When my kids were young, they used to love the game Monopoly. But rather than play the traditional way — interminably buying, renting and selling properties to see who would become the wealthiest tycoon — my family came up with a much faster, more entertaining and perhaps more lifelike version. We would distribute all of the properties at the start, as well as $5,000 to each player. The winner: the first person to lose all of his or her money.
Under these rules the hedge fund industry would have had a lot of managers vying for the top prize in 2008. Some 1,471 funds closed their doors last year, representing about 15 percent of the global total, as investors withdrew a record $152 billion in the fourth quarter alone, according to Chicago-based Hedge Fund Research. The redemptions continued into the first quarter of 2009, as a further $75 billion fled the onetime $2 trillion industry, reducing its total capital to $1.33 trillion.
The exodus is likely to continue, despite the strong performance of hedge funds this year (up 4 percent, on average, through April), as investors look to raise capital where they can. Of course, redemptions, like unemployment, are a lagging indicator — reflecting investors’ reaction to past events — and as the economy emerges from recession, money should start to flow back into hedge funds. The big question is, Which managers will be left standing to benefit?
Expect Izzy Englander to be among them.
As Alpha Senior Contributing Editor Stephen Taub writes in this month’s cover story (“Millennium Management: From Nickels and Dimes to Goliath”), Englander is a rarity in the world of hedge funds: a manager who actually hedges. The 60-year-old founder of New York–based Millennium Management has built his firm into an $11 billion multistrategy giant over two decades by making lots of low-risk bets. Millennium employs some 160 different teams of portfolio managers and traders in a variety of arbitrage, fixed-income and long-short equity strategies, routinely accounting for as many as 2 million trades a day.
Englander has long been admired for his skill at both managing risk and measuring talent. His investment mantra today: Keep it simple. He could have benefited by following that advice earlier this decade, when Millennium was implicated in the probe by then–New York attorney general Eliot Spitzer into the late trading of mutual fund shares. In 2005, Millennium paid $180 million in fines without admitting or denying any wrongdoing; the firm’s assets have since more than doubled. Englander, it seems, wouldn’t do very well playing Monopoly against my kids.
