Barton Biggs the Hedgehogger Part 2 -- The Pulse of the Markets Before the Credit Crisis of 2008

Why was Hedgehogging on my reading list in the first place?

While the common reason to pick up this book would probably be Biggs being a longtime hedge fund manager, it was also really when the book was published that caught my eye: Although published in 2006, most of it seemed to have been written in the summer of 2005, three years prior to the infamous Credit Crisis of 2008. While much will be made of the rumblings that were taking place in the summer of 2007 and perhaps a little earlier, the year 2005 was a year rife with the fingerprints of a bull market in the eyes of a lot of folks (including the forecast of Biggs himself).

The value of reading a candid book by a hedge fund industry insider (probably the least transparent area of the investment industry) really brought a sense to the tone of the world at that time. Although Biggs himself was bullish, he did cast doubt on that sentiment. In particular, talking about the housing bubble and conceding the trillion dollar point on derivatives, stating “…it is true that derivatives, which are designed to mitigate specific risks, at the same time may actually be increasing systematic risk because every financial institution is entwined in the web.” (Biggs 123) As he just described the vehicle that really exacerbated what took place, such arguments being made as early as 2005 do suggest that folks did have enough to work with to draw the credit crisis as a reasonable conclusion.

The argument was out there. While folks might say, “Of course, of course but who would have known that liquidity would dry up as it did. That banks would cease lending, not just to businesses to allow them to grow or ordinary folks, but to each other.” Yes, a valid point, but the enablers…the causes to this effect…were well known, and it seemed actively discussed as problems that could cause a bear market. Hedgehogging helped illustrate that it wasn’t as much as a blind side a great many have suggested.

Moreover, David Swensen, who, as Biggs tells it, saved the Yale Endowment since he took over as Chief Investment Officer in 1985, didn’t “…believe that the lows of this bear market have been made.” (Biggs 160) In addition, oddly enough, he did also speak of “Vince” (pseudonym), who gave quite the apocalyptic vision of the downfall of the US.

Furthermore, another bubble is about to burst. Existing home prices have been rising 7% to 8% a year, financed by Fannie and Freddie. Luxury real estate values from Park Avenue to Beverly Hills and from Southampton to Aspen will collapse. In the aftermath of every burst financial bubble in history, paper wealth of all types evaporates. (Biggs 103)

And, he went on to say:

Secondary consequences take time--years--to happen, particularly when central banks cut interest rates drastically and flood the system with liquidity. But they can only be postponed not averted. In three years, the American economy will be in depression, the S&P 500 will be at 500, and there will be a revolution in America. (Biggs 103)

Not bad, eh? Reading the book at the time, it seemed like the obscene prediction, but he nailed the Great Recession (except the S&P never went lower than the high 600s) and the dramatic cutting of rates. I don‘t know about a “revolution,” but the Tea Party movement does sometimes seem a little irksome. ;)

Source:
Biggs, Barton. Hedgehogging. Hoboken: John Wiley & Sons, 2006.

Barton Biggs the Hedgehogger Part 1 -- A Review

This long weekend, with the facebook newsfeed rife with exciting activities, I decided to spend some time getting some of my overdue “assigned” reading done. I picked up Hedgehogging by Barton Biggs, a hedge fund industry veteran. Biggs joined Morgan Stanley in the early 70s as a partner responsible for setting up, at the time non-existent, research and investment management departments at the firm. He stayed there for 30 years before leaving to co-found Traxis Partners.

While it isn’t Gatsby, the book is entertaining. Biggs begins the book speaking of his experiences with the Triangle Investment Club, a monthly meeting of 25 hedge fund and aggressive long-only money managers. Using that anecdote as an anchor, he goes on to a series of other stories relating to his conversations with money managers while also sharing his personal journal entries detailing his thoughts as he went about raising money for his hedge fund. Biggs had no reservations about sharing his perspective and those of others in his circle. His outlook on everything from the markets [bullish] to gold [doesn’t like it] were openly shared.

As for drawbacks, I found the book mildly discursive where Biggs went from point to point without any sort of noticeable fluidity. The upside to that is he did cover a lot of ground. To name a few:

• Jewelry as a currency in apocalyptic situations

• The quality and history of the Yale endowment

• His thought on art as an investment

• Private equity as an investment vehicle

• Fibonacci’s numbers and the unlikelihood of using them to track the markets

• Money managers liking golf

The wide array in topics indicate that Biggs really wanted to get out everything in his mind from the past few decades. Although a creative writing major at Yale, this was his first publication. Prior to his career in financial services, he attempted a career writing short stories. So, to finally have a debut book, you can tell the passion to lay it all out there was evident. He is genuine from start to finish.

Although it can easily be argued that he overdid it a little with the anecdotes, it brought charm to the book. Unfortunately, anecdote is the operative term for these stories. There really couldn’t have been considered proper case studies as we really couldn’t get an academic sense of these folks investment styles. He basically started each story describing a manager with several adjectives, including always “attractive” or “handsome,” and ending it giving us a sense that managing money is a really tough job. However, there were useful subjective snippets that we were able to take from these stories.

An odd thing about the book, aside from using too many exclamation marks, is how he ended it. He basically went into this bio about John Maynard Keynes, who he admired as a hedge fund manager. Don’t get me wrong. An incredible figure in our history, but it just came out of nowhere, and the book ended after detailing Keynes life. The last line being “It’s an incredible story!” Yeah, it is. But, so what? What does that have to do with anything?

That being said, considering reading this book has inspired four blog posts, who am I to judge? The following blog entry will not cover the entire book, but a concept from the book that got me thinking. If that isn’t an endorsement to read this book, then I don’t know what is…

Coming Up:
Part 2: The Pulse of the Markets Before the Credit Crisis