Exclusive interview with Hedge Fund Chief David Mueller

Hedge Fund Chief David Mueller sat down yesterday with Bureau Chief Juniper Leamington of The Mop and Pail for an intimate, tough, exclusive, hard-nosed interview about his family, his legacy and why he won’t be raising another fund and is retiring from the hedge fund industry. At it’s peak, Mr. Mueller’s firm had $8.7 billion under management.

Why did you make this announcement now?

I can’t go to any more weekly meetings with my fund staff and look them in the eye and give them a straight answer when they ask “we’re down almost 80%, are we going to be able to raise another fund?” “My only answer can be ‘yes’, because otherwise your moral authority to run the firm is cancelled, is gone.”

Through the time you have been a Hedge Fund Chief, there have been incidents, accidents and things that have meant that you have missed events with your family.

It’s almost a standing joke at the office that if I would go away with my family, something happens. The Russian Ruble crisis, the Tech Bubble bursting, 9/11, Enron, Hollinger, Worldcom, Tyco, Madoff, the housing bubble, Bear Stearns and Lehman. And then the worst financial crisis since the Depression. One of the challenges of being a business person who creates jobs and fosters the economy, let alone a Hedge Fund Chief, is that on a day-to-day basis, your schedule demands that you’re not at home. One week I’m going to Vancouver to see an investment opportunity, Chicago to visit a syndicate partner, New York to appear to CNBC. And then it’s off to Saudi to meet potential investors.

I’ve thrown myself into being a Hedge Fund Chief with my whole heart, so the family time we had — particularly the summer vacations, we planned months in advance — and every single summer — it is remarkable — something would happen and I’d be on my BlackBerry or sitting on conference calls.

And how did you feel about going out to fundraise again?

Being a Hedge Fund Chief is unlike any other job on Bay Street. Raising a new fund is a year-long effort, it’s seven days a week, it’s 16 hours a day. And I always outwork the other fund managers that are in the market at the same time. I did it last time on Fund II, and I did it in 2003 when we raised Fund I. And at the end of the financial crisis in March, I talked to Janet Kaney, our VP of Investor Relations, about how tough it would be to raise Fund III since we were down about 80% in Fund II. And she said, “remember, in 2010, little Jules’ going to be in highschool”.

It might be a non-sequitur but I can remember, when I first joined the hedge fund industry, my first three years as an Associate, bringing Jules as a baby and putting her on the trading desk, and Ronnie W. was Head Trader…he spoke with a bit of profanity just like my Brother Johnny at Thanksgiving, and Jules yelled out “Johnny”!

In 2006, there were alot of earnings misses across the exchange. We were flying to Maine on my NetJets card to visit some American friends, and I found out that Nortel was in trouble, and I knew most of the management team, so we turned around and came back. I knew in 2006 just how very, very difficult it was. You can’t spend time with your family and be a father during the regular week, so you can’t commit to being a soccer coach, and it becomes very difficult to spend time with your family during the summers.

But didn’t you know that when you were an Associate? Before you got the job to run the Hedge Fund?

I certainly did. I was prepared for what was coming — the 18 hour days — when I stepped up to the big job in 2003. But they gave me a free car and driver, the money was great and the market was always going up. That made it easier to take. Everyone understood when I couldn’t get home for dinner. And if it wasn’t work, I still had to attend three or four early morning meetings and/or late dinners each week due to charity fundraisers or the United Way Campaign. It was all fine until our returns went negative. The fun went out of it when the music stopped and I realized we couldn’t raise another fund.

So this decision to not raise a fund again goes back to 2006?

Yes. I resolved back then that if our returns were poor and I couldn’t raise another fund, I’d leave the industry. If I was up 80% and not down that amount, I’d obviously be going for Fund III…and looking for it to be at least three times as large as Fund II. Think about it: Cerberus just lost US$7 billion of hedge fund commitments, and that pension money is looking for a home. A 2% management fee on US$7 billion buys a lot of peace on the homefront. But, since we’ve hit the wall, it’s all academic; we’re done. The institutions won’t even take my calls, the placement agents say we’re toxic, so I’m retiring to spend more time with my family. At least until I get a new gig. Thinking about raising a sub debt fund backed by the Business Development Bank. That’s the flavour of the moment, and their CEO is looking to make a splash to get the politicians off his back.

And was it Janet’s comment that really kind of crystallized it for you?

I spoke to my wife after that. I broke the news to her that we’d be below the preferred return and have to give up the second weekend night nurse, at least in the summer when she was in Muskoka. It gave me the resolve in a couple of important areas. The first — you probably saw this as a reporter who has covered Bay Street and understands it — I changed my style a little bit, and was really very aggressive about acting on the investment priciples we’d sold our investors on. Because I believed then that if our returns were sucking at that point, then I wanted to swing for the fences. I wanted to make sure that I honoured my promise to make our investors a fabulous return. If I couldn’t turn it around then, it didn’t matter that I’d amped up the vol on the fund by something like 200%.

Were there times when you thought you might someday get a chance to work in the industry again?

I had it resolved in my heart, March 2009, and there are two or three moments since then, I mean, you make a decision like this — it’s a decision you revisit every time your returns outperform the hedge fund index.

I love running a hedge fund. I love the fact that our investors love the stock market. I love the fact that I, as an industry titan, can leave behind my fund-provided car and driver and take the subway without security, and everybody talks to me about the market and asks me for stock tips. I like the fact that people are pretty nice to me and tell me that I’m doing a good job, even though I’ve lost their respective pension plans hundreds of millions of dollars. Because their pension boards don’t disclose the performance metrics of their individual public mandate fund managers, no one has any idea that we’ve blown up. They just know I’m a hedge fund king, live in a gorgeous house on The Bridle Path, they see me on TV and in the National Pest’s Party Poop photos, and assume that I have some golden touch that might rub off on them if they get a few moments of my time.

