by John Brooks
A constellation of money-management stars rose swiftly around Tsai; some of the stars in that constellation will have roles, lightly or not so lightly shaded, in the rest of our chronicle. There was Fred Alger, a mere thirty years old, of Security Equity Fund in New York: a man with one foot in the Establishment and one out, his stance perfectly symbolized in the career of his father, who was on the one hand a former U.S. ambassador to Belgium and on the other a former Detroit pol; himself a graduate of Yale, yet a favorite of the scapegrace international mutual-fund operator Bernard Cornfeld; a man with tousled hair and broad suspenders and quick reflexes whose widely publicized fund set an industry performance record for 1965 by shooting up 77.8 percent. There was Fred Carr, not yet thirty-five, a veteran of the Ira Haupt-salad oil fiasco of November 1963, who had then done a stint in the Hollywood-style brokerage house of Kleiner, Bell, and who now sat in his Los Angeles office surrounded by antique furniture and op art, swinging his Enterprise Fund in and out of emerging (and, one might add, frequently merging) growth companies that nobody had previously heard of. “The Enterprise Fund,” Carr professed in a pronunciamento aimed at his conservative competition, “will no longer trade an imposing building or pinstriped suit for capital gains.” In Wall Street itself, there was Howard Stein, one-time violinist, eminence of the Dreyfus Fund, following in the footsteps of Jack Dreyfus, who in a decade had brought the fund’s assets from $1 million to over $300 million, and showing, as Dreyfus had done, that people who stood at the dead center of the financial world—the imposing-building and pinstriped-suit set—could be light on their feet, too. These men, along with Tsai, were the early stars of the go-go years; and, at a time in the world’s financial history that stock investment had become a milieu for the millions, they were becoming something like a new kind of national hero.
4
The funds had queer excrescences, exotic offshoot plants deriving from the same root, and the oddest of these was the hedge fund. The hedge fund was a private mutual fund open only to the rich, requiring a minimum investment of $100,000, or sometimes considerably more, for entry. Federal law generally forbade publicly held mutual funds to operate on margin or to make short sales; therefore their speculative leverage was limited, and although they could soar in a good market, they had little chance of doing more than hold their own in a bad one. But hedge funds are not publicly held, nor are they mutual funds. Never advertised or offered to the public, they are actually limited investment partnerships, and in the nineteen sixties were totally exempt from the federal laws governing investment companies. They could pyramid debt and sell short just as an individual investor can, playing both sides of the Street, maximizing both their risk and their opportunity for profit in good markets and bad. In certain ways, they bear comparison with the famous pools of the nineteen twenties, in which the rich and celebrated of the time—Walter P. Chrysler, Charles M. Schwab, John Raskob, Percy Rockefeller, Herbert Bayard Swope, and many others—would get together a kitty of a few millions and turn it over to a stock-market technician whom they charged, for a fee or a percentage, with turning them a profit in a few days or weeks by market manipulations at the expense of less powerful and knowledgeable investors. Market rigging became a federal crime in 1934, but the banding together of rich investors did not. Like the pools of ill repute a generation earlier, the hedge funds of the sixties were the rich man’s stock-market blood sport.
Although until 1968 there were only a handful of hedge funds, their origin goes back to 1949—the very beginning of the long unparalleled postwar boom—and to a most unlikely man. He was Alfred Winslow Jones, no sideburned gunslinger but a rather shy, scholarly journalist trained in sociology and devoted to good works. Born in Australia at the turn of the century to American parents posted there by General Electric, he graduated from Harvard in 1923, got a Ph.D. in sociology at Columbia, served in the foreign service in Berlin during the thirties, and became a writer for Time-Life in the forties. Somewhere along the line, he conceived the idea that he could make money in the stock market, and, having convinced several friends on the point, in 1949 he left Time-Life and formed A.W. Jones and Company as a private investment concern with capital of $100,000—$40,000 of it his own, the rest from his friends. Jones’ notion was to use the classic speculative means—operating on margin and balancing stock purchases with short sales—to achieve what he, at least, described as conservative ends: to increase his investors’ profit while minimizing their risk. The term “hedge fund” to describe his sort of operation derives from the fact that short sales are (at least in theory) used to hedge market bets on the upside. It was characteristic of Jones the scholar that he considered the popular term for the style of investment he invented to be a grammatical barbarity. “My original expression, and the proper one, was ‘hedged fund,’” he told friends in the late nineteen sixties, when the expression in its corrupt form had become fixed by common usage. “I still regard ‘hedge fund,’ which makes a noun serve for an adjective, with distaste.”
