Michael Steinhardt: Hedge Fund Legend - Part 2

Last year, Benzinga brought you Part One of our exclusive video interview with Michael Steinhardt.

Today, we are proud to bring you the second part of our interview with the hedge fund legend.

Interview with hedge fund legend Michael Steinhardt, Part 2

In Jim Cramer's book, Confessions of a Street Addict, he talked about how he was reaching out to you non-stop about a shoe company. The image that I had was – you were the Gordon Gekko, he was the Bud Fox of Wall Street, and going after you and trying to get you to listen to him. You refer to [his wife] as the trading goddess.

Michael Steinhardt: Jim has many special qualities, one of which is exceptional use of the English language. His wife worked as a trader on our desk and she was a lovely girl. I don't think he's married to her anymore, you should know.

But he did meet her here. And he once shared office space with me and I knew him fairly well. We were never intimate friends, but to the degree that we knew each other, but to the degree that we knew each other I liked him, and I certainly hope he liked me. I still like him and I sometimes watch his program and am sometimes amazed at the energy he exhibits on there.

There are some things people probably don't know about you. They think you're this serious guy who, [after earning] 30% a year, can't joke around. But that's not the truth – in your book, and I've been talking to brokers [who indicated that] you wanted to put some levity in the office. At the end of the day sometimes you'd call a broker and tell a joke. Can you tell our viewers about this?

Michael Steinhardt: My day was filled with tension. And I had a variety of ways to try and ease the tension, some of which were at the broker's expense. So what I might do at the end of the trading day, particularly with a broker who was very anxious to get an order, I would pick up the phone and I would say, “Hey, Jim, it's 3:47, I've got something to do right now.” And I'd say, “I'd like you to buy 85,000 shares of [purposely mumbles],” and hang up the phone.

In the same way he probably didn't know what I said, but it sounded like three symbols – he couldn't quite tell what they were. And he would [call back], and I'd have someone else pick up the phone and say, “Yeah, who is it?” “Hi, my name is Jim [whatever], and I think I just got an order from Michael Steinhardt.” [And my guy would respond], “Oh, he just went to the bathroom, but he'll be back in a few minutes.”

Then at 3:55 I'd call the guy again. “Jim, did you call back?” “Yeah, I couldn't understand—“ “What do you mean you couldn't understand? Just take the order, buy 85,000 [purposely mumbles]” and hang up again. [Laughs]

[Laughing] And this guy's going crazy, ‘cause it's not just any guy – it's Michael Steinhardt!

Michael Steinhardt: Yeah.

And if he screws that up, he's done! If I was on the other end, I'd be pulling out my hair.

Michael Steinhardt: That joke didn't last too long. The market ended at four-o'-clock. There were all sorts of crazy things you could do – funny things.

There used to be stocks that just got bought out one way or another, but they were still very familiar names. I don't know what a present example would be…

Lucent, maybe?

Michael Steinhardt: Yeah. I'd call up and say, “Hey, buy 300,000 shares of Lucent!” and hang up. There wouldn't even still be a symbol. They'd go around, “What company?”

[In your book] you talk about how you were a hard boss, but you fostered an environment where people were determined to succeed. They didn't leave a stone unturned. And your true testament to that is that when you closed the firm in 1995, not one employee didn't find a job. They were all heavily recruited.

Michael Steinhardt: Just about all of them are in the business today.

The hedge fund industry has changed since you retired. Do you believe the changes are positive or negative? Also, are there any hedge fund managers that you follow?

Michael Steinhardt: When you're an old dog like me, the perceptions, how things were, when you were doing it. When I was doing it I felt that in order to run a hedge fund you had to perceive yourself as a genuinely superior money manager. You had to perceive yourself in order to justify what were egregious compensations. You had to justify your potential for making that, only by your view that you were going to achieve truly superior returns.

And that was the only rationale for doing it. It was the competition for money managers and mutual funds, etc., charging half of 1% and 1%. To charge 20%, the assets are even more today, are justified only by superior returns.

Now, everything has changed. The idea of making 20% or 30% a year is extremely remote. I don't think most hedge fund managers even think in those terms. I think they're much more interested, if possible, a very, very low double-digit number – 10% or 12%, 500 basis points higher than a treasury, or something like that, they feel they've really achieved sufficient hedge fund compensation.

When I was doing it, there were tens of hedge funds. Now there are tens of thousands. It's a different world. And I think the standards are different. The measures are different. It used to be the best and the brightest, and now…it's still some of the best and the brightest, and sometimes it's not.

Do you still invest in hedge funds?

Michael Steinhardt: Yes.

Do you follow big guys like Bill Ackman and Carl Icahn?

Michael Steinhardt: I don't.

You just invest in funds that you have experience with?

Michael Steinhardt: That's correct.

Do you still feel strongly about politics? The Democrat hedge fund managers are all for Obama, but people are kind of going away from him. Do you have any opinion on that?

Michael Steinhardt: For a while I was the head of the DLC, the Democratic Leadership Council, which was, in the ‘80s, the organization that, more than any other, brought Bill Clinton into power. It was a centrist organization in the Democratic Party. And I was involved in them for 10 or so years as the chairman.

It was an interesting experience. But in the end I thought that being involved with politics and with politicians was, for me at least, a very empiric experience. I didn't enjoy it. I didn't enjoy the relationship with most politicians. It wasn't something I would ever do again. And I did not find it to be particularly rewarding. And I am not involved with politics now.

Your father – he had a huge impact on your life. He had a larger-than-life personality. He helped drive you into some of the right steps; encouraging you to invest, giving you the money to invest. Do you think his personality helped motivate you to make your mark in life?

Michael Steinhardt: I guess for most people the relationship with a parent is complicated. Mine was particularly complicated with my father because he was divorced from my mother when I was a baby, and I didn't see him regularly. He was an unusual person. He was a gambler all his life. And I often speculate on the difference between gambling and speculating in markets.

I would watch my father, in his later years in Vegas – ‘cause he loved to gamble and he would gamble on anything – a number of times I watched him sitting in front of a television set having made a bet with some odds on some football team and lose in the last two minutes because something happened where someone scored a field goal or a touchdown. And I remember at one point him walking over to the television and kicking the screen and breaking it. He was so angry. That's who my father was.

My father was intense. I'm a little intense. I was fortunate enough to get a good education because of him. But I can't accept the idea that some of his interest in gambling probably spread to my interest in speculating in markets, even though most people in the stock market would deny the gambling aspect of what they do. I don't. I think it has that element, and you have to deal with that. In my case, the relationship was so close that I think about the bond. I think I got some good things from my father and some not so good things. But he was an important influence on me.

What was the best and worst investment decision that you ever made?

Michael Steinhardt: The best investment decision that I ever made was marrying my wife. Number-one. The worst investment decision I ever made was… Oh gosh, I've made a lot of bad investment decisions. There were too many to think about.

Do you ever clean out your funds? Do you call your broker and say, “sell ‘em all”?

Michael Steinhardt: I wouldn't quite say it that way. I would say, “I would like to create liquidity of my portfolio. Are you in a position to buy my portfolio? I'll tell you what I've got.” And we'll talk about it.