Slate Money – "The Hedge Funds Behaving Badly Edition" (March 4, 2017)

Main Theme & Purpose

This episode of Slate Money, hosted by Felix Salmon alongside Jordan Weissman and special guest Sheila Kolhatkar, is a deep dive into the outsized personalities, strategies, and often controversial behaviors of the hedge fund industry’s leading figures. The conversation explores hedge fund succession crises, the activist and event-driven investing playbooks, and the murky moral landscape around short selling and insider trading—with juicy details on Ray Dalio, Bill Ackman, and Steve Cohen. The show also touches on the societal impact and regulatory responses to hedge fund activity, wrapped up with a lively numbers round.

Key Discussion Points & Insights

1. Hedge Funds, Personalities, and Succession Crises

(00:10–08:24)

• Introduction of Sheila Kolhatkar: New Yorker staff writer and author of "Black Edge," a book on Steve Cohen.
• Hedge Funds as Personality-Driven: The cult of personality is central to fund performance and investor appeal (Dalio at Bridgewater, Ackman at Pershing Square, Gross at Pimco).
• Succession Problem: Large funds tied to one charismatic figure struggle to sustain performance and investor trust after the founder (e.g., Ray Dalio stepping down from Bridgewater, Bill Gross from Pimco).
  • Quote: "So many investors were there because of Bill Gross. So it reminds me a lot of this Bridgewater thing." – Sheila Kolhatkar (04:39)
• Eccentric Leadership: Super-successful fund managers tend toward eccentric, sometimes abrasive behavior—a feature, not a bug, in this world.
  • Quote: "There seems to be a necessary condition for being a super successful investor that you’re completely crazy." – Felix Salmon (05:01)

2. Ray Dalio & Bridgewater: Radical Transparency and Algorithms

(08:24–10:35)

• Dalio’s Unique System: Radical “cult-like” management style, numeric rating of employees, and recordings of all meetings for internal review.
  • "People are rated on this numeric scale and you’re expected to constantly criticize yourself and others." – Jordan Weissman (05:56)
  • "Every meeting is recorded, is then available to everyone else in the company." – Felix Salmon (06:14)
• Algorithmic Succession: Dalio building an algorithmic framework based on his macroeconomic theories to institutionalize success.
  • "He’s for a long time been trying to build an algorithmic model based on his employees’ brains." – Jordan Weissman (06:19)
• Risk & Questions: Doubts about whether the system or “Dalio’s brain in code” can sustain returns after his departure.

3. The Activist Playbook: Bill Ackman and the Herbalife Saga

(12:10–23:29)

• Ackman’s Activism: Known for concentrated, high-profile activist positions (Herbalife, MBIA, etc.).
  • "He has so much capital at his disposal that he can pick a company, a target... [and] really become involved." – Sheila Kolhatkar (12:12)
• Herbalife Short: Ackman's bet against Herbalife as a pyramid scheme—outrageous risk, public campaign, and high drama with Wall Street trying to “squeeze” him.
  • "If you come out in public with a very, very large short bet, what you’re basically doing is you’re putting a huge kick me sign on your back for the rest of Wall Street..." – Felix Salmon (15:01)
• Short Selling Ethics: The social function and ick factor of short sellers—exposing fraud versus promoting negative rumors for profit.
  • "Short sellers can really expose problems. However, there’s a lot of potential for abuse..." – Sheila Kolhatkar (19:32)
• Herbalife Outcome: FTC investigation led to a fine and forced changes, but did not label Herbalife a pyramid scheme, meaning Ackman’s bet lost on paper—though he was right on many points.
  • "Bill Ackman has been right about everything except the stock and the FTC’s conclusions about Herbalife." – Sheila Kolhatkar (21:24)

4. Short Selling and the Steve Cohen Saga

(23:29–30:29)

• Steve Cohen’s Style: Event-driven “long-short” trading—bets on near-term corporate events, rapid trading style, and a focus on exploiting very short-lived informational edges.
  • "[Cohen] just had this kind of weird...he kind of knew which way individual stocks were going." – Felix Salmon (23:29)
• Legality vs. Morality: When does short selling cross the line? If short sellers knowingly spread false rumors, it’s illegal; honest but negative opinions are protected speech.
  • "If you are knowingly saying things that are not true about a company to enrich yourself, that is illegal." – Sheila Kolhatkar (26:44)
• Insider Trading: Insider trading in event-driven funds, not macro or HFT funds, is where enforcement energy was focused; once beginning with short selling probes, investigations morphed into insider trading prosecutions.

5. Regulatory Response & Societal Impact

(30:29–38:21)

• FBI/SEC Focus: In the 2000s, as hedge funds grew, regulators neglected the sector, only to start investigating potential fraud, manipulation, and especially insider trading later.
  • "By 2006…hedge funds...had grown up into this huge part of Wall Street. The government really had no idea what they were up to." – Sheila Kolhatkar (31:15)
• Insider Trading Harm: Debate about whether insider trading truly harms “average” investors. Kolhatkar argues confidence in market fairness is crucial given the shift to 401k/individual investing.
• Societal Value: Should information-gathering/speculation jobs be so highly compensated? Are we diverting talent from more productive societal roles by letting hedge fund alpha hog the best and brightest?
  • "The people who were good at this, including amassing black edge, have made our generation’s enormous robber baron level fortunes...Is that a valuable use of our societal resources?" – Sheila Kolhatkar (37:05)

Notable Quotes & Memorable Moments

• "There seems to be a necessary condition for being a super successful investor that you’re completely crazy." – Felix Salmon (05:01)
• "He’s for a long time been trying to build an algorithmic model based on his employees’ brains." – Jordan Weissman (06:19)
• "The problem is, if you have an institution running $100 billion, you need to have some kind of institutional continuity. It can’t just be Ray." – Felix Salmon (03:52)
• "Short sellers can really expose problems. However, there’s a lot of potential for abuse..." – Sheila Kolhatkar (19:32)
• "If you are knowingly saying things that are not true about a company to enrich yourself, that is illegal." – Sheila Kolhatkar (26:44)
• "The people who were good at this...have made our generation’s enormous robber baron level fortunes. Is that a valuable use of our societal resources?" – Sheila Kolhatkar (37:05)

Timestamps for Important Segments

• 00:10–03:38 – Introductions; Sheila Kolhatkar’s background; hedge funds as personality cults
• 03:38–07:44 – Ray Dalio’s succession plans, management style, and Bridgewater’s structure
• 07:44–10:35 – Algorithmic succession, radical transparency, and Dalio’s legacy
• 12:10–16:44 – Bill Ackman’s activist investing strategy; Herbalife short saga begins
• 16:44–23:29 – Herbalife’s MLM structure, Ackman’s reasoning, short seller ethics, and outcome
• 23:29–30:29 – Steve Cohen’s event-driven style, short selling legality, and shift to insider trading investigations
• 30:29–38:21 – Regulatory efforts; debate over insider trading and its societal significance
• 38:21–42:05 – Numbers round: Hedge fund pay, China’s coal use, Obama book deals
• 42:05–end – Farewells, book plug for "Black Edge," credits

Conclusion

This episode offers a lively, insider’s look into the world of hedge fund giants—their psychology, strategies, and the inescapable moral gray zones they operate in. Sheila Kolhatkar brings stories and analysis straight from the investigative journalism trenches, making this a must-listen for anyone curious about modern finance’s wildest operators and what, if anything, society gains from their quest for edge and alpha.

Recommended Resource:

• Sheila Kolhatkar’s "Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street."
  Memorable detail: The book is "bright yellow and it has a shark made of money on the cover." (42:00)