Clever Geek Handbook
6 July 2025

The Six Immutable Laws of Mobile Business

Recommendation

Mobile phone technology is ascendant. With billions of subscribers across the globe and more signing on every day, it is the technology of today and tomorrow. Japanese firms are by far the leaders in the thriving “mobile market.” Three experts on Japan’s cellphone industry – Philip Sugai, Marco Koeder and Ludovico Ciferri – explain why, providing an in-depth, insightful report on where mobile is headed in the years to come. They also discuss six principles that mobile carriers and service providers around the world can learn from and may want to follow. BooksInShort recommends this book – with its informative foreword by Martin Koelling, the Japan correspondent for the Financial Times Germany – as a worthy reference guide for professionals in the mobile arena. In this area, as Japan goes, so goes the globe.

Take-Aways

  • Throughout Japan, mobile phones are becoming the ultimate “symbol of freedom.”
  • By following six principles, Japanese mobile firms have become global industry leaders.
  • The first principle, “value over culture,” says that Japan’s mobile firms thrive because they provide a superior customer experience, not because of cultural factors.
  • The second, “the law of the ecosystem,” means that Japanese mobile companies work together, rather than competing ruthlessly, to deliver the best value to subscribers.
  • The third, “mobility empowers,” explains that mobile devices give people more control.
  • These devices enable people to “embrace” or mentally “escape” their surroundings.
  • The fourth principle, “the value of time zones,” shows that people use mobile two ways:
  • They either use it for short periods between tasks, or during leisurely “golden time.”
  • The fifth principle states that “mobile-specific business models are essential” to the success of any mobile company.
  • The sixth principle is “the future is simplexity”: The best mobile devices are easy to operate, though they are complex machines with advanced capabilities.

Summary

The Rise of “Homo Digitalis”

Who do Japanese car manufacturers see as their most formidable competitors? Other carmakers? Nope. They constantly look over their shoulders at their nation’s mobile phone companies – and for good reason. Most of Japan’s young men who previously spent their money on cars now spend large sums on sophisticated “voice and data services” for their handsets. Throughout the country, mobile phones are replacing automobiles as the ultimate “symbol of freedom.” Just as people once valued cars for the physical mobility they granted, they now prize mobile technology for its ability to connect them to “almost everything and everybody” wherever they go.

“This book distills the most important lessons from how Japanese businesses and consumers have optimized the mobile channel into Six Immutable Laws for mobile business, and through these provides the most viable path forward for global success of mobile Internet content, services and solutions.”

Of course, mobile services are popular worldwide. But in Japan and, to a lesser degree, South Korea, they dominate. Advanced third-generation (3G) mobile technology in Japan has a two-to-three year lead on cellphone technology in many other developed nations. The country’s more than 100 million subscribers are evolving from homo sapiens to homo digitalis. Though Apple, Google and other major high-tech companies are making great strides in their mobile offerings, these firms and the entire industry worldwide have much to learn from Japan, the “biggest field laboratory of the mobile net.” The country’s mobile companies teach a valuable lesson: Creating a superior user experience for consumers is more important than “quick returns.” Thus, Japan’s mobile firms work together to develop a mobile “ecosystem” that benefits everyone.

Mobile Technology at the Forefront

Today more than 50% of the globe’s population owns a mobile phone, and eventually everyone, everywhere, will have access to mobile networks. What does this mean for the World Wide Web and other media? According to the International Telecommunications Union, by 2009, mobile phone subscribers already outnumbered Internet subscribers four to one. Soon, mobile will also push past television as an attractive advertising medium. With the emergence of One-Seg, Digital Video Broadcasting-Handheld (DVBH) and additional mobile digital broadcasting technologies, the mobile phone “has actually become the television.” Mobile innovators will guide the way toward Internet Protocol Television, the “next generation of television.” Besides its TV function, the typical mobile device has also evolved into a “camera, a house key, a corporate security card, a credit card, an airplane boarding pass, a game machine, a music player, an Internet browser, a watch, an alarm clock, an excuse to leave a meeting early, a scheduling tool and a wallet.” And, yes, you can phone people with it, too.

Why Japan Leads the Pack

In Japan, where hundreds of millions of consumers subscribe to mobile networks, the mobile industry “penetration rate” is an estimated 70%. Though a few other countries have larger wireless populations, a closer look at Japan’s “mobile market” shows some remarkable statistics. For instance, four out of five Japanese mobile subscribers are “active high-speed” 3G users, and they represent “17% of all 3G subscribers” worldwide. That’s a large percentage, given that Japan’s mobile phone subscribers comprise less than 3% of all mobile customers around the globe. Moreover, Japan’s mobile market accounts for two-fifths of the revenue “generated globally from mobile data.”

