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Jonathan Hoenig: Capitalist Pig, Ayn Rand Fan, Highly Successful Manager

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By Jonathan Hoenig’s definition, being greedy means never having to say you’re sorry. Indeed, the founder and portfolio manager of Capitalistpig Hedge Fund has nothing to be apologetic about: His fund scored a 30.11% return last year and has been profitable nine of its 14 years.

Greed is good, insists the Gordon Gekko-inspired, Ayn Rand-loving Hoenig, 38, whose version of pigging out is hungrily pursuing what one wants out of life — in his own case, profits and big capital gains. He claims that his was the first hedge fund to advertise after the ban on soliciting investors was lifted two years ago.

A panelist on Fox News Channel’s “Cashin’ In,” Hoenig is spunky, blunt and skilled at debunking the popular belief that hedge funds are harmful to the markets. At his computer, he assiduously homes in on price action and just as diligently tunes out market noise. His biggest equity holding right now? Egypt.

The Chicago-based portfolio strategist manages $22 million in assets under Capitalistpig LLC. His fund is open only to accredited investors with a liquid net worth of more than $1 million. The minimum investment is $150,000.

So wedded is this vocal cheerleader of individual rights and free-market capitalism that he gives every new client a copy of Rand’s “Atlas Shrugged.” Hoenig holds Rand’s objectivism philosophy near and dear.

He started out with a college radio show preaching the gospel of investing to fellow students. Then, three credits shy of a degree, he quit Northwestern University to realize his dream job: trading an account on the Chicago Mercantile Exchange. He worked there and at the Chicago Board of Trade for two years, carrying over the pig theme in a book, “Greed Is Good: The Capitalist Pig Guide to Investing” (Harper Business 1999). By age 23, he had launched his fund.

ThinkAdvisor chatted recently with the Glencoe, Ill.-born financier — an early supporter of the Tea Party — about his investing strategies, his radical ideas for the American economy and why those bashed and trashed hedge funds deserve a place in a diversified portfolio.

Your fund has chalked up a return of 379.27% since its inception 14 years ago. What’s behind your investment strategy?

“Cut the losers, let the winners run” is our mantra. The point isn’t to be right — but to make money. So the strategy focuses much more on investment technique rather than prognostication.

What is Capitalistpig invested in right now?

Egypt is my largest equity holding. We’re in a number of long and short strategies designed to profit regardless of the economy or overall direction of equities. That includes long positions in base metals, African stocks and select international shipping equities. We hold short positions in retailers, bonds, preferred stocks, REITs, as well as put options on a number of broad indices that function as “correction insurance.” 

Let’s talk about being greedy.  What does the “Wall Street” movie catchphrase, “Greed is good” mean to you?

I’m absolutely a proponent of greedily pursuing your self-interest, whether it’s making money or anything else. People should be greedy for what they want out of life and take every step to achieve it.

Is the bad rap about hedge funds unfair?

Hedge funds are besmirched as unregulated, gun-slinging time bombs waiting to blow up the economy at any moment. In today’s culture, they’re like a persecuted minority. G.M. went down? It’s hedge funds. Oil prices going up? Hedge funds. Stocks volatile? Hedge funds. They’re blamed for everything. People in my business constantly hear that speculation is evil and immoral.

Hedge funds are said to be largely responsible for the financial meltdown. Are fifty-million Frenchmen wrong about that?

Without question, hedge funds and financiers were blamed for the financial crisis. But in reality, it was very much the opposite. The mythology has been that hedge funds and speculators caused the 2008 collapse and market turmoil, when in actuality, hedge funds have been a tremendously beneficial element of the capital markets and for the millions of investors who have participated in them.

What caused the crisis?

It was the regulated elements of the financial system – all controlled, either explicitly or implicitly, by government – that blew up and took the rest of the economy down with them. Hedge funds are one of the few parts of the financial sector that didn’t ask for a bailout, didn’t get a bailout and were the ones who went in and bought so many of the quote-unquote distressed assets that people wanted to unload. Hedge funds not only survived the crisis but helped to rebuild afterward.

What matters most to your investors?

I always joke that they don’t care how I make them money. They’re not committed to any one asset class. They want a consistent return over time and, ideally, something that can zig when the rest of their portfolio is zagging.

How risky is that?

We believe in taking risks, but in a smart way. That’s what money management is. We try to seek out alternative strategies. For example, most financial advisors, I believe, would be very leery to recommend putting their clients into Egypt — that’s the kind of thing that can get them fired. But it’s our biggest trade right now.

Are financial advisors adding value?

Unfortunately, the regulatory environment is making life quite difficult for them: it’s like they’re guilty until proven innocent. They have to be very careful about what they can say and how they can practice. But I see many who don’t do a great job because they put their clients’ portfolios on auto-drive and don’t follow up, all the while telling them to hang in for the long term.

How does that compare with your approach?

While many money managers are in a plane waiting on the tarmac at O’Hare or out to lunch with clients, what I’m doing all day long is sitting on my ass in front of a computer watching people’s money. I’m making trades, allocating assets, being aware.

And the others aren’t doing that?

