- No crisis is the same, and there are significant differences between the recession in 2008 and the coronavirus pandemic of 2020 — but for many hedge funds, this is the first sustained economic disturbance in their existence.
- Business Insider rounded past comments from some of the biggest names in hedge funds, including legends like George Soros, Seth Klarman, Paul Tudor Jones, and several more.
- For some, the 2008 recession was a chance to reevaluate their businesses and decide the best path forward in a new world; for others, it was a realization about the market forces at play and how governments will respond to crises like this in the future.
- Visit Business Insider's homepage for more stories.
Ken Griffin changed his business. Steve Cohen got back to basics. Jamie Dinan and David Tepper reexamined old investing maxims in a new light.
The financial recession of 2008 led to more than a decade of low-interest rates, uneven recovery, and re-energized populist movements across the world. It was also the last time there was sustained economic disruption at the scale that is currently being experienced thanks to the coronavirus pandemic.
For many hedge funds, this is the first time they've had to invest in this type of environment — hundreds have been launched since 2008, and industry stalwarts have closed down as well.
Business Insider pulled together what some of the industry's loudest voices took away from 2008, whether it was a realization about their business, investing as a whole, or even human nature.
All crises are different, and this is no exception. Katy Kaminski, chief research strategist at Natixis' AlphaSimplex, told Business Insider that the coronavirus pandemic was felt quicker and deeper than past crashes.
"What was unique about the recent event was the depth was spectacular," she said.
The economic recovery from the pandemic has been even quicker. Already, equity markets have mostly bounced back, despite major cities still mostly working from home and an unemployment rate that is still higher than any time during the Great Recession.
The tide may be turning for the virus as well — Wednesday was the first day in months New York, which has been the epicenter of the outbreak in the US, did not have a death related to COVID-19.
But there are parallels, especially in the money management space, where money has poured into credit strategies, with the hopes that managers can repeat some of the bargain hunting that was done in 2008.
Below is a list of 12 billionaire hedge-fund founders as well as the chief investment officer for the largest publicly traded hedge fund in the world.
Steve Cohen: 'Shoemakers make shoes'
In a 2011 Vanity Fair article, one of the few times Point72 founder Steve Cohen has done an interview, the billionaire said 2008 could have hit harder if they didn't reduce exposure as soon as they did.
Still, "we got stuck in some positions that we couldn't get rid of. Argentine bonds, stuff like that. But we were lucky. We got out of that stuff at the right time. Otherwise we could've been crushed," he said. His old fund, SAC Capital, lost nearly a fifth of its assets in 2008 still, and Cohen refocused on what his firm did best: pick stocks.
"My dad had a saying, 'Shoemakers make shoes,'" he said.
SAC eventually closed due to an insider trading investigation, and Cohen was personally barred from trading outside capital for a stretch of time. His current fund, Point72, primarily focuses on equities, but has stretched beyond human stock-pickers, with quant arm Cubist. The firm's private investing arm, Point72 Ventures, is also a departure from the tried-and-true strategy of stock-picking Cohen originally made his fortune in.
Ken Griffin: Changing from a balance-sheet business to a skill-based business
Ken Griffin's Citadel was hit hard in 2008, and he owned up to it in a recent talk with Goldman Sachs president John Waldron.
Speaking at an Economic Club of New York lunch shortly before the coronavirus shut down the US economy, Griffin said it was "the 16 worst weeks of my life, of my professional life."
"We lost half of our investors' capital in 16 weeks. We'd never had a double-digit drawdown in roughly – at that point – 20 years and lost half of our capital in 16 weeks," he said.
The firm survived, of course, but Griffin made changes. "We simplified our business," he said.
Citadel stopped being what he called a "storage business" where they would buy "if we thought an asset was cheap and it'd create value to us over time, we'd buy it, we'd fund it."
Now, "we're in the moving business. So unless we think there's a very clear reason as to why an asset we own is going to appreciate soon, that's just not where we're going to be. And we drove our business away from balance-sheet intensive businesses to – in a sense – all skill-based businesses."
"So will Netflix beat on subscriptions this quarter? And is Amazon going to beat in AWS Cloud revenues? Everything today is a skill-based, fundamental-based investment decision for all intents and purposes across Citadel. It's a different business than the balance sheet-intensive business that we had pre-08."
David Tepper: Don't fight the Fed
David Tepper was able to make 100% returns in 2009 because he followed a simple investing maxim: Don't fight the Fed.