“The Japanese mobile market is both a testing ground and an early warning system for the possibilities that a fully functioning mobile ecosystem can provide.”

Japan’s “mobile platform” experienced 10 years of rapid growth from 1999 to 2009, propelling the country to its current role as industry leader. Yet the West – along with “most of the East, North and South” – has yet to achieve “a fully functioning [mobile] value system.” Why? In Japan, customers sit at the head of the table, but this is not necessarily true in other nations. Elsewhere, a great divide exists between end users and mobile technology, resulting in wireless devices that consumers find overly complicated and hard to use. To address this problem, mobile firms need to merge simplicity with complexity to achieve “simplexity” in their technologies. But this is just one of “Six Immutable Laws” that govern the Japanese mobile market and that offer valuable lessons for mobile companies around the world:

1. “Value Over Culture”

Does mobile do so well in Japan because of the country’s culture? Is mobile technology’s success “just a Japanese thing”? Not at all. Those who hold this politically and factually incorrect view erroneously rely on four myths about Japan’s mobile marketplace. They mistakenly believe that “the mobile Internet succeeded in Japan because”:

  1. “Japan is a land of gadget-lovers” – Research shows that South Korea and Hong Kong have a higher rate of “gadget adoption” among their citizens than Japan does, and China’s and Italy’s rates of adoption are not far behind. Clearly, mobile’s tremendous popularity in Japan must stem from some other cause.
  2. “The Japanese live in small houses and lack the space for a computer” – Some people think that the Japanese are using mobile phones to go online because their homes don’t have room for PCs. In truth, computers are extremely popular in Japan, and they are common in many households.
  3. “The Japanese spend a lot of time on public transportation” – On average, the Japanese use public transportation about half an hour daily, but most commuters do not spend a lot of time fidgeting with mobile devices while traveling. Research indicates that the Japanese use mobile more at work and at home.
  4. “Mobile-phone based communications suit the culture” – A prevailing myth is that the Japanese have a “polite and quiet” disposition that makes them favor mobile phone-based communications. However, if the Japanese were choosing devices based on this temperament, they would naturally prefer communication forms such as Short Message Service (SMS) and email messaging instead. These methodologies are popular in the US and Europe, which don’t necessarily fit the description of “quiet culture.”
“The future is already here. It’s just not very evenly distributed.” (science fiction author William Gibson)

Clearly, Japan’s culture isn’t the reason for the nation’s widespread adoption of mobile technology. As Takeshi Natsuno, a pioneer in the wireless communications industry, explains, “It’s not about being Japanese. It’s about knowing what people want and how to sell it the right way.”

2. “The Law of the Ecosystem”

Japanese mobile firms generally do not engage in cutthroat competition to increase their profits. Instead, they work together, because their leaders understand that they can all do well in their flourishing mobile ecosystem. By striving toward a common goal, they demonstrate their devotion to kaizen, the concept of “ongoing improvement.”

“Consumers should not serve technology; technology should support us and serve our needs.”

At the heart of Japan’s cooperative mobile market are “network operators,” firms that offer “voice and data service packages” and network connectivity. These companies function as “benevolent dictators” that set guidelines and specifications for cellphone manufacturers while paying for a large amount of research and development. The Japanese network operator NTT DoCoMo is a prime example of a benevolent dictator. It holds on to only “9% of subscription revenues, passing 91%” on to its partner companies, such as service and content providers. In addition to network operators, seven categories of firms comprise the mobile ecosystem in Japan:

  1. “Infrastructure providers” – These firms supply the “base stations, servers and subsystems” needed to ensure nonstop connectivity for subscribers.
  2. “Handset manufacturers” – These companies make the actual mobile devices.
  3. “Middleware providers” – These businesses offer “intermediary services” that connect “back-end databases and mobile devices.”
  4. “Application developers” – These include various companies that build or sell software.
  5. “Content providers” – These firms create the enjoyable, useful content that makes the mobile experience satisfying for end users.
  6. “Service providers” – These companies dispense the content to customers.
  7. “Consumers” – As the “ultimate target for offerings,” these individuals are possibly the most vital link in the chain.

