The Hustle (17 page)

By then, Dino was long gone. He'd decided that he was going to do what he always wanted to do: work for himself and make a living buying and selling stocks.

A hedge fund is basically an investment vehicle for very wealthy people—Dino's, for example, requires a minimum outlay of $500,000—looking for high returns on their capital. Unlike mutual funds, the way the average person invests in the stock market, hedge funds are lightly regulated. That allows managers to both go “long” on stocks—betting that their prices will go up—while also selling “short,” which entails taking a position against a stock in the belief that the price will go down. This means that a fund can be “hedged” to perform well no matter what direction the market takes. Hedge funds typically take 20 percent of profits as well as an annual management fee of 2 percent of the money in the fund.

The job of a hedge fund manager is to scour the global markets to find investments that will beat the average return, whether that is investing in a Seattle software company, platinum mines in South Africa, or betting that the value of the Japanese yen will rise against the U.S. dollar. Some hedge funds use computer models to try to predict shifts in the stock market, allowing their managers to place large bets on those movements. Other funds, like Dino's, seek to identify companies whose fortunes are changing—for better or for worse—and buy their stocks or sell them short before other players in the market catch on. In many ways, the job of running a hedge fund is similar to that of a professional athlete. As in sports, performance is easily measured—by points, rebounds, and assists in basketball, and by overall return as a hedge fund manager. Underperformance will end your career. Dino nods when I mention the analogy. “You're as good as your numbers. If you don't do well, guys fall like that,” he explains, snapping his fingers.

Until fairly recently, hedge funds were a fairly arcane type of investment, mainly known by Wall Street insiders and the rich. Occasionally, hedge fund managers made the news, such as when Long Term Capital Management, a huge fund, lost $1.9 billion in one month in 1998 and set off a global financial crisis. Hedge funds really began to grow in popularity after the dotcom crash. While the stock market fell 40 percent between 2000 and 2002, the average hedge fund stayed even. That—as well as low interest rates after 9/11 and easy money created by the housing boom—spurred an inflow of money to such funds. In 2000 there were about four thousand hedge funds with $324 billion under management. By 2007, there were an estimated total of nine thousand hedge funds responsible for around $1.5 trillion.

By midmorning on the day I visit Dino's office in August 2007, the market has dropped several hundred points. It is the beginning of the subprime mortgage crisis, in which tens of thousands of people, lured into home loans by low introductory rates, began to default as the teaser rates expired and reset higher. Most of the people classified as “subprime” mortgage lenders either had spotty credit histories or lower-than-average incomes for borrowers. Their loans had been made possible by inventive Wall Street securities that bundled the mortgages and sold them as bonds (in the old days, mortgages were issued by local banks, which had a greater interest in making sure a borrower could make monthly payments). As long as interest rates stayed low and the price of homes kept rising, everyone made out—people with lower incomes got to buy homes, and Wall Street made a killing. Now, with credit drying up and insecurity about what would happen next, markets from New York to London to Shanghai were seizing up.

Several huge hedge funds—many with assets valued well in excess of $1 billion—had already gone bust or lost large percentages of their capital. All had been “quantitative” hedge funds, which had relied on computer models to guide their investments. The risks of the subprime meltdown and resulting credit squeeze had not been factored into their calculations.

“The quants are the ones really getting hit by this. We're doing all right. We have a lot of shorts out,” Dino tells me as he looks at his portfolio on the computer screen. A cover ripped from a February 2007
BusinessWeek
magazine is taped on the wall behind Dino's chair, with the headline
IT'S A LOW, LOW, LOW, LOW-RATE WORLD
. Dino tells me that he stuck it up there to remind himself, in contrarian fashion, that the days of easy credit were probably just about over. “I knew it was near the end,” he says. “It was time to short the debt plays.”

