T seemed like a good idea.
Two Wall Street refugees would set up shop in a dumpy office over
an arts store near Silicon Valley. Their plan was to invest money
for the superrich, becoming wealthy themselves in the process.
But these two men, Andy Kessler and Fred Kittler, didn't foresee
a number of quirks along the way when they created their company,
Velocity Capital Management, in the mid-1990's. The lessons they
learned are recounted by Mr. Kessler in a new book, "Running Money:
Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score"
Some of the stories in the book deal with personalities. One is
about a billionaire who begged them to reconsider when he was shut
out of a deal - which involved a company that ended up being called
Another describes how the managers were asked to put their money
into developing software intended to allow anyone to play the piano
perfectly. The inventor's primary credential was that he was an
The bumps along the path to riches, as described by Mr. Kessler,
give the book a seemingly endless string of humorous stories about
hedge funds - sophisticated, unregulated mutual funds that have
generally been open only to wealthy investors.
"The first rule of investing is never to buy something because
someone else tells you to," Mr. Kessler writes. "Of course, I spent
10 years of my life as a Wall Street analyst telling people they
should buy stuff," he adds. "God, I hope no one listened." He says
he and his partner came at their decisions from another angle,
spending much of their five years at the fund visiting the
management of companies in which they were considering
In fact, the book's tone is so engaging and the stories come so
fast that they almost obscure what Mr. Kessler has accomplished
First, he pulls back the curtain on the world of hedge funds, in
which a minimum investment of $1 million is often required and the
fund managers, in lieu of fixed salaries, annually receive 1 percent
of the money under management and 20 percent of the profits. He also
lays out a rational framework for long-term investing, and provides
context for the technological revolution's place in economic
The investment strategy is particularly interesting because Mr.
Kessler's fund was an aberration. It was intended to hold stocks for
a long time - in a world where his competitors would buy or sell
equities based on moves of a quarter-point and would engage in
currency swaps and anything else to increase returns.
This relatively conservative approach was one way for the fund to
differentiate itself from the pack. Another was its choice of
Given Mr. Kessler's background, the focus of the fund was on
technology stocks. In the early 1980's, he spent five years at Bell
Labs as a chip designer and programmer before becoming an
electronics and semiconductor analyst at PaineWebber and, later, Morgan
But instead of finding companies that had created breakthrough
technology, Mr. Kessler's goal was to find companies that could
That is where real wealth has been made throughout history, Mr.
Kessler writes. It wasn't James Watt, the inventor of the steam
engine, who became very rich from it. It was the people who figured
out how to use the engine efficiently to power steamships, railroads
Money can be made in betting on the commercialization of new
ideas, Mr. Kessler says, whether you are running a hedge fund or
investing for your retirement.
His fund made successful investments in Inktomi, the search
company eventually acquired by Yahoo;
the maker of media-playing software; and Silicon
Image, a digital media company.
Equally important, from the perspective of its shareholders, Mr.
Kessler and his partner decided to go out of business just before
the technology bubble burst. Unlike most investors, they sensed that
the valuations were absurd.
"We'd just seen the list from the folks that track hedge funds -
our 377 percent gain in 1999 made us the fourth-best hedge fund for
the year," he writes. "We are on our way to being up 40 percent for
the first quarter of 2000, our sixth quarter of big gains in a row.
It is just too bizarre to be believed."
As a result of their decision to start closing the fund, they
produced 55 percent annual returns - and all the war stories - over
the fund's life.
STILL, the book does have its flaws. Because the narrative
constantly jumps forward and back, it is hard to get a clear
understanding of how quickly the fund grew. (It eventually had $1
billion in assets that could be invested.)
Terms are not always defined the first time around. In the first
half of the book, for example, Mr. Kessler discusses why his fund
doesn't "short," a fairly common hedge fund strategy in which
managers bet that a given stock will decline in price.
When you "go short," you borrow shares and sell them, hoping that
you can replace them later at a lower price. The difference between
what you received for selling the borrowed shares and what you have
to pay to replace them, is your profit. But shorting is not
explained until the second half of the book.
And if you don't already have a deep grounding in both the
Industrial Revolution and the technology boom, you may find it hard
to keep up with the discussion as the book tries to describe how the
current technology revolution is consistent with what has come
But none of these things distract from the central point. Mr.
Kessler has written an entertaining business book, in which it is
more than possible to learn something. That is a rare combination.