3. “Mobility Empowers”

Mobile devices give subscribers better control over their lives and their surroundings. People using mobile technology can mentally “escape” from unappealing environments, such as a dilapidated airport lounge. Alternatively, they can use this technology to “embrace” positive environments by phoning, texting or messaging other people. For example, someone who is headed to a trendy restaurant can send a text message to his or her mobile social network, inviting friends and contacts along. Mobile also exerts a great influence on consumerism. In fact, companies throughout Japan take advantage of its capabilities to “attract and retain” loyal clients.

4. “The Value of Time Zones”

Usually, the Japanese are not in motion when they use their mobile devices. More often, they are in “fixed locations,” such as home or work. They “take two approaches to content irrespective of location and time,” either spending lengthy periods intensely focused on specific mobile phone activities, or using mobile in quick “bursts.” Conceptualize “access time” for mobile devices as a matter of defined zones of time, that is, the use of mobile communication within different time constraints. The first zone is “in-between time,” when you have a few free minutes, say, to check the news, and the second is “golden time,” when you have the leisure to engage fully with your mobile device and enjoy “gaming and TV content,” for example. If you provide mobile content, be aware of the concept of time zones as you plan your material.

5. “Mobile-Specific Business Models Are Essential”

Japan’s mobile firms are masters at creating mashups of mobile Internet content – for example, “combining pictures, maps and GPS information” – to offer exciting, engaging mobile experiences. They help mobile device users access material that enriches and empowers their lives. In Japan, mobile devices are changing “the consumption of online content from a passive activity to an active one.” Japanese mobile technology has advanced so rapidly in this area that people may eventually call it “Web 3.0.” Popular, advanced Japanese mobile services include the social networks mixi and GREE, as well as Mahou no Island (“Magic Island”), which offers a way to create free personal homepages on a mobile device instead of a computer.

6. “The Future Is Simplexity”

Though technology geeks may enjoy fiddling with complex devices, most users don’t want their handsets to challenge them. Instead, they seek intuitive interfaces and easy-to-use features. To continue to grow, mobile needs to offer a natural, effortless user experience while enabling a multitude of attractive, engaging features. This combination of front-end simplicity and back-end complexity melds into simplexity, a crucial target for mobile companies looking toward the future. To be successful in the field of mobile devices, you must design, build and offer handsets on the basis of this all-important principle.

Brave New World

Today, mobile devices are about a great deal more than just telephony. Consider Amazon’s e-book reader, the Kindle, which comes with a “mobile phone network chipset” that lets you browse Amazon’s online bookshop and download e-books without a mobile phone contract or fees. Expect to see other innovative devices and applications that use the mobile Internet in creative, convenient ways.

“The customer is god, not a mere king.” (Japanese proverb)

Future growth in the worldwide mobile industry will occur primarily in developing countries. But to do well anywhere, tomorrow’s mobile devices will have to provide the benefits and services customers want in an accessible, personalized way. These machines will act as “mobile widgets,” serving a “user-driven, preference- and behavior-based personal net” that works on a variety of devices. They will be “gear,” not “gadgets,” in that they will help people attain their goals or accomplish their tasks. And they will integrate the web with the real world in a seamless manner.

About the Authors

Philip Sugai directs the Mobile Consumer Lab at the International University of Japan. Marco Koeder heads CyberMedia K.K., a Japanese digital media agency. Ludovico Ciferri is a research manager for Istituto Superiore Mario Boella.

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The Six Immutable Laws of Mobile Business

Book The Six Immutable Laws of Mobile Business

Wiley,
 


6 July 2025

Agile Career Development

Recommendation

IBM’s long-standing president, the legendary Thomas J. Watson Sr., and his son and successor, Thomas J. Watson Jr., always made sure IBM workers could advance in their careers by offering them superior employee development programs. Indeed, in his McKinsey Foundation Lectures, Watson Jr. contended that such visionary programs, plus other IBM traditions, contribute heavily to the corporation’s success – even more than its remarkable technological achievements or much-copied organizational structure. IBM career development experts Mary Ann Bopp, Sheila Forte-Trammell and Diana A. Bing (now retired) explain the company’s ongoing programming. They discuss what it does, why and how, even if that necessitates making some areas of their manual a little heavy on lists. BooksInShort recommends this detailed picture of IBM’s superior career development activities to any human resources professional.

