EXCERPT: Diary Of a Hedge Fund Manager

I went home for Canada Day, July 1, 2007, and sat by the lake, drinking ice-cold Molson Canadian beer with my brother, Ryan.

Although Lake Superior is one of the deepest lakes in the world, the water on the shoreline is really shallow. So you can walk 100 or so meters out into it and still only be up to your knees, so we’d wade out with our beers to cool off and stare back at the beach.

Ryan liked to invest, and loved it when I gave him my ideas, particularly when they worked, and he’d been losing money. Since the first time since he’d been following my ideas, Ryan was losing money, and he knew my feelings on the economy in general.

Two weeks earlier, the first reports had surfaced about a pair of troubled Bear Stearns Asset Management hedge funds. Bear Stearns would let one collapse and issue a credit line to the other, but $1.5 billion of investor money had been wiped out. This news, however, had not prevented Carlyle from creating another new affiliated fund company, this one called Carlyle Credit Corporation (CCC), in which Carlyle owned a 15 percent stake, and which was about to begin trading on the Euronext Amsterdam stock exchange. CCC existed to buy up, using leverage, the same kind of risky mortgage-backed securities that had undone the BSAM funds. Meanwhile, Blackstone had just gone public, as a sure a sign as any that last call at the bar could not be too far off.

Ryan was looking back to shore, at the spectacular three-story log cabin-style house he and my dad had built with their bare hands, and which I had paid for, and he asked me what I thought about the market. I told him I was as f-ing bearish as I had ever been in my life, even more so than earlier in the year, and that I was going to double down on my shorts.

“So you really think this whole thing is going to end badly?” he asked.

“Yes,” I said.

“When does it end?”

I recall looking back at the beach and the great big house and saying this to him.”

“Now.”