But there wasn’t even a little bit of temptation to say “Gee, well, maybe let’s go get ’em again”?

It was really, really tempting. But it’s not the right thing for me or my family, because it wouldn’t be about what I believe in, it would just be about my…it would just be about me. And let’s face it, our numbers stink. No one was going to give us one red cent for the new fund. The firm is finished. So making it about me would be a total embarrasment. To pull a new fund off, we’d have to goose our numbers, and make a bunch of assumptions about the NAVs of our Fund II private holdings. Even then, it probably wouldn’t work. I just don’t believe in that kind of public relations. This is simply just: “you can’t fire me, I quit”.

Your older brother Johnny is also a Hedge Fund Star, but he’s going through a divorce right now. Just like your parents did. How does that play into this?

I’m incredibly honoured by the chance to run a hedge fund and I’m very proud of my record, at least on a relative basis, but I also feel that I never wanted my kids to grow up in a broken home. Or with a Father who got the door slammed in his face by the pension funds after losing them 80%. But being a father. I feel like that’s what I can do, now that the fund’s basically on autopilot. And that’s why it’s so important to me. I’ve got a little chance now, having not been home since I raised Fund I in 2003. People kept saying to me, what are you going to do now. Have you got something lined up? And I said, “No, I’m going to be the assistant coach on our son’s hockey team”. Well, I actually said “the hockey coach,” and my son said, “No, Dad, we’ve got a coach.”

What made the housing bubble so difficult to trade? Aren’t hedge funds supposed to make money in good times AND bad?

What was hard was that it dragged on and on and on. I knew what the issues were and it was frustrating because I spoke to our institutional limited partners when the SEC banned short selling of financials, and they knew we were short against a massive whack of bank converts. I said, “the fund has huge financial challenges because of this ban.” I mean, look at TPG. The got laid out on their exposure to the financial sector. And it was from that perspective that I couldn’t figure out what the LPs wanted from us. From that perspective, it was difficult.

During the financial crisis and after, there was a sense that the sharks had been in the water. A lot of very negative media commentary and a lost of rumours of margin calls and major losses in the fund. Staff quitting, the ‘gates’ going up. We even did a story that bashed you. How did you respond to those?

Well, that stuff all got my dander up. I’ve got confidence in the financial community and I’m not sure what I would have said if I was asked to invest more in our Fund II last winter. I did the level best I possibly could and I think that, as investors reflect on it, they will agree that we handled it very well. At least on a relative basis. It was a really difficult circumstance and we kept going in to work each day, even though we knew we could never get back to the High Water Mark. Other guys just closed up shop, hit the golf course. You can look that up.

But the suggestions you weren’t doing a good job must have hurt?

There was only one article ever written about me that stuck, and that was when a different newspaper than yours said that I was competing with my brother but I didn’t want my children to grow up without seeing their father before breakfast or after school. They wrote an article critical of that, pointing out that firefighters, nurses, doctors, management consultants, investment bankers, lawyers, sports journalists, all sorts of people work jobs that mean they miss their kids. Not just Hedgies. I thought that was outrageous, and it still rankles me to this day…. They said I sought the job of running a hedge fund, and was now complaining about how much time it took to run a fund. They said if I didn’t want the job, and all that came with it (the car & driver, the wealth, and the prestige), I should let someone else from the firm have a shot at it.

Fortunately, I could always rely on you, Juni-Poo, and your broadsheet newspaper to do the puff pieces for me to show my investors what a great job I was doing. If I asked you to attack one of our mortal fund rivals, you’d call them up and ask them a bunch of tough questions about rumoured OSC investigations, just like Adam whispered in your ear. And who can forget the article last Christmas when you wrote about how I’d lost 30 pounds and looked like a million bucks? You can’t buy that kind of slavering media coverage. It kept a bunch of our investors in the fund far longer than they would have stayed otherwise.

As far as the next job, you’re just going to take your time?

Right. I’ve still got my Harvard Law Degree. Frankly, law wasn’t very good training to run an $8 billion hedge fund. But it’ll get me back on my feet as a municipal lawyer or something of that ilk. Maybe go on a few Boards. Teach a course.

And what are your plans in the upcoming months?

I’ve got 14 months before all of the redemptions are complete, and nobody’s offered me the Chair of RBC, that seems to be taken, but I’m going to continue to work on the issues I care about. Primarily harvesting the remaining management fees that we get before the fund totally liquidates.

Do you think your investors will buy this storyline? That you decided in 2006 to not raise a Fund III? What about the interview you gave in July, where you said that you “were definitely doing it” again, and “wouldn’t change your mind in six months”? Were you fibbing then, or are you fibbing now?

Gulp. Fortunately, I can rely on sympathetic journalists like you, Juni-Poo, to not push me on that point, right?!?! I mean, they both can’t be true statements, I recognize that. But I would have had no authority to swing for the fences last summer if everyone knew about my intention to not raise a fund again. Likewise, if I wasn’t sitting at 20% on NAV, I’d be doing just what I said in that interview last July: It’s not a career…It’s completing that task … I’ve been put here to do certain things. I want to make sure those things happen.”

Well, I won’t mention that in my article.

I’ve always been able to rely on you. That’s why you get these exclusive interviews.

MRM
(Hat Tip to the original interview that was drawn upon heavily for this satirical piece; this post, like all blogs, is an Opinion Piece)