Take-Aways

  • Firms that don’t invest in employee development risk losing their competitive edge.
  • Companies need to predict which skills they will need in the future, and to provide training and education that deliver those capabilities.
  • Career development programs boost retention by keeping employees engaged and motivated. These programs are bigger motivators than money.
  • People want recognition, financial security, friendships, self-esteem and self-actualization. They need “trust, hope, worthiness and competence.”
  • Provide your employees with the option of developing “vertically” by adding depth in a specific field or “horizontally” by learning numerous areas.
  • Develop a database so you can easily match an employee to a job vacancy.
  • Employee career-building programs also benefit managers, clients and shareholders.
  • Managers should help employees develop achievable, appropriate career plans.
  • Assign a mentor to new employees to help them acclimate to their new roles.
  • Frequently evaluate your career development activities to make sure you are receiving a good return on your investment.

Summary

Career Development the IBM Way

Companies that want to compete must invest in developing their employees’ career capabilities and expertise. This is particularly true in today’s business climate, where management is complex and demanding, and economic conditions are increasingly challenging. To stay ahead, companies must be “agile” in all areas, including employee learning and career development.

“No matter the size of a company, career development is vital to its success and ability to grow.”

IBM has long been a leader in employee career advancement. As it has grown and evolved over time, so has its employee-training package. Delivering a top-quality, flexible – or agile – career-development experience is vital to keeping employees engaged so that your company can retain good people. Superior career advancement programming gives employees the knowledge, skills and expertise the organization needs them to have. Career development is a subset of talent management, which has six main elements:

  1. “Develop strategy” – To be useful, career development must cooperate with and support company strategy.
  2. “Attract and retain talent” – To hire and keep good people, offer them appealing opportunities. Once they are onboard, help them advance.
  3. “Motivate and develop” – An easily understood career development program encourages employees to better themselves and, in the process, to do better work for you.
  4. “Deploy and manage” – Move employees around inside your company so they build expertise in numerous areas. Use “cross-unit projects” to accomplish this objective.
  5. “Connect and enable” – Encourage “professional communities” to grow throughout your organization so employees learn from each other.
  6. “Transform and sustain” – As business changes, so must your firm and its employees. Continuous transformation is the hallmark of agile, adaptive companies and employees.
“The overall objective is to be sure that the right person with the right skills is on the right job, quickly and cost-effectively.”

IBM manages its employee talent portfolio by anticipating which skills and aptitudes it will need its workers to have in the future, and by providing education that delivers those capabilities. It carefully hires people for staff or project positions who have – or quickly can develop – the right capabilities to do the work well. High-quality employee development has four main elements:

  1. “Expertise-based learning” – Employees learn particular, knowledge-based skills.
  2. “Work-based learning” – Training is integrated into tasks accomplished on the job.
  3. “Performance-based learning” – Employees receive specific feedback on their work.
  4. “Worldwide integrated solutions” – A corporation shares best practices and proven solutions by offering understandable information in the right context for each region.
“Career paths of tomorrow have begun to take different shapes than the career paths of yesterday.”

Collaboration in many forms breathes life into “experiential learning” and “knowledge transfer programs.” At IBM, collaborative educational activities take one of four forms:

  1. “Apprentice programs” – Students learn from skilled professionals.
  2. “Collaboration programs” – The Internet makes virtual collaboration a practical reality.
  3. “Communities of practice” – Employees share knowledge worldwide.
  4. “Learning portals” – These primary connection points enable employees to contact “experts, mentors and coaches,” and to join helpful social networks.

The Importance of Career Development

In 1954, renowned psychologist Abraham Maslow published Motivation and Personality, a study of the “hierarchy” of human needs. This pyramid of needs correlates with specific areas of the professional world, in this order of importance:

  • “Physiological needs” – Remuneration and reward, including money.
  • “Safety needs” – The security of having ongoing work.
  • “Belonging needs” – Collegial relationships with co-workers.
  • “Esteem needs” – Acknowledgement of accomplishments.
  • “Self-actualization needs” – Advancement up the career ladder by achieving goals.
“Technology is changing with breathtaking speed, affecting both the workforce itself, as well as the process of career management.”

In this hierarchy of needs, money is only a partial motivator. Higher needs are often more meaningful incentives. Research indicates that employees’ most common response when asked why they’ve left a job is “limited career growth or promotional opportunity.” A study using Saratoga Institute survey results confirms that “80-90% of employees leave for reasons related not to money, but to the job, the manager, the culture or work environment.” It lists four other key motivators: the need to feel “hope, trust, competence and worthiness.”

