INTRO: The job of being a hedge fund
manager is often met with a lot of controversy. It seems like their jobs are not only boring but also
lack meaning. They generally work 80 to 100 hours per week for decades just to make their
clients richer. And then, there’s also the whole manipulation side of things that many despise.
Even some of the highest profile figures in the world like Elon Musk have knocked on the idea of
being a fund manager. But despite the criticism, hedge fund managers are some of the highest
paid individuals in the world, often earning hundreds of millions if not billions per year.
And the man who topped the list in 2020 was a man named Izzy Englander who pulled in a whopping
$3.8 billion. His flagship fund was up 26% last year which was their strongest performance in
20 years. Meanwhile, second place went to the famous Jim Simons who earned over
a billion dollars less at $2.6 billion. So, here’s how Izzy Englander beat out even the
most iconic managers in the world and became the world’s highest paid hedge fund manager.
EARLY LIFE:
Taking a look back, Izzy was born in 1948 in Brooklyn to a Jewish migrant family.
His parents were originally from Poland, but they moved to the US in 1947 after they were extradited
to a Soviet labor camp following World War 2. You could say that his parents left everything
behind to come to the US, but the sad truth was that there was nothing left for them in
Poland in the first place. All of Izzy’s father’s family and much of his mother’s family were killed
during the Holocaust. Despite all the pain and discrimination the family had gone through because
of their religion, the family remained devout Jews and that’s still the case with Izzy to this day.
Anyway, Izzy developed a strong interest in the stock market from a rather young age.
By the time he was in high school, he was already trading stocks in his free time. Izzy would go on
to attend New York University where he majored in finance, and after graduation in 1970, he found a
job at the Wall Street firm Kaufmann, Alsberg, & Co. His job at Kaufmann consisted of trading
convertible safeties and options which were new financial instruments at the time. As many y’all
probably know, options are extremely volatile and can move hundreds of percent in a day,
so this job really taught Izzy how to be extremely disciplined and manage risk. In the meantime,
Izzy enrolled in NYU’s MBA program and attended classes in the evenings,
but he never ended up completing the program as he would get distracted by an opportunity.
You see, around the same time, the American Stock Exchange also began to list options,
and Izzy would go ahead and buy a seat on the exchange. This allowed Izzy to create his own
floor brokerage house called IA Englander & Co, and that brings us into Izzy’s first business.
SERIAL ENTREPRENEUR:
IA Englander & Co was just a simple brokerage that allowed customers to buy and sell stocks and
bonds. While it was nothing groundbreaking, the company was profitable and it’s actually still
around to this day. Izzy still even holds a stake in the company, but he’s not involved in its day
to day operations. Anyway, after running this company for several years, Izzy would start
an investment firm called Jamie Securities & Co with a man named John Mulheren Jr in 1985.
But, this business wasn’t nearly as smooth as the first. In the beginning, it looked like things
were going great though as the Belzberg family would invest $75 million into the company. The
problem though was that John had a dark past that would come to haunt him. Before opening a business
with Izzy, John used to work for a man named Ivan Boesky who would end up being convicted for
insider trading. Ivan would testify against John in return for a reduced sentence,
and John would end up being convicted for aiding in insider trading. Izzy wasn’t associated with
this incident, but given all of the bad press John had garnered for the company,
Izzy had no choice but to shut it down. Izzy didn’t waste any time looking back though. By
this point, Izzy had become quite wealthy thanks to his first two businesses and he would use this
money to start up Millennium Management with Ronald Shear in 1989. Izzy put in $5 million
of his own money and the Belzberg family would put in another $2 million. Once again though,
the company would get off to a rough start and Ronald would leave the company just one year
later in 1990. But, Izzy wasn’t willing to start over again, so he would continue nonetheless.
MILLENNIUM STRATEGIES:
In terms of growing millennium management and generating profits,
Izzy leveraged three key strategies with the first being convertible arbitrage. A convertible
security is usually a corporate bond or preferred stock of a given company that came to be converted
into regular stock. With convertible arbitrage, fund managers are looking for discrepancies in
price between convertible securities and common stock. For example, maybe Tesla preferred stock is
trading at $1000 while the common stock is trading at $1005. The idea is that the gap will close and
that both securities will eventually trade for the same price. In such a scenario, the fund manager
will buy the preferred stock at $1000 and short the common stock at $1005. If you look closely,
you’ll notice that this leaves the manager with no directional bias. It doesn’t matter if Tesla
doubles tomorrow or if it crashes 80%. As long as the discrepancy between the preferred and common
stock remains $5, the manager loses no money. By eliminating directional bias, managers are able to
heavily reduce risk, but that doesn’t mean that there’s no risk. If the discrepancy between the
two securities grows, you start to lose money fast as you’re bleeding money from both sides. This is
extremely rare, but it has happened before. One example of this was with GM stock in 2005. At the
time, many hedge funds had long positions in GM convertible bonds and short positions in GM stock.
