A brilliant investor, a born raconteur and an overall smartass, Andy Kessler pulls back the curtain on the world of hedge funds and shows how the guys who run big money think, talk and act. Following on the success of Wall Street Meat, his selfpublished book on the lives of Wall Street stock analysts, Andy Kessler recounts his years as an extraordinarily successful hedge fund manager. To run a successful hedge fund you must have an investing edgethat special insight that allows you to reap greater returns for your clients and yourself. In Running Money, which refers to Kessler's ultimate epiphany about the role of America in the world economy, we follow Andy Kessler as he makes the transition from striving Wall Street analyst to his initiation into the secretive world of hedge funds. The rewards for a hedge fund manager are greater but the brutal competition to get to a good investment first leaves Kessler worrying about his decision. A quick study, Kessler gets an education in investing from some fascinating and quirky personalities. Eventually he works out his own insight into the world economy, a powerful lens that reveals to him hidden value in seemingly negative trends. Focussing on margin surplus, Kessler comes to see that current American economy, at the apex of the information revolution, is not so different from the British economy at the height of the industrial revolution. Drawing out the parallels he develops a powerful investing tool which he shares with readers. Contrarian and confident, Kessler made a fortune applying his ideas to his hedge fund. Which only proves that they may not be as crazy as they sound.

Running Money
Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score

Chapter One

No Homa

Kowloon, Hong Kong -- Early 1996

The doors of the marble-lined elevator opened on the 32nd floor. Iwalked out, looking for a receptionist to direct me to WilliamKaye, a money manager I was set to meet at 10:00 A.M. Back in 1986, Kaye ran the deal arbitrage desk at PaineWebber. Now, 10years later, he is running money out of Hong Kong, and I was tryingto get him to invest in our fund or point me to others in Asiawho might be interested.

But something wasn't right. There was no receptionist, just agiant room filled with Chinese men and women bustling about,jabbering away, passing pieces of yellow and red and orange plasticaround the room. Boxes filled with wires and screws and nutsand bolts were on every table. Against the wall, a stack of shrinkwrappedboxes looked ready to ship out. This was all very odd fora classy office building in Kowloon. I made eye contact with awoman scurrying by.

"William Kaye?" I asked.

"No homa."

"He's not in?"

"No, he homa."

"So he is in?"

"No. Homa. Homa Sim-san." She pointed to the finishedboxes.

She was right. The boxes were of Homer Simpson figures. Agiant arrow on the box told me to push his exposed belly, which Idid and heard, "D'oh!"

I checked my calendar. William Kaye was on the 33rd floor.D'oh.

I rode the elevator up one more floor, and the doors opened toa completely different world. Cherry wood–lined walls, modernfurniture, a sign that said Pacific Group, under which sat a blondreceptionist who greeted me by name.

"Mr. Kessler, Mr. Kaye will be with you in a moment. He is ona conference call with the management of a Thai cement company.May I invite you to wait in our conference room? Tea for you?"

I stood and stared in amazement out the conference room windowoverlooking Kowloon and Hong Kong Island and the port ofHong Kong. What seemed like hundreds of container ships stackedhigh with, well, probably with Homer Simpson figures, shuffledalong, while a few junk ships and motorboats darted in and out.

I guess you can run a hedge fund anywhere -- they come in lotsof different flavors. Some come up with complicated strategies tospeculate on the rise of Malaysian currencies versus pork bellyfutures. Or to take down the Bank of England.

In 1949, a guy named Alfred Winslow Jones figured out hecould improve his investment returns by simultaneously borrowingmoney to buy stocks with one hand and selling stocks he didn'tactually own with the other hand. If he constructed the right transaction,he could make money in a rising or falling market. That'show Jones discovered a "hedge." Ever since, smart guys whowanted to be rich began creating complicated hedges and gettingrich people who weren't as smart to invest in them. How do Iknow this? I tripped across the name "A. W. Jones" on a door atOne Rockefeller Plaza in New York years back and asked.

A few years into the evolution of hedge funds, in the late1960s, you started to recognize the names. Guys like George Sorosand Michael Steinhardt and even Warren Buffet ran some of the200 hedge funds that popped up. You must be a millionaire toinvest in a hedge fund -- an "accredited investor," in regulatorspeak.The Feds, focused on the downside, figure it's OK to let richpeople be stupid -- after all, they can afford to lose it all. But allthat really does is keep ordinary folks from getting great returns.By the 1990s, a couple hundred funds had become thousands,most of them fast-money operations eking out tiny returns on each trade but buying and selling so much stuff day in and day out thatit eventually added up to real money. That's what Julian Robertsonat Tiger and the Nobel laureates at Long Term Capital Managementdid. They ran huge pots of capital through monstertrading floors filled with computer monitors covered in dancinggreen and red prices. These folks hedged anything that moved. Iwas trying to raise money to get in the game.

"You Andy? Yeah, I remember you. Chips or something likethat. You sat back there with Jack Grubman."

Seeing Kaye brought the '80s flying back. I had spent five yearsat PaineWebber and another five years at Morgan Stanley as a semiconductoranalyst. I was the poor slob that had to say Buy or Sellon stocks like Intel and Motorola and Texas Instruments. Thesestocks loved to bob when everyone else weaved.

Technology was volatile, but stocks of companies that madechips were like hyperactive kids munching on cotton candy: they'dfly high until they crashed hard, and my job was to figure out whenthe sugar high would begin and end. I always figured I would endup with gray hair and ulcers. My clients were big money firms -- Fidelity, JP Morgan and increasingly lots of fast-money hedge fundsthat liked to play where things were moving.

I had hopped off that roller coaster still sporting a head ofdark brown hair, but now I was getting into running money or atleast I hoped I could if someone like William Kaye would give usenough money.

Kaye was a reasonably slight, very New York-looking guy, withblack hair and eyes set a little close together, which gave him botha serious and mysterious, almost sinister look at the same time. Hewas also smart as shit. At PaineWebber, he had made the firm andits clients tons of money (I assume he did well himself too). Courtesyof Michael Milken and Drexel Burnham and hot money injunk bonds, the late '80s saw mergers announced almost daily. If astock was trading at $45 and a deal was announced at $60, thestock might jump to $57 ...

Running Money
Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score. Copyright © by Andy Kessler. Reprinted by permission of HarperCollins Publishers, Inc. All rights reserved. Available now wherever books are sold.

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