Career Paths

As employees acquire new knowledge and skills, they build valuable capabilities. Such increased “individual capability” – which adds up to increased “organizational capabilities” – takes time to unfold, but it is crucial to maintaining a competitive posture. At IBM, career development is a defined, organized and monitored process. The company seeks the right employees, trains them, measures the results and incorporates any needed changes so the process works efficiently. Advancement and career development are integral elements of IBM’s three-part “expertise management system”:

  1. “Competencies” – All IBM employees must possess the ability to do their work.
  2. “Skills” – People acquire particular areas of expertise to do specific jobs.
  3. “Capabilities” – As employees develop, they add additional useful abilities.
“Four generations of employees might well be sitting side-by-side with different needs and desires as to their careers, [so] flexibility in how these employees are developed is mandatory.”

IBM offers employees a carefully planned framework for building these areas of career development. Highly skilled employees can move up “vertically” to increasingly senior positions in specialized areas. Or, people can advance “horizontally” by learning many fields. The emergence of the “versatilist” – as opposed to the 1980s “generalist” and the 1990s “specialist” – is a significant contemporary trend. “Versatilists” can widen their “portfolio of roles, knowledge, insight, context and experiences” to reach corporate goals. These flexible employees can step in and efficiently handle diverse projects. IBM now offers a special career path to move versatilists through lateral job changes so they gain broad experience.

“IBM’s learning goals are intricately linked to its global business strategy, and this is amplified by the company’s investments in learning and development.”

Another notable career advancement trend is modern companies’ need to build employees who can work anywhere. An international corporation like IBM must operate effectively in many different cultures. Individuals who have the language abilities and professional talents to work globally can expect enhanced careers at any corporation. IBM’s huge employee database details the specific capabilities people need to perform well in certain jobs. This “expertise taxonomy” helps managers deploy people with the right array of abilities to fill any IBM job worldwide. This carefully structured “career framework” enables staff members to “acquire, develop and apply the skills needed to drive business results, while providing them with the opportunity to advance and grow their careers.” A formal career development plan is good for these stakeholders:

  • “Benefits to employees” – Staff members who receive good career development services can advance their careers, acquire and polish valuable skills, identify promising future work-related goals and deliver superior value to the company and its clients.
  • “Benefits to managers” – The career development plan helps supervisors select the right employees for assignments, and motivate and retain quality workers, thus limiting turnover. It also gives managers a precise read on their overall personnel resources.
  • “Benefits to clients” – Motivated, well-trained workers produce better goods, so customers are more satisfied.
  • “Benefits to shareholders” – Superior goods and services do better in the marketplace.

Find the Right Employees

Before you can hire new people, you must identify the competencies that your firm needs. This involves not only lining up people with specific talents and knowledge, but also finding those who have certain attitudes and ways of behaving that clients and customers value. Job interviewers use specific questions to focus on these competencies and to ascertain how well applicants will embody them on the job.

“An organization’s expertise portfolio and talent management should be under constant evaluation to determine whether or not the company is poised to meet client needs, market demands and market volatility.”

Once IBM hires someone, managers assign an experienced “buddy” to the new employee. The buddy helps the new hire acclimate during the first 60 days on the job. IBM also provides a full orientation program to help all new employees learn about the company’s “history, culture, values and strategic vision.” Orientation, which takes place over an extended period of time, includes classroom activities, online learning and “touchpoint” presentations of important company topics. Additionally, the “New IBMer Zone,” a Web site for internal use, provides valuable information exclusively for new employees.

“The real difference between success and failure of a corporation can very often be traced to the question of how well the organization brings out the great energies and talents of its people.” (Thomas J. Watson Jr.)

Any career building program needs “learning modules” that employees can study to improve their skills and enhance their careers. IBM uses an “Expertise Assessment” to help employees assess how their competencies match the company’s expectations for top people in their positions. This is how IBM tells employees what talents they must acquire to advance within the company. People who want to move up easily can find out which specific “skill development activities” are available, and when, to help them position themselves for better jobs. With this information, IBMers can plan how and when they will secure the proficiencies they need to advance.

Goal-driven Education

Managers at IBM help employees define realistic career development goals and take satisfying, meaningful action to achieve them. Managers must know how to redirect those who hold unrealistic or unreasonable objectives. Managers should help employees aim for sensible, attainable career goals by guiding them to select and pursue the right educational activities in order to move ahead. Once managers approve individual educational plans, employees are responsible for executing them, though supervisors monitor their progress.

Opportunities for Learning and Mentoring

Employees build their careers through prescribed educational programming. Companies offer instruction in many different formats, including classroom lectures, online training, assigned reading and study, and on-the-job practice. IBMers benefit from a variety of job-based training methods, including challenging “stretch assignments,” cross-unit projects and “job rotations.” Mentoring is also a popular, effective element of IBM’s experiential learning. Mentors supply the know-how employees need to grow in their jobs or move up. Often, employees have several mentors, and mentors work with several employees. Mentoring fills knowledge gaps, spurs collaboration, builds IBM’s personality as a “learning organization” and helps it deliver the best possible goods and services.