The brunt of running the fund involves finding investment ideas through research—basically, what the analysts do full time. When I ask Dino for an example of an investment that went well, he tells me about a brand of expensive designer jeans called True Religion. While Dino was researching, he saw a reference to the company and found out that the jeans were hot in L.A. and New York. Dino and his analysts checked out the firm, calling stores and distributors to try to gauge how the jeans were selling. They spoke with the company's management to see if they had the ability to manage the brand as demand increased. When Dino invested in True Religion, it was trading at $1. Over the next year, as the jeans became a mainstream fad, the stock climbed to $20.

As we sit in his office, Dino calls the CEO of a small company that is one of many trying to capture the market to stream movies over the Internet. Dino chats with the CEO on speakerphone for a few minutes before the CEO launches into an extremely detailed explanation of the company's technology. As he does, Dino mutes the phone and continues to do about five things at once—sending instant messages to his trader, looking at his portfolio on his computer screen, and carrying on discussions with his analysts. At one point Dino picks up his cell phone as it rings and has a brief conversation.

Just as the CEO finishes, Dino takes the phone off mute and fires questions at him: “How much cash do you have? How much debt? What are the players in this space? What's going to take this to the next level? How comfortable are the big studios with you delivering their stuff, given your size and the amount of capital you have behind you?”

As the CEO begins another explanation, Dino puts the phone back on mute and continues multitasking.

Two years later, in the fall of 2009, Dino and I meet on a Saturday morning in New York City. As we walk from his hotel in midtown Manhattan, we pass several groups of runners dressed in brightly colored outfits and carrying cups of coffee. They have just finished an international “friendship run” in advance of the New York City Marathon, set to start on Sunday. Dino, who is married with three kids and one more on the way, has a rare day off. Yesterday he met with current and potential investors in his fund. After meeting with me this morning, he'll do some shopping and then get on a plane for Madrid, where he's been invited to participate in an investors' conference sponsored by Merrill Lynch. From there he'll fly to Athens to visit family and check out a few potential investments.

The past two years have been trying ones for the stock market, which lost more than half of its value between the fall of 2007 and the spring of 2009. Several thousand hedge funds—including many big players—have folded and disappeared. Dino's fund, in the meantime, has continued its run. Between 2004 and 2009, Dino is up 414 percent, a time during which an investment in the S&P 500 would have yielded nothing. Since my visit to his office in 2007, Dino has hired two more analysts and moved the firm onto a high floor in the Rainier Tower, one of Seattle's most prominent skyscrapers.

We settle in at a large and crowded diner—Dino chats with the manager in Greek—to talk. When I ask how he rode out the financial collapse, Dino tells me that his fund went heavily short on the market in the months before it cratered. “You just gotta listen to what's going on day to day,” he says over an egg-white omelet, fruit salad, and plate of hash browns. “When the car wash guy is buying a house, that's just a balloon that's inevitably going to pop.”

A key to managing money and dealing with the stock market is keeping an even keel, not letting the daily turmoil get to you, Dino tells me. “You can't get emotional, you can't get caught up in what the markets want you to do, because they'll try to stir your emotions,” he says. “No, just be steady, live your life, enjoy your family, enjoy the team that's around you, and collaborate and work together and row the boat.”

I mention to Dino an article I've recently read that traced the series of booms and busts that have rocked the world economy since the early 1980s, including financial crises in Latin America, Russia, and Asia; the stock market crash of 1987; the savings and loan bust in the United States; the dotcom bubble; and the housing bust and global financial meltdown. The authors, a pair of economists, argue that the cycle of pumping money into the financial system after a bust has become a disastrous pattern sure to generate more booms and busts. They predict that the next bubble and bust will come in emerging markets.

Dino listens and shrugs. “That's how this world is run,” he says. “Envy and greed. Those are cycles. Those all show up at certain parts of the cycle. So those are things I'm cognizant of, you just gotta be aware of them. Fear's another one. We see fear, envy, greed.”

I tell Dino that while most people experience a financial bust and call for the government or some authority to do something to stop the next one, it sounds like he sees them as an inevitable part of human economic existence, something to be incorporated into his models.