With stimulus desperately needed after the economy cratered in 2008, Tepper said in a CNBC interview in 2010 that in times like this either the economy would improve — and stocks would go up — or the Fed would pump money into the markets, which also often causes stocks to go up.
"What, I'm going to say, 'No Fed, I disagree with you, I don't want to be long equities?'" said Tepper, the founder of Appaloosa Management, which he has partially closed to outside investors to focus on his NFL team, the Carolina Panthers.
Ray Dalio: Understand what happened a long time ago in 'faraway' places
Bridgewater was hit hard when the coronavirus sell-off initially happened in March, but billionaire founder Ray Dalio reminded investors in a note that the firm was down 20% in September of 2008 before making money for the year.
Dalio laid out why he felt so many investors were caught flat-footed that year.
"2008 was a year in which those who built their strategies on the basis of what happened in their recent lifetimes did not understand what happened in 2008 and did so badly, and those who had a perspective of what happened in long ago times in faraway places did well," he wrote.
"Since I believe that a big common mistake that caused many investors problems in 2008 was not having a broad enough perspective, I believe that one of the most important lessons for those who did badly in 2008 is to have a 'timeless and universal investment' perspective, which means to broaden your perspective to understand what happened in long ago times (e.g., in the 1930s) and faraway places (like Japan and Latin America)"
Paul Tudor Jones: Human nature means there will always be bubbles
In a 2009 foreword written for an updated version of legendary investing book "Reminiscences of a Stock Market Operator", billionaire Paul Tudor Jones advises investors to always expect bubbles to come about in the markets "I would be reluctant to think that men will ever be smart and farsighted enough to avoid the next bubble."
"We know wars are not good, but they seem to be a permanent staple of humanity. Why not bubbles? It seems pretty clear that excess leverage ultimately leads to a very painful unwind. But is this new news?" he wrote.
Jones, the founder of Tudor Investment Corporation, said it's human nature to believe that "it will be different this time."
"It will take a fundamental change in human nature to ever truly control this."
Cliff Asness: Luck is a part of this
Cliff Asness has been fighting against Black Swan evangelist Nassim Taleb for a decade now, with a recent battle lighting up Twitter for several days.
In 2011, with quants gaining power but still somewhat unknown to many in the industry, the question was how would these computer-run strategies handle economic catastrophes that can't be predicted, also known as Black Swans.
Asness, the founder of AQR, sees the logic in that argument, and even believes more of these events are happening now, according to a 2011 profile of the feisty billionaire in The Atlantic.
"I do have a recurring nightmare about being hacked to death by a pack of rabid black swans," he said.
"What do you think that means? Seriously, anyone, quant or not, with a shred of intellectual honesty recognizes that there is some chance their historical success is just luck."
The reason quants and others are able to start their strategies everyday is because they believe in the copious evidence pointing away from a Black Swan event.
"We had to first convince ourselves we were right," he said.
Seth Klarman: Government bailouts for bad companies were a 'moral hazard'
Baupost founder Seth Klarman, whose long annual letters become the talk of the investing world every year, told his investors in early 2011 that many did not learn their lesson from 2008.
"Most of us learned about the Great Depression from our parents or grandparents who developed a 'Depression-mentality,' by which for decades people shunned leverage, embraced thrift, and thought twice before quitting their secure jobs to join risky ventures," he wrote.
"By bailing out the economy rather than allowing the pain of the economic and market collapses to be felt, the government has endowed our generation with a 'really-bad-couple-of-weeks-mentality:' no lasting lessons are learned; the government endlessly intervenes in the economy, and, ironically, the first thing to strongly rebound from the 2008 collapse isn't jobs or economic activity but speculation."
Klarman rolled out a Warren Buffett phrase to describe "people who are in over their heads: patsy."
"If you buy debt based on credit ratings from the established agencies, if you trade based on a computer program that sometimes causes you to sell stocks of perfectly solvent companies at a penny a share, or if you think that past correlations are a precise guide to the future, then you are a patsy," he wrote.
"The great financial disasters of our era all involved patsy-like behavior by one or more major institutions," he noted, naming AIG in particular. The issue was the government didn't let the patsies "out of the game."
"For no apparent reason other than indirectly rescuing AIG's creditors, the government bailed out the parent company's debt-holders, thus elevating moral hazard to new heights."
