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The Actuary The magazine of the Institute & Faculty of Actuaries

Diary of a Hedgehog: Biggs’ Final Words on the Markets by Barton Biggs

Hedgehog, Photo: iStock
Photo: iStock

Publisher: John Wiley & Sons
ISBN: 978-1118299999
RRP: £19.99

What do a hedge fund manager and a hedgehog have in common? Sure, some might say that hedge fund managers have the tough spiny exterior required to fend off attacks on their performance fees – and you’d like to think their nocturnal habits include staying awake worrying about the positions they are taking with your money – but, generally, they are not ones to shy away in the undergrowth.

It turns out there is actually little in common save the first five letters in each of their names. Nevertheless, written by the late Barton Biggs, who was famed for predicting the dot-com bubble well before it burst, the hedgehog’s diary promises to provide its readers with some final insight into the mind of a successful and highly regarded investor and hedge fund manager. Published posthumously in late 2012, the book is a chronological selection of Biggs’ investment commentary between mid-2010 and mid-2012 – a time of great uncertainty in global markets and experimentation in global policy.

Biggs has an engaging writing style. If he were still writing today, I would enjoy receiving these commentaries in my inbox. That way, I could dip in and out of them as I wished. The same might be said of this book, as even with the short contextual paragraph added before each chapter, one feels that the commentary loses some of its lustre outside the throes of the markets they describe. Indeed, one can’t help but feel that the book would be enhanced by the inclusion of the performance of Biggs’ own portfolios as compared with the market — if not over short periods, at least over the whole period covered.

It is worth persevering though, because it is also this immediacy of thought that provides us with the promised insight into how Biggs weighed up and considered key factors influencing his investment decisions. In addition, without the benefit of the housekeeping that a retrospective offers, these writings serve as a reminder of the need for humility when bad decisions are made. It would be an interesting exercise for asset owners to consider their own reactions to market events.

One episode that comes to mind lies in the middle of the period covered by the book: August 2011. This month saw sharp drops in equity prices across all major stock exchanges, driven by fears of contagion from the European sovereign debt crisis. It also sparked a protracted period of high volatility in those markets.

On 3 August, Biggs wrote: “A few more days of this, and we are going to get a powerful rally.” On 8 August, Biggs wrote: “No one can predict outcomes, but my guess must be only a day or two away from a powerful rally that could retrace half of the decline of the last two weeks.” On 15 August, Biggs quotes from Lord Tennyson’s The Charge of the Light Brigade and looks back at what history can teach us about booms, bubbles and bust – too little, too late?

But history lessons alone do not help the modern investor. “Bear in mind that Mr Market is both contrary and sadistic and thus loves to inflict the maximum amount of discomfort and pain on his worshippers.”

By giving Mr Market a personality, Biggs reminds us that markets do not behave according to the historical parameters of quantitative models and that understanding the effect of human emotions and behaviour, both individually and collectively, is as important as having a rigorous investment process.

The book ends with a conclusion written by Biggs, which could easily have been placed at the front. “I am struck with how hard it is to be an investor and a fiduciary. When managing risk in a portfolio… you always have to remember that there is the possibility of a catastrophic outcome.”

This is something for us all to bear in mind, at a time when policy has become a key driving force in markets. Better to acknowledge and manage the range of risks, than to bury six hundred heads in the hedgerow of unknown unknowns.

Jeremy Lee is a features editor at The Actuary