the rustle of a snake to the flap of a butterfly. But the king says his son’s education won’t be complete until he can hear the terror in the stillness, and the hope in the sunrise. To be fit to rule, the prince must learn to hear what doesn’t even make a sound.
Students of the investing game also have a lot to gain by observing animals in the wild. In fact, it’s perfectly logical for many hedge funds to have named themselves after predators, with legendary investor Julian Robertson’s Tiger Management the most well known example. Laws of the jungle easily apply to the investing world and every investor aspires to be king of the wild.
They can’t all be, of course. Just as only a third of the lion cubs born make it to adulthood and a tiny 3 percent of those lions go on to lead the pride, nearly two thirds of the hedge-fund industry’s $1.1 trillion in assets are concentrated among the top 100–out of a total of 8,000–registered funds. The majority of new fund launches do not survive past the first year. The initial three to six months are absolutely critical and much rides on luck.
If a fund manager posts negative returns in the first few months of launch, the game is over. That’s despite the fact that it’s not unusual for an investor to have a poor three- to six-month spell with the bad patch often caused by externalities. Much of a cub’s survival depends on the mother’s ability to conceal it well in the wild and fend off other predators who want to kill the cub before it starts to compete for prey. In the investing world too, it’s well understood that someone’s outperformance comes at the cost of another’s underperformance.
Even after the unpredictable initial phase, there is no guarantee of survival–as the events of last week show. Nine-figure losses on natural gas trades at Amaranth, a well-established fund based in Greenwich, Connecticut, led to the biggest hedge-fund crisis of this decade. Indeed, there’s much to be learned from the hunting habits of the big cats. For one, the king of the jungle knows how to conserve energy: a lion is typically inactive for two thirds of the day and focuses on going for the large kill, in line with the investing aphorism of not letting too much hard work get in the way of big ideas. Fund managers should keep that in mind, as many burn themselves out by incessantly following each market zig and analyzing every other zag. Getting the big picture right is mostly what matters.
It’s also important to appreciate that predators hunt with different styles that all yield results if they are executed well. Leopards often hunt at night, stalking their prey for long hours before suddenly pouncing at the right moment. In contrast, cheetahs venture out in the day, often in pairs, and are able to give a much longer chase. In the marketplace, too much time is spent on figuring out whether growth and value investing or quantitative and qualitative strategies work better–because history suggests that all styles have their moments. In the long run, no one style is superior and stars emerge from all of them. As the old market saying goes: “If you don’t know who you are, the market is a very dangerous place to find out.”
Predators have a high degree of self-awareness and approach the hunt accordingly. The key is to be comfortable in your own skin rather than imitate someone else’s investing style. Instead, the current fad in the hedge-fund complex is multistrategy funds where the emphasis is on scaling up by dabbling in every “hot” area. This leads to a dilution of the investment philosophy and makes it more difficult to monitor the overall risk in the portfolio. In fact, one of the most common reasons for the downfall of large funds is their foray into noncore areas.
Going back time and again into the African wild helps reveal what makes a successful predator. The big cats have a mind of their own, think strategically and are very self-aware. However, for every such majestic creature, there are hundreds of rather less clever wildebeests. And while we may marvel at the picture of a lion sitting atop a hill reveling in his golden mane, the chances of getting there are slim. So are the chances of staying there for long.
