Hedge funds are in dire straits. After a decade of stupendous growth and phenomenal returns, Investors withdrew a record $152 billion (£110 billion) from stricken funds during the final three months of 2008, prompted by the worst investment performances ever recorded.
Global assets under management fell from a peak of almost $2 trillion to $1.4 trillion last year with hedge funds loosing an average 18.3 per cent of their value over a 12-month period. According Ken Heinz, president of Hedge Fund Research, in 2008 roughly 900 hedge funds were forced to close or stop declaring their monthly returns. To add to its misery, a recent high profile scandal has done much to damage the reputation of the industry. In December last year, it was revealed that the investment fund run by veteran Wall Street financier, Bernard Madoff had been an elaborate scam, costing clients tens of millions.
Meanwhile, at the age of 78, Warren Buffett continues to keep up with the cut and thrust of the investment world. His investment firm, Berkshire Hathaway, which he has been running since 1965, recently invested 3 billion Swiss Francs in the reinsurance giant Swiss Re. He has clearly not lost any of his nerve, nor his standing within the investment community.
But where does Buffett's freakish gift for investing come from? Snowball offers a rare glimpse into the protagonist's beginnings and his development as a financial guru. Written by former Morgan Stanley managing director, Alice Schroeder, the book utilises countless direct quotes from Buffett himself. There have been a number of smaller books written about Buffett but none with his cooperation.
The Snowball is a massively detailed piece of writing. Buffett is perhaps best known for his contrarian investing style and his strong views on the global economy and politics, yet at 838 pages, this book will test the patience of even the most interested of readers.
In 1956, at the age of 26, with $174,000 to his name (worth about 1 million pounds in today's money), Warren Buffett announced he was retiring. Five years out of university and with two years of work experience in New York City, Warren had decided that he had already made enough money to not work for the rest of his life. Notoriously thrifty with his money, he possessed of a strong belief in his own ability to invest money in stocks. Few people in the world would have heard of Warren Buffett had he not formed a partnership to let a few friends and relatives in on the investments he was making. That partnership, formed in 1956 in Omaha, got a snowball of money rolling that made him the richest man in the world in 2007.
Buffett's investment philosophy, one he has rarely deviated from over the last fifty years, was learned from a famous investor and Columbia University Professor Benjamin Graham and his seminal work entitled Security Analysis, first published in 1934. Graham's thesis is to look for what he calls "old cigar butts", out of favour companies that are worth more dead than alive. In other words, the total value of all the shares outstanding is less than what would be fetched if the company stopped work tomorrow and had to sell everything. This minimizes the potential for losses while nearly guaranteeing earnings on investments. In his twenties, Buffett goes to work for Graham himself in New York City at what would today be called a hedge fund, learning much of what he still uses today to pick his investments.
Buffett closed his first fund with 300 investors. In what would be novel to today's fund managers, he took half of the profits above 4 percent but then covers 25% of any losses himself! It was a good thing he has never had a down year until 2008. He tells his investors in the early years that he will beat the market by ten percent, and blows that away most years. It was not uncommon for his to return 40 to 60 percent during the 1960's.
The book chronicles every deal, and the personalities involved in each, over Buffett's fifty year career. Famous politicians, business men and women, as well as Buffett's friends to whom he was fiercely loyal, all make cameos through the pages. This excruciating attention to detail will turn many readers off of Schroeder's book. Many of Buffett's biggest deals involve companies the reader has never heard of from an era they are unfamiliar with. Buffett's role as a major force in international business, beginning in the 1980s, provides for some interesting reading. Still, the sheer size of the book, with its overwhelming detail, should only be attempted by the most diehard of Buffett aficionados.