Monitor and Evaluate Program Effectiveness

Career development activities must earn a sound return on the company’s investment (ROI). Confirming that ROI requires rigorous monitoring and measurement. IBM managers survey employees after orientation, and after two months, three months and a year on the job. IBM asks new employees to report on what they’ve learned and asks them if they are satisfied with their career development education. Managers try to ascertain if IBM is deriving specific “organizational benefits” (that is, more productivity, better sales and heightened morale) from its career programs. The company also conducts a “workplace effectiveness survey” asking employees to rate these programs and processes. Data collection is essential to determining if your career development program is meeting its goals.

About the Authors

Mary Ann Bopp is in charge of career development at the IBM Center for Learning and Development, where Sheila Forte-Trammell is a learning consultant. Now retired, Diana A. Bing was IBM’s director of enterprise learning.

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Agile Career Development

Book Agile Career Development

Lessons and Approaches from IBM

IBM Press,
 


6 July 2025

The New Investment Superstars

Recommendation

Lois Peltz has stolen the keys to Wall Street’s inner sanctum and is waving you over to take a peek inside. Her insights on the hedge fund money machine - how it works, who runs it and how - should enthrall insiders and outsiders alike. She begins with the grand old gentlemen of the game, the likes of Julian H. Robertson Jr., Michael Steinhardt and George Soros, and tells how Soros speculated his way to a $2 billion profit - in one day! She shows how the game is played, and gives an insider’s perspective on the methods of the new superstar managers. The in-depth profiles include: Lee Ainslie, Leon Cooperman, Ken Griffin, John Henry, Mark Kingdon, Bruce Kovner, Daniel Och, Raj Rajartnam, Paul Singer and Brian Stark. These managers will build the vast fortunes of the future while also amassing their own. BooksInShort encourages investors, Wall Street players and interested spectators to hedge their bets, and buy this book.

Take-Aways

  • The established gentlemen of hedge fund investing are gradually giving way to a new breed of fund managers with different characteristics.
  • The new fund managers are more concerned with delivering superior performance under varying market conditions than with amassing huge assets.
  • The new managers employ a more team-oriented style of decision making.
  • Many superstar managers use investment committees to evaluate opportunities
  • Many superstar managers use investment committees to evaluate opportunities.
  • It remains to be seen how many brilliant bulls will turn into embarrassed bears.
  • Sheer size of a fund is considered a potential liability, rather than an objective.
  • Many managers diversify by giving money to other fund managers to invest.
  • Numerous types of hedge funds are available, but superstar hedge fund managers tend to have common characteristics.
  • There are now 4,500 to 6,500 hedge funds with assets of $350 billion to $450 billion.

Summary

On the Hedge-Fund Horizon

New stars are emerging on the investment horizon: hedge fund managers who consistently generate superior returns and also manage downside risks and reduce volatility. These managers share certain common traits:

  • Most have Ivy League backgrounds and/or MBA degrees.
  • Most view markets opportunistically.
  • Most use fundamental research.
  • They worry more about delivering superior performance under various market conditions.
  • They worry less about amassing the largest amount of assets under management.
  • Most fill the role of coordinator and overseer of the fund.
  • Minimum investments are higher and the asset lock-up tends to be longer. Some funds bar new investors to maximize returns.
  • Most fund managers lead balanced lives, and enjoy sports as a common free-time activity.
  • They share a passion for their work.
  • They have an ability to manage downside risk.
  • They wish to institutionalize their firms, including having planned succession.
  • They invest a lot of their own money in their funds.
  • The use investment committees.
  • Some allocate funds to other managers’ funds to further diversify.
“A new breed of hedge fund manager has evolved... they managed to embrace change and profit from it rather than fight it.”

When the markets were robust, a lot of the managers looked like stars. Now that the markets are bearish, managing the risk and selling short become significant. The weak are being separated from the strong. Yet, some wizened survivors have seen it all before.

The Man with the Eye of the Tiger: Julian Robertson

Julian Robertson is the archetypal Southern Gentleman. He graduated from the University of North Carolina with a business degree. After the Navy, he went to work for Kidder Peabody, where he spent 20 years as a stockbroker and as the head of Webster Management, which managed the firm’s money. In May 1980, he started Tiger Management, investing $2 million of his money and $6 million from investors. By 1991, the firm approached $1 billion in assets under management. It peaked - as the largest hedge fund at that time - in October 1998 at $22.8 billion.