Buying stocks, and hedging with short sales according to a complicated mathematical formula that Jones devised, the first hedge fund flourished. (Its main problem was that the market kept rising so broadly and steadily that Jones and his associates were always having trouble finding stocks to sell short.) The firm’s investors—or more properly, its partners—were mainly highbrows like Jones himself, writers, teachers, scholars, social workers. An early one was Louis Fischer, prize-winning biographer; other later-comers were A. Arlie Sinaiko, a doctor turned sculptor, and Sam Stayman, bridge expert and inventor of the celebrated bridge convention “Stayman over no-trump.” Jones compensated his management organization, which he personally headed, by simply taking 20 percent of profits off the top—a steep cut, but on the other hand, no profits, no compensation to management. Jones’ partners had little call to complain. Year after year the fund made money on its trades, even, because of its capacity to sell short, in disastrous markets like that of 1962.
By 1965, when the name of Alfred Jones and the corrupt expression “hedge fund” were just coming into the general Wall Street lexicon after a long period of carefully preserved privacy, his fund showed a five-year gain of 325 percent and a ten-year gain of more than twice that amount. His partners for a decade had almost sextupled their money, while the Dow industrials had hardly more than doubled. The average individual investment in the Jones enterprise had swollen to almost half a million dollars. The partners, to be sure, had started out rich or near-rich; now, to a man, they were considerably richer. People pleaded to be let in. An emulative hedge-fund “industry” had begun to make its appearance, manned chiefly by alumni of A. W. Jones and Company. Jones’ two principal hedge-fund competitors, City Associates and Fairfield Partners, were both run by former Jones associates who had broken away to start their own firms.
Jones neither objected to the competition nor wanted the new publicity. Exclusivity and secrecy were crucial to hedge funds from the first. As with the old pools, partnership in a hedge fund, and particularly in the hedge fund, was like membership in a highly desirable club. It certified one’s affluence while attesting to one’s astuteness. Casual mention of such membership conveyed status in circles where associations mattered. With applicants begging at his door, Jones could scarcely worry about competition. As for publicity, what could it do but harm? True enough, hedge funds were exempt from regulation—so far. But was not such a fund, potentially at least, a private concentration of capital like the old pools, free of the necessity to disclose its operations in public statements, that might (like the pools) use inside information and manipulate the market to make profits at the expense of other, smaller investors? And as such, was it not—again potentially—in violation of the Securities Exchange Act after all? At any rate, in the middle nineteen sixties representatives of the S.E.C. were beginning to pay “courtesy calls” on the offices of the various hedge funds. Nothing came of them.
