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SURVIVAL/HONESTY/LOSSES AND LESSONS

Survival is a key motivator. Over the long run, at various times, the managers have gone through adverse times. All have suffered losses, survived, and learned from those difficulties. Resilience, a key word for Kingdon, indicates how the manager reacts to adversity and client withdrawals. While admitting to many mistakes over the years, one situation often stands out in these managers' minds. Also key are the lessons they learned.

The year 1990 was a memorable one for Cumberland. Wilcox says they had done great analysis, but the distressed high-yield markets became illiquid. At year-end, they were faced with redemptions that had to be funded in an illiquid market. They learned to pay more attention to portfolio liquidity.

Henry lost almost 11 percent in 1992 in his longest-running program, financials and metals. That loss motivated him to tighten risk control and reduce leverage.

For Cooperman, non-U.S.–dollar bonds stood out in 1994, as did Russian fixed income in 1998. As a result, Cooperman no longer includes emerging markets or illiquid instruments in the portfolio.

For Rajaratnam, one memorable rough period was the fourth quarter of 1997 during the Asian crisis. Lessons learned were to spend more time on macro issues. Now if the fund is down 4 to 5 percent a month, they reduce exposure.

For Stark, who suffered his only annual loss in 1998, he learned you can be right on the fundamentals but short-term liquidity constraints can dominate arbitrage pricing. The year 1998 also reinforced the value of diversification—diversification by strategy and geography. More emphasis is put on the component of the portfolio derived from credit. More investment-grade product is used in all kinds of environments even if it is not as cheap as lesser-grade products. Stark has increased the extent of asset swapping and default protection.

As a result of 1998, Sussman learned never to put capital where he is not in control of what's going on.

The managers acknowledge that they can and often do make errors. Kovner, a big supporter of intellectual honesty, emphasizes that you have to be honest about what you don't know. It is not so much about being right all the time as being able to adapt and find a strategy that works. He said more often he is wrong than right. He made a wonder-