging through earnings-call transcripts, the private investigators in far-flung countries -- he’s realizing that the more profitable route, in the long run, might be to turn himself into a brand, go on CNBC, get some gravitas, and start picking fights.

Tell me more about how you're pivoting your strategy from "develop fundamental investment idea and then make a trade" to "make a trade and then move the market through sheer force of celebrity." By all means, describe how hard work and financial analysis are fine and all but the real action is in talking your book on CNBC. Certainly let's hear how you made an investment decision in order to be mentioned in Vanity Fair.

The background is what you might expect: Adrangi started very small, made a killing shorting Chinese reverse-merger stocks back when that was a thing in 2010-2011, and now has some $250 million under management and an apparent case of style drift.** Also a Soho penthouse, etc., you can probably fill it in from there.

I don't know much about Adrangi, and there are supportive quotes from smart people about his investing acumen and work ethic, so let's just assume that I'm overstating the case a bit. Still, the general rule -- if you want to go from being a small hedge fund to a big one, don't go around giving magazine interviews about how you're planning to coast on your celebrity -- is probably a sound one.

Except maybe now? This feels like the sort of article that would be harder to do in the days (last month) before the SEC allowed "general solicitation" by hedge funds, freeing them up to talk publicly about how great their funds are. Large institutional hedge fund investors are unlikely to be too impressed by that sort of thing, and to worry about the incentive problems that bigness generates and publicity exacerbates. But a whole new class of hedge fund investors is opening up: People who are accredited investors but not, y'know, family offices, who tend not to go to hedge fund conferences, whose knowledge of hedge funds comes from what they see in the press, and who see a sort of glamour in investing in hedge funds. If you're trying to appeal to those people, why wouldn't you want a New York magazine article about how much press you're getting?

* SAC Capital hires a bunch of different portfolio managers and then sets them against one another in a brutal Darwinian battle for capital, which is actually sort of a great solution to this problem. It's like everyone runs a miniature hedge fund with no reputation to coast on. The problem is that a lot of them were apparently insider trading. But the returns are good.

** And attendant diminishing returns:

He’s recently begun reorienting around safer long stocks, picking up stakes in companies like Amerco, which owns U-Haul, and Lindsay Corporation, which makes farm irrigation systems. … Kerrisdale’s long-dominated strategy hasn’t been as lucrative as his 2011 shorts -- the fund gained just 13 percent through August 1 of this year -- but it’s still commanding respect.

The S&P 500 was up 19.7 percent through August 1.

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