The hedge funds of 1965, then—offshoots t
hough they were of the great brawling public mutual funds that symbolized and epitomized the coming of democracy to Wall Street—were Wall Street’s last bastions of secrecy, mystery, exclusivity, and privilege. They were the parlor cars of the new gravy train. It was fitting that their key figure was a man who had taken up stock investing as a sideline, an elegant amateur of the market who liked to think of himself as an intellectual, above and beyond the profit motive. Alfred Jones, in his own middle sixties, had made so much money out of A. W. Jones and Company’s annual 20 percents that he could well afford to indulge his predilections. Spending less and less time at his office on Broad Street, he devoted himself more and more to a personal dream of ending all poverty. Considering material deprivation in the land of affluence to be a national disgrace, he set up a personal foundation devoted to mobilizing available social skills against it. He sometimes took season-long Peace Corps assignments in South America and Africa, leaving the management of his company to his associates. He set to work on a book (never finished) that he hoped would become a sequel to Michael Harrington’s famous study of United States poverty, The Other America. Some in Wall Street, perhaps enviously, called him a financial hippie; the charge could not be made to stick so long as his fund was earning its few lucky partners 75 or 80 percent a year. Jones could afford to go the way of the aristocrat, treating money-making as something too simple to be taken very seriously, and putting his most profound efforts into work not in the cause of profit but in that of humanity. Rarefied and above the battle as they were, though, the hedge funds were not exempt from the common condition of Wall Street: they too were living on borrowed time, and when its time ran out, so would theirs.
5
Moving half-consciously toward apotheosis, Tsai in late 1965 cleared his desk at Fidelity, said a deeply regretful good-bye to Edward Johnson and a more coolly casual one to Ned, and moved himself to New York to establish his own Manhattan Fund. He took a suite of rooms at the Regency Hotel and a suite of offices at 680 Fifth Avenue; at the latter, he established himself in a large corner room, where the carpet was beige, the thermostat was always set at a chilly 55 degrees to keep the occupant’s head clear, and the principal ornament was a large leather-covered representation of a bull. There he set about selling shares, at $10 each, to establish initial participation in his new enterprise and give him some assets upon which to work his presumed investment magic. What he was really selling, of course, was that magic and nothing else; the real initial asset of Manhattan Fund was Tsai’s reputation for investment skill. In his new role as his own boss, he was cool, composed, and commanding. He had come a long way from the raw, promising youth who had walked into Johnson’s office thirteen years earlier. Publicity, although he still feared it, agreed with him; he had learned well enough to live with it; in fact, he had about it the hot-stove-you-can’t-help-touching ambivalence that is common among financiers. Now he sparred with the press, jocularly, easily, and with evident pleasure. Early that year someone asked him why he was always buying stocks like Polaroid, Syntex, and Fairchild Camera and never the old wheelhorses like U.S. Steel. “Well, you can’t kiss all the girls,” Tsai replied, extending his old boss’s metaphor with an Oriental grin. Still, to preserve his and his family’s privacy he kept his home telephone number a secret even from his office colleagues.
How many shares of Manhattan Fund would be sold before the official opening date, February 15, 1966? Tsai set himself on an original conservative goal of $25 million worth. But he far underestimated the extent to which he had captured the public imagination. It is possible to believe that more was at work than rational appraisal based on Tsai’s record. There was in the middle sixties an underground current of thought in the country that said the West had failed, that its rational liberalism was only a hypocritical cover for privilege and violence; that salvation, if possible at all, lay in the more intuitive approach of the East. Such ideas, to be sure, did not seem to have taken firm root among the kind of people who invest in mutual funds. But perhaps many of the original investors in Manhattan Fund, contemptously as they might reject such ideas in their conscious thought, were reacting to them unconsciously when they decided to entrust their savings and thus a part of their future to Tsai. At all events, checks poured in to Manhattan Fund in a torrent. What would the opening total finally be, then? Not twenty-five but one hundred million? Or, unbelievable as it sounded, one hundred and fifty?
Not at all. On February 15, at the staid Pine Street offices of Manhattan Fund’s staid bankers, the Chemical Bank, there took place the chief event of that season in American finance. Harold L. Bache, head of the firm that managed the Manhattan Fund share offering, handed Tsai a check representing the proceeds of the sale and the original assets of his mutual fund. The sum inscribed on the check was $247 million. At the standard management fee of one-half of 1 percent per year, Tsai’s new organization, called Tsai Management and Research, was starting life with an annual gross income of a million and a quarter dollars.