A lot of money managers are [primarily] asset gatherers, and that’s where they focus their time. But many clients expect their financial advisor to review their portfolio on an even semi-regular basis. Too many money managers don’t spend enough time monitoring and managing money. I wish more advisors were proactive.

In what way?

For instance, going back to 2000, what percentage of clients had gold in their portfolios? Very little, I would venture. Now, 14 years later, most advisors have finally come around to the idea that “Gee, maybe you should have some commodities as a diversification.” I’m not recommending it; I’m just saying that it took gold moving from $250 an ounce to $1,700 an ounce.

Anything positive to say about advisors?

A lot of them are tremendously knowledgeable, not just about market history but about what I consider to be the real nuts and bolts of money management: trading technique. The industry has come a long way since Martha Stewart’s famous stop-loss order with her broker. Back then, people weren’t even aware of what a stop-loss order was. So in some ways many advisors have raised the bar for their clients.

How do you determine what to invest in?

Technical analysis is my primary tool because that’s where the rubber meets the road. It provides something that fundamental analysis does not, which is a discipline — a plan as to how to trade. A lot of stocks are great fundamentally; but then they go down and down and down – and half the time, cheap stocks get much, much cheaper. Technical analysis focuses on the price action itself, which is the most important factor and an objective reality in the marketplace.

Where does selling short come in?

A portfolio is not a time machine. You can’t bury it, then dig it up a year or two later to see how it’s doing. The best indicator of the market is the market. Our fund changes based on market conditions. So when an asset class is weak or poised for a decline, at that point we’re able to sell short and benefit.

What’s an example?

A big part of our performance success in 2013 was being short gold. In ’01 and ’02, my fund was long gold. That was because of the market condition at that time. What matters about any asset isn’t how it acted a decade ago but how it’s acting in the here and now. Money becomes wealth when you start thinking about investments not so much as a bet on the stock market but as a durable portfolio that can withstand any market – and hedge funds play a really important role in that.

You’re a proponent, big-time, of Ayn Rand’s philosophy of Objectivism, which advocates self-interest and capitalism, and that altruism is deadly. Why do you like her ideas?

Ayn Rand represents the only hope for saving not only America and capitalism but the world. She’s the only philosopher who put forth a complete system and said that trade is mutually beneficial – and that speculation isn’t evil and immoral.

Nevertheless, she remains controversial.

Objectivism is tremendously radical even in what is supposed to be a free market and free society. Our culture today is not individualistic; it’s about sacrificing yourself for everyone else. Ayn Rand said no, what you want out of life is important.

Along those lines, you propose doing away with Medicare. Correct?

Definitely. We’ll transition out of Medicare, Medicaid and Social Security – all those entitlement programs, absolutely. First and foremost, they’re immoral. They violate your right to your own life and make everyone a servant of everyone else.

How so?

From birth, the government says you’ll be forced to pay into Medicare, Medicaid and Social Security – all of which programs are financially bankrupt. That’s a reflection of the problem. But the real problem is that they’re immoral. Free means free from government force.

What about middle- or low-income people who need medical care or hospitalization that’s extremely expensive? What would they do without Medicare?

What they did before Medicare: People who can’t afford medicine should appeal to private charities. There are innumerable charities that do wonderful work helping people in need. The government is not a charity, and need is not the standard of value. Just because someone expresses a need doesn’t mean that you or I have a moral obligation to serve them.

And what’s your take on the Affordable Care Act?

If [President Obama] wanted to help the uninsured, he should have set up a Kickstarter campaign and allowed people to participate to help those in need. Just because someone has a need doesn’t mean they have a claim on anyone else’s life. Your life belongs to you.

Were you shocked when the Bernie Madoff scandal broke?

Was I shocked? I was disappointed. It set the financial industry back a decade or more. It had taken us years to get past the smear of WorldCom, Enron and Adelphia — and then along comes Bernie Madoff to give the antagonists of capitalism another reason to try to take away our freedoms and rights.

What about Madoff’s effect on hedge funds specifically?

He did a tremendous disservice to the hedge fund industry. Now the culture assumes that every financier is a Madoff waiting to happen. We’ve got to stand up and say, “Bernie Madoff is not a hedge fund manager – he’s a crook!” I wish more people would stand up for the morality of making money.

What are hedge funds doing to improve their image and gain investors?

Because of the 2012 JOBS Act, which dropped the ban on hedge fund advertising, we can now be slightly more communicative with the public. My ads have been very successful in bringing people to our website. And blogs, Twitter and Facbook are really effective tools for communicating, like any other business communicating with prospects in a free marketplace.

What was your first investing experience?

When I worked at Starbucks in high school, I bought their stock and made money. That really piqued my interest, so I moved on from there – but always with a fascination not just in making money but also in the mechanics of trade. Trade is mutually beneficial and how you operate in a free, rational world.

What’s been the bestseller of the merchandise offered on your website?

The t-shirts that says, “American Capitalist” on the front, with a target printed on the back. It was born after the Madoff scandal, when suddenly every American profit-seeking capitalist was assumed to be up to no good. It takes a lot of gall to wear a shirt that says I’m an “American Capitalist.” In our culture, that’s seen as someone who’s a radical, dangerous character. The [silver] Nazi coins sell quite well too.

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