Book Review: Diary of a Hedge Fund Manager

“My hockey philosophy kicked in full force,” Keith McCullough writes at the beginning of Diary of A Hedge Fund Manager. “I clung to the concept that only harder work could separate me from the rest of the pack. ” This is the story of a Canadian Junior A hockey player who, after failing to make it to the NHL, went on to captain the hockey team at Yale, where he earned a degree in economics. McCullough then spent a decade on Wall Street, enjoying greater success than he ever had on the ice.

McCullough started his career as an institutional equity sales analyst for Credit Suisse First Boston, which served as a foundation and springboard for his breakthrough into the hedge fund world. He cut his hedge fund teeth at Dawson-Herman, where he was given responsibility for a carve-out of a fund. That was his first chance to play with “live ammo,” and he was thrilled with the experience. Later McCullough progressed to manage his own fund at the firm, but before long he realized that rather than breaking his back working for somebody else he should do it for himself. He recounts an episode in which he flew on the same flight as a hedge fund bigwig to a conference in China. While the bigwig ate caviar and drank wine for the entire flight, McCullough devoured reading materials. McCullough came to believe that he wasn’t just as good, but was better than the giants in the field.

So this hockey “mucker” (a mining term given to those who did the dirtiest of jobs and also given to McCullough by his hockey teammates) wanted more of the action and decided to go it alone. He set up his own firm and called it Falconhenge. “Henge,” borrowed from Stonehenge, was supposed to reflect permanence; the fund lasted one quarter. As it turned out, McCullough had been in the sights of Magnetar Capital—a hedge fund from Chicago and, at that time, the fourth biggest hedge fund start-up—and Falconhenge was absorbed into that. He spent a year at Magnetar before moving on to become a portfolio manager for Carlyle-Blue Wave when the private equity firm made its first foray into the world of hedge funds.

McCullough came to Carlyle as a star, but his performance out of the gate was less than stellar. He was openly mocked for his bearish views in 2007. Eventually, he was let go for what he said was for nothing more than losing a few million dollars. He thought he was playing the best game of his life and had foreseen the pending economic crisis while others around him remained bullish. This closed the chapter on his hedge fund career, and he admits that he was glad to be out of the “hedge fund racket.”

After 9/11 McCullough had realized that forecasting a company’s earnings was of little use if he could not see major events down the road. This prompted his interest in doing more macro research, which he religiously did for years by tracking market and economic data in a handwritten journal. Now gone from Carlyle and out of a job, he decided to blog and started his own macro research shop with the objective of countering some of the problems of the hedge fund industry by being more accountable, conflict-free, and transparent.

The book’s title is a bit of a misnomer in that it isn’t a diary in the strictest sense, although it does look at some of McCullough’s daily reports to investors from Research Edge (now known as Hedgeye Risk Management). The book doesn’t give any hard and fast investing tips. Rather, McCullough recommends that we work harder than the next guy, be ahead of the crowd, and always ask the right questions. The book is relatively free of jargon and very accessible. It provides us with valuable insights into the secretive world of hedge funds and is also an inspirational story of a mucker who made it big.

–Brendan O’Connell, CFA