But then suddenly, GM’s credit was downgraded which caused their convertible bonds to crash
in value. You would think that the stock would also follow suit, but a billionaire investor was
actively buying the dip which propped up the stock price and made the disparity explode. So clearly,
things can go bad, but in most cases, convertible arbitrage is an easy way to capitalize on pricing
discrepancies with low risk. Moving onto Izzy's second strategy, we have statistical arbitrage.
Similar to convertible arbitrage, statistical arbitrage aims to leverage price discrepancies.
This time, the goal is to leverage the discrepancy between the market and an individual stock
or industry. Unless a stock receives some crazy news or has a killer earnings report,
it follows the overall market. Now, a stock may be more volatile than the market,
but this can also be measured by something called beta. For example, for every 1% the S&P 500 rises,
you may be able to expect Tesla to rise 5% barring any external factors. But what if
the market is up 1% and Tesla is also only up 1%. In this scenario, it’s statistically likely
that Tesla rises another 4%, so it would be a relatively safe bet to buy Tesla stock. Similarly,
if the market is only up 1% but Tesla is up 9%, it’s statistically likely that Tesla will drop 4%,
and it would be a safe bet to short Tesla stock. Statistical arbitrage looks to leverage such over
and underperformances of the market to squeeze out some profits. And finally, moving onto Izzy’s
third key strategy, we have fundamental long and short pairing. This is really the bread and butter
of all hedge funds. You go ahead and buy some stocks and short some stocks at the same time
in order to reduce your overall exposure to the market. Some funds employ neutral strategies
where they have an equal amount in long and short positions while other funds utilize long biases
which means that they have more in long positions. There’s really nothing unique or special about
this strategy, but being a hedge fund, Izzy often finds himself leveraging this strategy as well.
TRADING PHILOSOPHIES:
In terms of trading philosophies, Izzy only has a few simple guidelines, but these have
proven extremely valuable for him. His first rule for trading is maintaining severe risk control.
When you’re playing with tens of billions of dollars, this should really be a given,
but it’s not uncommon to hear about hedge funds managers taking outsized bets and
getting destroyed. So, clearly sticking to risk guidelines is not as easy as it sounds.
Moving onto Izzy’s second rule, we have be committed to non-directional strategies.
As we saw with all of Izzy’s trading strategies, none of them depended on the market going up
or down. In fact, the direction of the market had no impact on Izzy’s performance, and this is
extremely important because the hardest part isn’t making money in a bull market or a bear market,
but making money in a sideways market. And finally, moving onto Izzy’s last rule,
we have a Warren Buffet type rule which is never forget to observe the first two rules.
MILLENNIUM MANAGEMENT TODAY: Applying these strategies
and philosophies over 30 years has allowed Millennium Management to rocket from $35 million
in 1989 to $57 billion in assets today making them one of the largest hedge funds in the
world. They currently operate a total of 200 different investment teams and employ
2800 people. If you’re thinking about getting a job here though, you better be extremely tough as
employment and compensation is strictly dependent on quarterly performance. Millennium Management
along with the rest of Wall Street has received massive criticism for these high pressure work
environments, but despite how the media paints them, people continue to flock towards these
companies because the upside potential is extraordinary. As for Izzy Englander today,
he’s spent a lot of his efforts on supporting the Jewish community as much as possible. Since 2006,
the Englander Foundation has donated a total of $20 million, most of which has gone to Jewish
schools and organizations. He hasn’t been shy in splurging on himself either. In 2014, for example,
he bought a duplex in New York’s Park Avenue for a whopping $71.3 million which is a record price
for a Manhattan co-op. At the end of the day, Izzy’s life matches the hedge fund stereotype
pretty well. He’s made his fortune on leveraging miniscule price discrepancies in the market,
and despite making so much money, it’s not clear what sort of legacy and impact Millenium really
has on the world. You could argue that Izzy is just really good at a zero sum game, but he’s
not creating any real value. Regardless of these critiques though, it seems like Izzy is enjoying
his life just fine though, and in the end, that’s all that really matters. Would you guys consider
becoming a hedge fund manager? Comment that down below. Also, drop a like if you wish
you had a billion dollar salary. And of course, consider joining our discord community to suggest
future video ideas and consider subscribing to see more questions logically answered.