Paul Singer: Little confidence in policymakers and central bankers
Billionaire Paul Singer, the doomsday investor who founded Elliott Management decades ago, is worried about many things. In a recent note to investors, he talked about the possibilities of solar flares shutting down the electrical grid and hackers attacking our systems.
One of the biggest issues for Singer is that, if a worst-case scenario were to hit the global economy, he no longer believes those in charge can handle it. In a 2017 interview with Carlyle founder David Rubenstein, Singer said "I don't think the fixes that have been put in place have created a sound financial system."
He blamed policymakers and central bankers for creating an uneven recovery to the financial crisis of 2008, which has spurred populist movements around the world.
"I don't think confidence is justified in policymakers and central bankers," he said.
George Soros: Markets left alone will produce bubbles
Billionaire George Soros hasn't managed outside capital in some time, but continues to write on his views of the markets and geopolitical realities.
In a 2012 collection of essays titled "Financial Turmoil in Europe and the United States", Soros argues against the infallibility of a free market, saying "the basic tenet of market fundamentalism is plain wrong: financial markets, left to their own devices, do not necessarily tend toward equilibrium — they are just as prone to produce bubbles."
Still, he cautions against too much government intervention — or government aid that comes too late. He faults former Treasury Secretary Hank Paulson for saying that taxpayer money wouldn't be used to bail out Lehman Brothers.
"When Lehman Brothers failed the entire system broke down," he said.
A word of warning though for governments that are currently pumping money into economies all across the world — Soros believes the state, especially in Europe, replaced leveraged corporate credit with their own sovereign debt.
"Just as when a car is skidding the driver first has to turn the wheel into the direction of the skid to prevent it from rolling over — and only when he has regained control can he correct the car's direction," he wrote.
Izzy Englander: There was 'a mistrust of wealth management' after the crisis
In a 2010 presentation to elite investor group Tiger 21, Millennium founder Izzy Englander said the top four questions he most frequently is asked since the collapse of Lehman Brothers are all the same: "How do I get out of a fund?"
Millennium weathered 2008 reasonably well, dropping 3% for the year overall. Englander predicted the trust issues would linger on, even if losses were made back.
"The mistrust that now permeates the wealth management business will take a few years to subside."
Millennium became more transparent with investors after 2008, giving his investors semi-annual copies of Millennium's audited financial statements and monthly reports detailing the fund's trading exposures.
"Hedge funds will have to get used to more rigorous scrutiny from regulators as well as investors," Englander predicted a decade ago.
Funds seemed to have learned this lesson from the 2008 crisis — managers were far more communicative with investors during the coronavirus sell-off than they were during the housing crisis.
Stanley Druckenmiller: Debt accumulating at low interest rates is dangerous
Billionaire Stanley Druckenmiller has been sounding the alarm about the unsustainable reality of low rates for years since the financial crisis.
In a 2015 talk to the Lone Tree Club in Florida, Druckenmiller said "if you think we can have zero interest rates forever, maybe it won't matter, but in my view one of two things is going to happen with all that debt."
The first thing is "if interest rates go up, they're screwed," he said about companies who borrowed on low rates.
The second is "if the economy is as bad as all the bears say it is, which I don't believe, some industries will get into trouble where they can't even cover the debt at this level."
Already, debt-laden companies like JC Penney's, Hertz, Neiman Marcus, and several others have filed for bankruptcy since the pandemic started.
Jamie Dinan: Best time to buy is when blood is in the street — unless it's your blood
The best time to buy is when others are feeling pain.
It is easier said than done, of course, but value investors and others are often opportunistic when a large market correction happens.
Jamie Dinan, the billionaire founder of York Capital, had a small addition to that advice during a 2018 panel on the financial crisis.
"The best time to buy is when there's blood on the streets, but not if it's your blood," he said.
He also told the audience that "when the dead start walking, that's when you start paying attention" — and start buying. His firm made money, and recouped its slight losses from the previous years in 2008, he said.
Sandy Rattray: The dangers of overleveraging and crowding came to fruition
As the chief investment officer for the largest publicly traded hedge-fund manager, Man Group, Sandy Rattray had a privileged vantage point into the causes of the crisis.
In a 2017 Financial Times article, Rattray said there were three lessons he took away from the crisis: liquidity risks are more complicated than they appear; crowded strategies should always worry investors; and leverage needs to be kept under control.
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