Hedge Funds that Started During a Recession

Why right now is the best time to start your fund… and what we can learn from Paul Jones & Leon Black…


Right now, a lot of people are worried. A lot of companies are stressed about making payroll or meeting loan obligations. It’s really easy to watch today’s news in the ‘here and now’ and have a dismal outlook… but I think we can look bigger.

In my mastermind group, we have mentors and people that come in and talk to our group. I like to ask people why they are waiting to invest. They usually say something like,

I’m just looking for a market correction. I need some kind of dip so I can find better alpha and increase my chances of success.

NEWS UPDATE!!! …. We’re in one!

Right now, is arguably one of the best times in the past ten years to start a fund or start investing into them. Let me tell you why…

First, let’s learn a little bit from our history, shall we? Below I’ve listed a few companies that launched during recessions and what their outcomes were:

  • General Electric started back in 1893 by Thomas Edison- out of an economic crash.
  • General Motors was founded in 1908– started during the pandemic of 1907. They just posted revenues of $137 billion in 2019… not too bad.
  • Remember all of the bank rushes in the early 1900’s? Like the one in, “It’s a wonderful life”? Yeah, so IBM started in 1911– while the banking industry saw double-digit declines.
  • Microsoft launched in 1978 during an oil crisis and a stock market crash that led to a 16 month recession.
  • Remember the ‘.com bubble’? Do you know what product apple launched in 2002? The iPod. Which led to the iPhone… which, by the way generated $218 billion in revenue for 2018. In case you forgot? That’s $218,000,000,000.00.

You get the point!? There is obviously plenty of opportunity to be had in the markets, especially down markets. I’ve been getting a lot of deals coming across my desk lately where I’m thinking… this is just too good to be true.

I was talking to my dad earlier today, co-founder of a $20 billion family of funds. He said the same thing has been happening in their board meetings…

“Can this deal really be that good?”

We like to tell ourselves that- ‘if it’s too good to be true, it’s probably not.’ Well, sometimes you really can buy a dollar for a nickle. Why? Because desperate people or companies would rather have a nickle then nothing at all!

If you can control an asset and look at the long term play, not just the next two month or six month, but four, five or six years out… There’s a lot of potential.

When investors are scared, when companies are scared or over leveraged it creates a lot of opportunity for people like us.

Two different people that I’ve learned a lot from lately Paul Tudor Jones and Leon Black:

Paul Tudor Jones

Billionaire hedge fund manager Paul Tudor Jones joins giving pledge
Paul Tudor Jones | Billionaire Hedge Fund Manager

I want to tell you about a guy named Paul Tudor Jones. He has an incredible story. I’m not going to tell you his full biography… but you should read about it sometime.

He started out in 1976. He was interested in trading and he had a cousin that was working on wall street and Paul says,

“Hey cousin, can you get me into a trading brokerage and teach me this world of finance & trading.”

His cousin brings him on and they start trading together. Four years later, Paul says, screw the system – I’m going to start my own firm.

He goes out and launches his company called Tudor Investment Corporation with a grand total of $30,000. In today’s money that’s about $94,000.

They slowly grew and made conservative investments until they saw huge opportunity. In 1987, they mapped the {then} current economic conditions against the 1929 market conditions. And they said, it looks exactly the same. This must be a bubble.

In case you forgot, the 1929 market was right before the crash that led to great depression. They went all in and put a huge short on the market- pretty much levered their entire fund against the market.

They predicted Black Monday right on dot and almost tripled their money. He posted a 125% return that year to his investors increasing the fund size to one hundred million dollars.

Yep – you read that right… He had turned that original $30,000 into over one hundred million dollars in less than seven years because he took advantage of a market correction.

Now, a lot of people would say,

“Well, Paul was just lucky, right? Every blind squirrel can still find an acorn… so how do we know if it was luck or skill?”

It’s not so lucky if you do it twice. So Paul, only three years later in 1990, sees a huge bubble in the Japanese markets and he goes in shorts the entire Japanese market. And sure enough, that year he posted an 87% return on his entire portfolio.

That is no luck. Paul marks history as one of the greatest investors of all time starting with only $30,000. He is currently worth about $5.5 billion dollars.

He does a lot of philanthropic work is one of the investors behind Robinhood. He wants to teach young people about investing and to get in the markets when you are young, which is why he’s promoting Robinhood.

Apollo | Leon Black

Private Equity Billionaire Leon Black Sends Letter To Employees ...
Leon Black | Private Equity Billionaire

Now, another exemplar. Apollo is the second largest private equity fund in the world, right under Blackstone. They have ~$350 billion in AUM. They own companies like Disney,Caesar’s palace, Cox media, ADT and even Vail skiers.

It’s just crazy- The amount of companies that they actually are behind. Apollo was started by Leon Black in 1990. Similar time to when Paul Tudor Jones shorted the Japanese Market.

Leon came to the U.S. from Poland after his dad committed suicide, just looking for a new start. He gets into investment banking and works for Michael Milken, “The Junk Bond King”.

Michael is known for basically inventing the Junk Bond. Unfortunately, he wasn’t always SEC compliant- so much so, that the SEC put a lifetime ban on him and put in prison back in 2013 or 2014. Update however: like two months ago, he was pardoned by President Trump.

But I digress…there’s a little history lesson on the modern financiers.

Back to Leon Black- he watched and learned from Michael for several years and decided he could do it himself. He takes a few guys with him from the firm and they start Apollo.

They start buying distressed companies. They would come into companies that are cash deficient or struggling with one thing or another, and offer them cash and a chance to whether the storm.

He started taking large majority stakes in solid companies. Companies that were just hurting in the short term- and helped them navigate through. If you look at the markets right now… you have a lot of companies in that same boat.

There’s a lot of really good companies that have great supply chains and doing very well, but are just struggling because Covid-19 has shut down everything.

Most small or lean companies don’t have enough cash on hand to survive two months or more with minimal revenues. When they don’t have the revenue coming in they need someone to come in and save their business.

They will give you a 5%, 10%, or even 20% discount on their equity or stock. Pretty cool, Right?

That’s what Apollo did. They raised $1.5 billion dollars in five years. Started in a down market and just worked their way up.

There’s a saying, that I like:

“Everyone is an expert in a bull market.”

It doesn’t matter how smart you are. If it’s an up-market, which we will soon be approaching, you should generally do well. Warren buffet says, when a market crash comes, you see who’s wearing underpants and who’s not.

You see companies like cheesecake factory, totally exposed- forced to lay off 40,000 employees after being out of business for two weeks. Like, are you kidding me? Companies have just been running way over leveraged lately.

And that gives people like us- a huge opportunity to step in and find incredible deals.

Conclusion

There are a number of successful companies and funds that have started in a downmarket. It is arguably one of the best times to start a business because you have a longer runway before another market correction.

It may seem daunting to try and start your own fund or company, but it has worked out great for both myself and my dad and I encourage you to do the same!

So, what do you think? Is a recession the best time to start a company or fund? Why or why not?


Leave a Reply