He nods. “It's been going on for centuries, whenever there's countries growing, you're going to have these. When there's money being circulated, it's going to gravitate toward wherever the easiest way to go is—the point of least resistance is where the dollars are going. It's cheap money, and if you can get into emerging markets, it's going to go there. If it's the housing deal, you're giving money there, it's going to be houses. It's boom, bust.”

Later in the day, after Dino and I part, I think about the boom-and-bust cycle he laid out. A part of me resists his depiction of relentless surge and contraction, though when I look at the record, I can't disagree with Dino—economic existence in market societies has for centuries followed that pattern. Some people have made fortunes, and others have been broken; in Dino's words, every trade has two sides. There's no reason to think that this cycle is going to stop. Regulation can work for a time, but the historic pattern is that the lessons of a crash are always forgotten. Greed comes to the fore, people find ways around the rules, and the next bubble begins.

Technology has simply sped the process. Two booms in roughly the past century had centers in Seattle. For the Yukon Gold Rush, you generally had to pack up and get yourself physically to Alaska before you found that you'd wasted all your money. This limited the amount of people who could take part, and at least those who did could say they had a costly adventure. For the dotcom boom, one hundred years later, you didn't even need to get out of your underwear. You could sit at your computer anywhere in the world and invest your life's savings in soon-to-be nearly-worthless stocks such as Webvan and InfoSpace—financial devastation from the comfort of your own home. Now, when we can watch our portfolios fluctuate up and down on our cell-phone screens in real time, it makes life seems ever more lashed to the gyrations of the world markets—mercurial beasts that favor or obliterate 401(k) plans as their owners pray for mercy.

Dino seems born for his work. There is no sense he's in the hedge fund business just to get rich, but more that he loves the analysis, the adrenaline, and the decision-making. He also has an astounding gift for understanding financial markets and an ability to look at economic life unemotionally. In the same way, some people have a great aptitude and love for basketball, and others don't. Unfortunately, in our modern economic system, few of us have the skills of a Dino.

…

One morning at seven thirty, I arrive at Terminal 30, about a mile south of downtown Seattle. I turn off the road into a vast, empty parking lot. To the west, four white cranes rise over Elliott Bay. To the north, I see the side-by-side stadiums of the Seattle Mariners and the Seattle Seahawks. A little bit past them, in the heart of the downtown office district, the black surface of the Columbia Center office tower mirrors the morning sun. The Rainier Tower, where Dino works, juts up nearby. It is at least a hundred yards across the parking lot, which abuts a canal where ships dock. At the far end there are nine white, rusty shipping containers stacked three across and three high on the concrete lot. Past the containers, I park in a line of cars.

A few minutes later, JT pulls up in a white Pontiac sedan. There is a blue baseball cap on the ledge above the backseat. On its front, facing out of the back window, are the silver numbers “206”—the Seattle area code.

JT springs out of the car. He wears a gray sweatshirt with
SEATTLE SEAHAWKS
written on the front, loose blue jeans, a blue knit cap, and chunky work boots. The thick, black beard he usually wears has been shaved down to a goatee—he thinks it makes him look younger, he tells me later. He walks with a jaunty step and almost reaches me before he stops, pivots around, rushes back to his car, and then comes back smiling, holding up for explanation a pair of blue gloves lined with rubber on the palms for grip.

“I just got off the phone with my mom,” JT tells me. “She wanted to make sure I made it down here, that there was no problem with traffic or anything. I told her everything was fine. No way I was going to be late for this.”

We walk over to a trailer parked on the lot. About twenty-five people stand outside, some talking in low voices, others keeping to themselves. Several hold cardboard cups of coffee and drink through the plastic lids. All are dressed in similar fashion to JT, in jeans, sweatshirts, and boots, and they range in age from about eighteen to fifty. A couple of the younger kids, with their buzzed hair and eager faces, look like they just walked off the high school football field. Some of the men look like they're coming off hard nights. Four men, including JT, are black. One man looks like he might be Native American. Everyone else, including the two women in the group, is white.