“Hedge funds are not designed to outperform the stock market in a roaring bull market but rather to shine in flat, negative, choppy markets.”

Robertson was renowned for picking U.S. stocks, but he was not as effective globally. When Russia defaulted on its debt, Tiger lost $600 million, and it later lost a cool $2 billion betting on the Japanese yen in 1998. Robertson was a value investor, buying stocks with good earnings prospects at low prices, including airlines, automobiles and paper stocks - old economy stalwarts that had become undervalued. Tiger owned Microsoft and Samsung Electronics, but avoided the highflying Internet stocks that had no earnings. By the end of 1999, Tiger owned 24.8% of US Airways, 14.8% of United Asset Management, 7.2% of Sealed Air and 3.7% of Bear Stearns. During this period, his performance naturally lagged behind that of younger managers who pursued technology stocks.

“Some analytical studies show that many hedge funds generate their best performance in the early years when there are fewer assets under management and the fund is more nimble.”

When a hedge fund under-performs, investors redeem their equity to invest it elsewhere. Robertson had to sell holdings from his portfolio to meet these calls, during the downward spiral. Between August 1998 and April 2000, $7.65 billion of assets left the company.

With 180 workers, Tiger had a net loss of about 25 analysts in 1999-2000. In October of 1999, Robertson revealed that he had lowered the amount of borrowed stock from 2.8 times capital to 1.4 times. In March 31 of 2000, he announced his retirement at age 67. Assets in his hedge funds were now $6 billion - $1.5 billion of that was his own money. He wrote to his investors: "There is no point in subjecting our investors to risk in a market, which I frankly do not understand." He announced he would return investors’ capital. Although Robertson’s Tiger funds dropped about 19% for 1999, its annual performance since 1980 was about 29%.

George Soros’ Quantum Leap

George Soros, born in 1930 in Budapest, graduated from the London School of Economics in 1952. He came to the U.S. in 1956 and worked as an arbitrageur at F. M. Mayer in New York. Soros had an important edge - he understood European financial markets, and quickly became known as an expert in that growing field. Soros convinced the management of Arnhold & Bleichroder to let him run two offshore funds: First Eagle, a long-only fund, began in 1967, and Double Eagle Fund, a hedge fund, began in 1969. He poured $250,000 of his own money into the hedge fund and attracted another $6 million from Europeans who knew him. In 1973, Soros moved on to start his own fund, Soros Fund Management. The Double Eagle Fund became The Soros Fund in 1973 and the Quantum Fund in 1979. By 1980, Soros’ 80% of the fund was valued at $56 million.

“The bull market in stocks helped many managers post excellent returns. Now that the markets are choppier and more difficult, risk management and hedging plays a larger role. The short side of the equation becomes more important.”

Soros believed that the key to his investment success was the art of survival. Weathering the business cycles is critical. Soros’ Quantum empire began to slip into entropy in 2000. His company was still loaded with high tech and bio-tech stocks when the sell-off began in mid-March 2000.

In his book, The Alchemy of Finance, Soros says reflexivity is crucial to understanding market behavior. Soros says financial markets are characterized by a discrepancy between reality and the participants’ perceptions. When the difference between the two is small, it is a near-equilibrium condition. When the difference is great, it is a far-from equilibrium condition. When the gap between the prevailing bias and reality are too wide, a reflex, catastrophic collapse ensues. Soros states that reflexivity isn’t very important when things are in a near-equilibrium state, but is very important during a boom/bust sequence. He looks for telltale signs that a trend has been exhausted, knowing that if he picks correctly against the trend he will profit, but that if he goes against the trend too early, he won’t.

“As a fund becomes very large, it also gets so closely watched on Wall Street that it hurts; its footprint makes it too visible in the market. Other investors watch and copy.”

If this sounds overly theoretical, consider that on Wednesday, September 16, 1992, Soros made close to $2 billion by shorting the British pound, against the prevailing wisdom. The Financial Times dubbed Soros "the man who broke the pound." Soros is a noted philanthropist who has doled out $2 billion during his career. His funds earn an average annual return of more than 36%.

