It was the spring of 2008, and David Einhorn gave the most memorable speech of his career. At a conference in Manhattan, the hedge fund manager took to the stage at the standing-room-only concert hall and delivered a scathing attack on Lehman Brothers. The U.S. investment bank, he said, hadn’t disclosed before that year billions of dollars of assets tied to loans and had incorrectly valued some its mortgage-related assets.
Lehman filed for bankruptcy four months after Einhorn’s presentation, cementing his reputation as a money manager with a sharp eye for spotting corporate troubles. Around the same time, another New York hedge fund manager, John Paulson, was minting a fortune by betting that more U.S. subprime mortgage borrowers would fail to make their payments. Across the Atlantic in London, a firm run by a lower-profile hedge fund manager, Alan Howard, had prepared for a financial crisis by cutting risk and buying investment contracts that would profit from market volatility.
The global financial crisis that unfolded in 2008 was terrible for the hedge fund industry—on average, it lost a record 19 percent. Strangely, though, it added to the mystique of the hedge fund manager. Einhorn, Paulson, and Howard were part of a small cohort who showed foresight at a time when other investors were racing toward the cliff. And that’s exactly what hedge funds are supposed to do. While regular mutual funds largely ride the market’s ups and downs, hedge funds charge high fees (traditionally 2 percent a year, plus 20 percent of profit) on the promise that their managers can outsmart the faulty wisdom of crowds. But in the decade since the crisis, Einhorn, Paulson, and Howard have all, to varying degrees, lost their cachet, and their businesses are mere shadows of their former selves.