The Go-Go Years (20 page)

So arises the question of to what extent, and with what moral overtones, Tsai's race and national origin contributed to the mystique of his success. Wall Street had never had a non-white leader—seldom enough, indeed, one who was not purest Anglo-Saxon Protestant—and now it had one. Presumably it could pat itself on the back for broad-mindedness. But could it really? The Oriental as a powerful and morally equivocal force in Western society was nothing new; he was Bret Harte's heathen Chinee in gold-rush California, or Peter Lorre in an old movie or Sessue Hayakawa in a newer one: suave, composed, his manners courtly and elegant, his intellect superior and essentially
Western in character, his motives automatically suspect but subject to being used by the good guys. An un-stuffy Boston trustee had found a new, real-life Oriental genie in a bottle and loosed him on the nation. The Wall Streeters who eagerly followed Tsai into the go-go game, and the investors who flocked to get what they were beginning to call a piece of the action, were not responding to elevated social impulses. They were following a money magician whom they expected to make them rich, a winner with whom they had neither the desire nor the opportunity to engage in any human intercourse.

3

In 1965, Tsai's career with the Fidelity organization came to a fork in the road. The elder Johnson was over sixty-five now and likely to retire soon. Who was to be his successor—Tsai, or Johnson's own son Ned? The younger Johnson was a good-looking, highly competent man in his thirties, with a marked speculative flair of his own. He had a dry sense of humor. To his father he would say: “Talk all you want about your poop-decks and companionate marriages. Some people have a well-developed sense of self-preservation, and you are one of them.” The elder Johnson would smile delightedly; in truth, the two men had unusual rapport for a father and son. To Gerry Tsai, Ned Johnson would say little, except when they occasionally became engaged in a heated boardroom debate about the merits of some stock—a debate in which it may have sometimes seemed that there was more at stake than was being said. Self-confident with fame and success now, a national force in the market, Tsai could no longer be expected to sit quietly in the counsels of Fidelity. Finally he put the question of succession directly to Johnson. It must have been a hard moment for both, but Johnson faced it forthrightly and without evasion; he said simply that Ned was his son and that he intended that Ned should
eventually succeed him. Tsai understood; he knew that Fidelity was basically a family business. But he also knew that he could not and need not endure a future of being permanently number two man. Later that year he resigned, sold his Fidelity stock back to the company for $2.2 million, and set out to New York to organize a new mutual fund of his own.

The movement he had had such a major role in starting toward a new, exciting, and dangerous conception of how to manage other people's money was by now a national ground-swell. As mutual-fund asset values went up, new money poured in. Tsai and others like him seemed to have invented a money-making machine for anyone with a few hundred or several thousand dollars to invest. There were around three million holders of shares in standard mutual funds, and at the end of 1965 their holdings in those funds amounted to $35 billion. True enough, the holders were paying through the nose for the privilege of having their money managed by Tsai or the likes of Tsai; half of their first year's investment often went for the original sales commission, and in late 1966 the S.E.C. would indignantly declare these charges to be excessive. But that was after the market had dropped; as we have seen, reform is a frail flower that languishes in the hot glare of prosperity, and at the end of 1965 the S.E.C. remained silent. So, for that matter, did the customers themselves, and no wonder. Wiesenberger Reports announced that for the year, twenty-nine leading “performance” funds had averaged a net-asset-value rise of just over 40 percent, while the laggard Dow industrial average, made up not of swingers like Polaroid and Xerox but of old-line blue chips like AT&T, General Electric, General Motors, and Texaco, had risen only 15 percent. Here, then, was a new form of investment in which it appeared that by picking your fund at random you could still make 40 percent on your money in a year's time. The trick seemed to be to pay your front-end load, relax and be happy. You got what you paid for—assuming, of course, what just about everybody did assume, that the Dow would appreciate annually around 15 percent and the performance funds 40 or 50 percent. It was
the sort of assumption that is widely made only in times when people have taken leave of their senses.

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 though 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.