Chair

Sex, Lies and Ticker Tape

Chair

The Buy Side Book Cover"I don't wait in lines...I snort them."

Those simple, yet searing words should have served as a warning siren for Turney Duff.  They should have signaled the impending and total crash of his own personal universe—had he only paid attention...

As it was, the storied hedge fund trader couldn't stop himself before he careened into disaster, as he personally details in his book, The Buy Side.

The true story begins with youngster Duff, landing at J.P. Morgan as an entry-level floor assistant when his newly earned journalism degree renders him unable to make rent.

He details the 15 short years (perhaps agonizingly long for Duff) in which he soared from newbie broker assistant to wildly successful hedge fund trader--and finally, as he crashes back down to earth—and frankly, right into it.

As a fiduciary advisor focused on passive investing, IFA has spent considerable effort educating investors about the hazards of hedge funds. Our numerous articles have highlighted the potentially endless downside associated with the funds that have been hyped as exotic, mysterious and super chic.

Yes, we have carefully examined and set forth the data and academic research exposing the excessive risks, exorbitant expenses, and unbridled, unchecked bad-boy behavior of hedge fund managers who apply a "shoot out the lights" and "damn the torpedoes" approach to placing big bets with other peoples' money—and why not? With a 2% management fee and 20% of above-benchmark returns, the spoils of success are so alluring, they'd be foolish to do anything but shoot from the hip. 

As much as we thought we knew about the perils of the hedge fund industry, even we didn't fathom the depth of the seamy underworld that envelops the industry.

Turney Duff's tome gives us a front-and-center seat to the wildly out-of-control side show in which hedge fund traders cast their lots of investors' money with reckless abandon among sell-side brokers who offer enticements including illegal drugs, expensive trips, and prostitutes—all of which Duff willingly accepted, to his own detriment, and certainly to that of the fund's investors.

Duff made the buy and sell decisions for Galleon's billion-dollar healthcare fund, among others. As the fund grew, so did his buying power—inviting a cadre of eager brokers who would clamor for business by treating him to a never-ending all-you-can snort, smoke, and drink buffet and brothel, in addition to the customary tickets to ball games and "elite" parties at expensive nightclubs (without standing in line)—all the trappings.

And Duff trapped himself alright—fully and completely. He says he came to the industry clean. When he first started as a trader, he spurned the enticements, but they just kept on coming—grander and with greater frequency. As the assets under management grew, so too did the temptations. Other enticements came in the form of minutes-in-advance insider information leaks and large placements of IPOs, which were quickly bought and sold in the owners'-only account, despite the fact that the assets were amassed by the fund's investors. (And, when the fund's founder was hauled away in handcuffs, the investors bore the brunt of the fund's collapse.)

Duff's personal life fell into a shambles. His professional life did the same. His wild escapades of all-night drug and alcohol benders often rendered him either stoned or hungover at his computer as he pulled the lever on the buy and sell decisions for the fund's investors who would be repulsed to know the quality of expertise they get for their 2 and 20.

While Duff's recounting hit us as bit of a shocker, it feels like a giant puzzle piece has fallen into place, helping to make sense of the travesties that befall so many hedge funds. We have chronicled the precipitous and catastrophic collapses of big hedge funds such as Amaranth Advisors—the $9 billion fund that instantly unraveled with a single bad bet on natural gas; we were stunned and outraged by Madoff's $50 billion hedge fund Ponzi scheme; Allen Stanford defrauded his investors out of $7 billion; and Galleon, Duff's former employer, rocked the industry when its founder was found guilty of trading on insider information, implicating other key players in the industry such as brokers and analysts.

It was hard to fully understand how such massive funds could go so far astray. Certainly, we know active management falls short of the market. But, these managers played a leading role in not just underperformance, but in destroying the legacies and aspirations of families and institutions who trusted them, and paid them handsomely. Other people's money was nothing more than the currency for manager access to the playboy playground. And, the more money there was, the bigger the perks, and the greater risk for rampant arrogance and lapse of judgment that certainly convinced these soon-to-be-convicted criminals they possessed the Midas touch. It's enough to turn the stomach.

As for Duff, it might be easy to cast him as a victim—and certainly, this is what he seems to seek. But, Duff was a big boy. He made his decisions, and he knew full well his actions and the risks--which is a lot more than can be said for his trusting investors who paid 2 and 20 to have a drug addict at the helm of their investments.

Two lessons from "The Buy Side":

1)    To paraphrase a country classic: Mammas, don't let your babies grow up to be hedge fund traders.

and

2)    It's virtually impossible to beat the market even when a hard-and-fast strategy is applied. One should walk away from actively managed mutual funds, but one should run like the wind away from hedge funds. If you need a further catalyst, see IFA's Hedge Fund Manager Hall of Shame.