He was off and running on his own. As the magazine The Institutional Investor reported later, he
set up Manhattan Fund just like Fidelity Capital. He loaded it with all of his big glamour favorites. To facilitate his chartist maneuverings, he built an elaborate trading room with a Trans-Jets tape, a Quotron electronic board with the prices of relevant securities and three-foot-square, giant loose leaf notebooks filled with point-and-figure charts and other technical indicators of all his holdings. Adjoining the trading room was erected “Information Central,” so aswarm with visual displays and panels that slid and rotated about that it resembled some Pentagon war room. Three men were hired to work full time maintaining literally hundreds of averages, ratios, oscillators, and indices, ranging from a “ten-day oscillator of differences in advances and declines” to charts of several Treasury issues, to 25-, 65- and 150-day moving averages for the Dow. “We keep everything,” [said] Walter Deemer, a former Merrill Lynch analyst and boss of Information Central who regards his charts the way an expert horticulturalist might regard a bed of prize geraniums. “You may only want a certain graph once a year, but when you do, it’s here.”
All the time there were ironies abounding. The social impartiality of the stock market, and the fact that the performance record of a mutual fund was as reducible to exact figures as a ballplayer’s batting average—the factors that had worked in Tsai’s favor when he had been an unknown Chinese boy knocking at panelled doors in a land far from home—had now turned into factors against him. He was on the spot, watched by a nation of investors and expected to make 50 percent profit a year on his customers’ money. Less would be failure, and the fickle public would convert its hero overnight into a bum. And the timing of the situation was inexorably bad. The market was too high. The leather idol in Tsai’s office was not a bull by accident. Temperamentally he was a bull himself, and therefore he needed an up market to keep winning. But by the greatest irony of all, he happened to start his own fund only a few weeks after the bull market of the nineteen sixties, as measured by the Dow industrials, had reached a peak that it would not reach again.
So Tsai in 1966 rode unawares toward his fall, and his adoring public toward its disillusionment.
6
The epilogue is anticlimax. The first meteor of the nineteen sixties was the first to burn out. But by shrewd and nimble footwork Tsai managed to get his heart’s desire nonetheless.
Through its first two years, the Manhattan Fund, as well as the other smaller funds Tsai managed from his new independent stronghold, stayed popular with investors though they were generally undeserving of popularity. Away from Johnson’s benign paternal surveillance, Tsai seemed to lose his stock-picking flair. After performing creditably in 1967, his funds took a beating in the tricky market of 1968; for the first seven months of that year, Manhattan Fund’s asset value per share declined 6.6 percent, leaving it 299th among the 305 leading funds whose performances were regularly analyzed and compared by the brokerage fi
rm of Arthur Lipper. At the height of the decade, the master of go-go was going in the wrong direction. Still, in the face of such depressing performance figures, the magic of Tsai’s name remained undimmed when it came to attracting new investment money; by mid-1968 the assets managed by Tsai Management and Research had grown to over $500 million, which meant that the firm had a gross annual income from fees of over $2 million. Whether, on the basis of performance, it was earning the fee was another matter. But if Tsai no longer seemed to know when to cash in the investments he made for others, he knew when to cash in his own. In August, 1968, he sold Tsai Management and Research to C.N.A. Financial Corporation, an insurance holding company, in exchange for a high executive post with C.N.A. and C.N.A. stock worth in the neighborhood of $30 million.
Thus Tsai, just in time and in one stroke, joined the nearly big rich of America. As executive vice president and the largest individual stockholder of C.N.A., he turned over the running of Tsai Management and Research to others and devoted himself to heading C.N.A.’s acquisition program. As a fund manager, he was retired. And why not? He was now a major stockholder of a huge, long-established American corporation with a listing on the New York Stock Exchange; he had a sizable office and golf clubs and country homes; he had a trust fund that would assure his son a considerable income for life.