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In the precarious hedge-fund bubble, it’s either clean up—or flame out.

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Zachary George of Pirate Capital, Norwalk, Connecticut.  

Zachary R. George, 27, serious, square-shouldered, and wearing some kind of goo in his hair, sits at a long counter of a desk in Norwalk, Connecticut. He’s got a phone and a screen, like a telemarketer. Picking up the receiver, Zachary dials into the conference call.

“Harry,” begins Zachary when it’s his turn. Zachary and Harry J. Phillips Jr., the 55-year-old CEO of Cornell Companies, one of Houston’s top 100 businesses, use each other’s first names, as if they’re cordial, which they’re not.

“You work for us,” Zachary likes to let Harry know. Zachary represents a two-year-old hedge fund called Pirate Capital, a name that Zachary says gets people’s attention. (And if that doesn’t, then the 32 percent returns per year do.) For $20 million, Pirate purchased 13 percent of Harry’s company, which runs prisons. This makes Pirate Harry’s largest shareholder and, as Zachary sees it, Harry’s boss.

By now Harry, a distinguished member of prestigious boards, a trustee of his alma mater, Washington & Lee, is accustomed to Zachary’s urgent tones, especially when it comes to, as Harry put it, his “recent acquisition of an interest in Cornell.”

Zachary, for his part, doesn’t really understand how people outside Wall Street can expect to not make their numbers and still have friendly relations. Zachary, who looks like he might still be the college snowboard competitor he once was, takes a different view. Cornell has missed its earnings predictions for six or seven quarters running. “Why,” he’d recently asked Harry, “should anyone expect a CEO that has overseen the destruction of so much shareholder value to be able to turn things around now?”

Harry knows that Cornell, with its 4,000 employees in sixteen states, has had some disappointments. But on the conference call, he makes it sound as if that’s a mere detail. “We are going to grow this company,” Harry tells the analysts. Then, as if the greatest worry might be that Harry is going to throw in the towel, he adds, “We’re in it for the long term.”

Zachary, it turns out, has been thinking along different lines. When it’s his turn, he lets Harry know that he and his four colleagues at Pirate have come to a decision: They want the company sold, and Harry replaced. He’s run the numbers, which are eloquent—the effect on stock price could be a 50 percent gain. To Harry, that sounds like a “fire sale”—not to mention unemployment—and all because some out-of-town hedge fund is in a profit-taking mood. (Actually, half a dozen out-of-town hedge funds are circling Harry’s company.)

One afternoon, a stock blew up, and Loeb lost $20 million, “an inflection point” that required, he said, “intense reflection.” Then he bought more.

“I’m not trying to be an asshole,” Zachary explained, emphasis on the word trying. Still, he next tells Harry and everyone else on the phone that he’s launched a search for a new CEO. Pirate has flown in candidates. Zachary has interviewed them in Pirate’s conference room, with its view of the office mascot, a life-size wooden pirate.

And so, concluding, Zachary leans into the phone and says, “Next year we’re going to be here, and you won’t.”

In the past few years, running a few hundred million dollars for a hedge fund—and taking tens of millions for yourself—has become the going Wall Street dream. And this high-risk, high-return trading game has lured plenty of dreamers. Nowadays, people like Zach—young, aggressive, impatient—seem to be all over. There are currently about 7,000 hedge funds, 95 percent of which didn’t exist ten years ago. Not that anyone knows exact numbers. In addition to being arrogant and insular, they’re also clandestine. “A guy can control a $5 billion fund, and you have no idea who he is,” explains one observer.

Most everyone, though, seems aware of the galling sums of money hedge-fund managers can pull in. What financial type hasn’t had shoved under his nose Institutional Investor’s list of the top hedge-fund earners? The bottom guy made $65 million last year, which happens to be more than the combined pay of the CEOs of Goldman Sachs, Morgan Stanley, and JPMorgan. “Never have so few made so much,” announced Institutional Investor. Even the manager of a smaller fund, someone like Zach’s boss at Pirate, which has $200 million in capital, is in line to make more than the CEO of General Electric, the fourth-largest company in the country.

Hedge-fund money has changed New York in the past few years, as hitherto unheard-of investors suddenly snatch up trophy real estate, decorate it with imported stones they’ve just got to have in their living room and, of course, a Picasso, then fly off in the Gulfstream to, well, another home.

Hedge funds have traditionally been open only to rich investors, those who supposedly can handle the risk. (Though Schwab will put anyone in for $25,000 these days.) In return, they’re not saddled with the kind of government oversight one expects when small investors’ money is at risk in, say, mutual funds. Within the hedge-fund category, there are a dizzying array of strategies, including some identified with banks, venture capitalists, and private equity firms. In addition to trading equities, currencies, and debt, hedge funds make loans, buy companies—and occasionally even seek to control them. Though even Zach’s company doesn’t often try to oust management.

Hedge funds skim as much as 2 percent off the top of the asset pool: Carl Icahn, the famed corporate raider, who—him too—recently launched a hedge fund, takes 2.5 percent. If you have a $1 billion fund, then, as one manager explains, “it’s January 1st. Welcome to work. You’ve got $20 million in the bank.” (And hedge funds don’t have many costs.) But the real money and the real defining characteristic of hedge funds, no matter their strategy, is this: They take a portion of the profits, usually 20 percent. (Icahn, of course, takes more.)

For years, the average overachieving M.B.A. could imagine nothing better than a job as investment banker—Zach had briefly been on that track. Investment bankers were the smart guys in $2,000 suits who whispered in the CEO’s ear. They cashed boat-size bonus checks from bringing tech companies public. But a sputtering economy not only hampered investment bankers (and Internet entrepreneurs) but also much of a once booming money-management business. In the past five years, the S&P index of stocks was down .6 percent. While investors licked their wounds, hedge-fund managers posted a titillating 15 percent return over that same period. No wonder they lord it over the rest.

“Investment bankers?” says one hedge-fund guy. “Their lives are miserable.” He ticks off the shortcomings—he seems to have been keeping track. The punishing hours, the endless pitching, and all those dull, needy clients. What could be worse? Perhaps only a job at a sleepy mutual fund, a plain vanilla, as the hedge-fund managers sometimes call them.

By comparison, the hedge-fund manager’s life seems effortless. Gloriously client-free and with reasonable hours. “I got into this business,” says one hedge guy—is he stifling a yawn?—“so I could make money while I sleep.”


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