Hedge-Fund Phylum

The major types of hedge funds are:

  • Global emerging funds involve investments in regions such as Russia, China, India and Latin America. Because emerging markets do not permit short selling, emerging markets use long-only strategies.
  • Long/short equities seek to be directional. Managers shift from growth to value or from medium cap to small to large, or from a net long to a net short position.
  • Managed futures involve financial, commodity and currency market investments. Managers use either a systematic strategy or a discretionary strategy based on judgment.
  • Market neutral funds try to lock out or neutralize market risk, while earning a monthly return of 1% to 1.5%. This is a conservative strategy.
  • Fixed-income strategies depend on public and private debt instruments, with fixed rates and maturities.
  • Funds of funds divvy assets up among several different funds, to achieve diversification.
  • Sector funds specialize in specific sectors such as healthcare, technology and finance.
  • Short sellers position themselves to take advantage of stocks that go down. They simply buy stock and sell it short, hoping to repurchase it later at a lower price.

Death of a Hedge Fund

A hedge fund might be retired or diluted for several reasons, including:

  • The incentive fee - The hedge fund manager doesn’t get an incentive fee until he has made up any losses, and the fee is the bulk of the manager’s compensation. So after a bad year, the manager has a disincentive to fight back to even since there is no pay for getting back to the so-called "high water mark." Hedge funds attract the best and the brightest because managers receive a 1% management fee plus a 20% incentive fee. This compares to half of 1% for the mutual fund manager, who receives no incentive fee.
  • Assets hit a ceiling - The more assets a manager has, the harder it becomes to deliver excellent returns. A fund is more nimble when it manages fewer assets. The return is often greater when investing in smaller companies, and as a fund becomes bloated it becomes difficult for managers to find market opportunities with the right return/risk criteria. Few managers want to hold more than 10% equity in any one company, as it becomes hard to trade out from under a company in which you own too much stock. So the total universe of investment opportunities begins to decline. Also, as the asset level increases, decision making is delegated to subordinate managers who probably have less skill. Finally, the larger the asset base, the more the fund attracts "turnstile investors" who buy in and then insist on high quarterly returns, lest they bug out.
  • Succession - The elite fund manager traditionally has been unable to satisfactorily groom an heir. A talented young manager is more likely to leave the firm and start anew than to wait for an opportunity to succeed the principal manager.

Hedge Fund Implications

Ironically, the more problems that the large hedge fund managers have, the more new hedge funds spring forth. Like the Hydra that sprouts two heads for every one lopped off, sub-managers eagerly wait for chances to start their own funds. When manager Michael Steinhardt retired in 1995, for example, six of his associates formed their own funds.

“Soros viewed himself not just as a speculator but as a philosopher - and a failed one at that.”

Younger managers learn from their mentors that funds need structure, team-orientation and succession. Cumberland Associates is the only large hedge fund management firm that has successfully created continuity from one generation to the next. The teams’ specialists are rewarded, in part, on their performance, to avoid the perception that managers are motivated only by large portfolios and incentive fees.

“The more assets a manager has under management, the harder it is to deliver excellent returns.”

When Alfred Winslow Jones created the first hedge fund in 1949, the idea was to hedge one’s position on securities. Jones would invest in 70% long and 30% short positions. With today’s different strategies, no uniform definition exists for a hedge fund - hence funds are also known as hybrid products, alternative securities, absolute return funds or private investment partnerships.

“And as a hedge fund manager gets very large, the percentage of hot money investors also grows in proportion, i.e., investors who are quick to come in and quick to go out, (that is) turnstile investors.”

Presently, some 4,500 to 6,500 hedge funds hold assets between $350 million to $450 million. Europe alone has an estimated 300 managers. Hedge funds are supposed to be non-correlated to stocks and bonds. Thus, stocks could go down, and hedge funds - an important tool for diversification - might stay the same, or even go up. During the stock run up, most hedge funds lagged a few percentage points behind the overall stock market, since some of their resources are used to hedge, by buying options or futures.

"Most of the managers seemed to lead balanced lives and talked passionately about some outside interest. Sports was a common theme. The challenge of winning and/or the mastering of a technique were exhibited in what managers did in their free time.&q

Among the top ranks of emerging hedge fund managers are the thirty-something Lee Ainslie and Ken Griffin, as well as Leon Cooperman, John Henry, Mark Kingdon, Bruce Kovner, Daniel Och, Raj Rajartnam, Paul Singer and Brian Stark. A few of these men are a good bet to replace the likes of Robertson and Soros as the kings of investment finance.

About the Author

Lois Peltz was editor-in-chief of MAR/Hedge Funds, an investment performance reporting service, for eight years. She is now President and CEO of Investment Information Providers, which supplies investment information services to the professional investment community.

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