Editor's Note: Ever wonder about the inception of Hedgeye? How it all started?
Our Founder & CEO Keith McCullough's memoir Diary Of A Hedge Fund Manager written in 2009 chronicles the life and insights McCullough learned on his way "from the top, to the bottom, and back again." Below is a free excerpt.
AN EXCERPT
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"The longer the levered long community believes, the higher the probability of a U.S. market crash", I wrote in June. I’d seen the formation and the bursting of the tech bubble, experienced firsthand the hedge fund bubble, and then the private equity bubble. The dots connected. I had been saying since late 2007 that this movie was going to end badly. Back then, when I started mentioning, out loud, to the members of Carlyle-Blue Wave’s investment committee, the possibility of a crash, I wasn’t shooting from the hip. I was not playing a hunch. Nor would I even consider it a prediction. My observation was born of a repeatable process. Every morning I was still up before 5 A.M. consuming news and data, plotting charts, analyzing statistics, like the positive U.S. consumer spending streak that I was sure would soon snap. When spending did turn negative, I knew it was not going to last six weeks. I’d spent countless hours tracking the politicizing of the Fed, and the U.S. government-approved leverage fest, including the little noticed but hugely pivotal exemption in 2004 of net capital ratio for the Big Five investment bank/broker-dealers on Wall Street, ratios originally meant solely for broker-dealers and once capped by regulators at 12:1 but which were allowed, starting in 2005, to in effect grow, in the case of Lehman Brother, to 32:1. With more freedom to tap their balance sheets, using their assets in hand as collateral, often mortgage-backed securities that themselves were tied to other people’s borrowings, the investment banks could borrow more, which meant they could lend more, to hedge funds placing bets, creating a scenario involving leverage on top of leverage on top of leverage. Regardless of all the many signals, no one set of factors can or will ever tell the whole story. History will assign a neat set of reasons for this past crash- the popping of the housing bubble, one created in large part by the U.S. government sponsored entities Freddie and Fannie, exacerbated by an overindulgent credit derivatives market. Sounds right. Future generations will wonder how it was allowed to happen, why no one saw it. In fact, though, there were many people who saw it coming. Plenty of people. The bulls just outshouted the bears. |
