Fear and Liabilities in Las Vegas

From aiCIO’s June issue: The anatomy of a hedge fund boondoggle, by Kip McDaniel and Leanna Orr.

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An improbable number of Gucci loafers await American Airlines flight 1949, the 7:00 a.m. direct from John F. Kennedy airport to Las Vegas.

“I wonder where you’re going,” the owner of one pair jokingly asks another as they greet pre-flight in the airport lounge.

“You look tanned—were you in Augusta for the tournament?”

“Nope, didn’t make it this year. Got some beach time instead.”

It is Tuesday, May 7, and some variation on this conversation will occur countless times as the hedge fund set swarms towards the Bellagio Resort and Casino, the site of the SkyBridge Alternatives conference—SALT, to those in the know. Started in 2009 and now attended by nearly 2,000 people, SALT is the essential social gathering for the world’s managers of money.

At least, that’s what SALT founder and mastermind Anthony Scaramucci wants you to believe. A hurricane of a man, the diminutive Scaramucci has spent five years cajoling, enticing—and often paying—the likes of Bill Clinton, Sarah Palin, and hedge fund managers from around the world to attend what amounts to The Anthony Scaramucci Show.

But what is SALT? It’s “a big networking event” for “meeting funds-of-funds” and “keeping up on the pulse of the industry.” But it’s also about “the parties, man, the parties,” and is “a shit-show, pure and simple”. Everyone has advice about SALT: “Don’t drink too much,” “don’t commit too early to a party,” “don’t forget your badge—you won’t get in otherwise,” and “attend a few panels, if you can.” Everyone compares SALT to something else: It’s like fishing, or speed dating, or a financial Davos.

SALT is also about rooms—specifically, rooms you can enter, and rooms you can’t. For the proletariat—which is about 95% of attendees—there are rooms for exhibitor booths, for shoeshines, and for intimate assemblies. There are balconies providing fresh-air conclaves, designated business rooms, and sponsored poolside cabanas for more casual encounters. The hallways, littered with over-cushioned couches and lounge chairs, also serve as potential contact points. With so many potential diversions, it’s no surprise that actually entering the main conference room—a palatial space that hosts the majority of the official program—is low on many to-do lists.

But it’s the rooms that most SALT attendees can’t access that most tantalize. When the presenters come on stage, they emerge from an unseen room behind a sky-blue backdrop. At all times, two security guards flank the entrance to the State Street VIP Speakers’ Lounge, as it is officially known. Within its walls, Leon Panetta, the former American defense secretary, mingles with his Israeli counterpoint, Ehud Barak. Al Pacino, if he shows up on time and so desires, has the chance to discuss Glengarry Glen Ross with former French President Nicholas Sarkozy. Director Oliver Stone and hedge fund titan John Paulson can huddle together in a corner—although, considering Wall Street: Money Never Sleeps, it might be a frigid conversation.

To enter the VIP Speakers’ Lounge, attendees must possess both Scaramucci’s blessing and the right credentials. Most possess neither. They are also unlikely to have the good fortune of a chance meeting with one of SALT’s headliners at the bar or shoeshine stand. After the panels, Scaramucci hosts the notables at intensely exclusive dinners—the room within the room within the room. Pacino and Panetta and Paulson, being on the inside, are whisked from the VIP Lounge to whatever restaurant the Master of Ceremonies chooses, bypassing the laboring class altogether. To be a true SALT celebrity is to hardly attend SALT at all.

As a result, a Fear Of Missing Out—FOMO, in business school parlance—permeates the Bellagio. Attendees jump from panel to party to penthouse suite in hopes of being where the action is. Yet at SALT, the action is always within a few feet of Scaramucci—and Scaramucci, as ringmaster and an idea, is a moving target.

Oliver Stone declared as much during his public tête-a-tête with Vanity Fair‘s William Cohen. “If anybody has epitomized the American Dream, it is Anthony—well, and Gatsby, too.”

Unlike Jay Gatsby, Scaramucci's origin story is clear. Ask him about it, and he is more than happy to tell you: Born on Long Island to parents without college degrees, he made his way to Harvard Law School, Goldman Sachs, and eventually to SkyBridge Capital, which he cobbled together with his self-made hedge fund-of-funds and the remnants of Citigroup's hedge fund unit, which he bought in 2010.

With $4.5 billion under management, SkyBridge is a middling player in this industry. But its leader, an ever-smiling self-promoter that looks a decade younger than his 49 years, is anything but anonymous. He is known and admired by his peers largely for one reason: Anthony Scaramucci didn't invent the hedge fund boondoggle, but he may have perfected it.

Drexel Burnham had its Predators' Ball, the famed leveraged-buyout summit in the 1980s that preceded the fall—and imprisonment—of its host, junk-bond king Michael Milken. Blackstone's Stephen Schwarzman had his star-studded 60th birthday party, thrown on Park Avenue in 2007 as world financial markets approached a cliff. Scaramucci has SALT.

He also has Ray Nolte. When Scaramucci made the Citigroup purchase, he was, in effect, buying two things: the group's assets and Nolte. The yin to Scaramucci's yang, Nolte—sandy-blonde hair, light eyes, conservative suit—may not be the salesman that his partner is, but he, like every other SALT affiliate, has the origin story down pat.

"One of our partners, Victor Oviedo, walked into Anthony's office in early 2009 and said, 'Let's put on a conference in Las Vegas,'" he recounted during SALT. "The initial reaction was, 'You want to what?' The president had just come out and basically blasted Wall Street for holding conferences in sunny places like Las Vegas. The country is at the height of the financial crisis and [the perception is] that all the Wall Street evil empire wants to do is throw parties in nice places. So you have all the big institutions running for the hills, canceling their conferences." Banks and financial institutions were under public pressure after accepting bailout funds. Some took million dollar hits on committed contracts after canceling last-minute, according to Nolte, because—in these institutions' thinking—"We're not going to be on the front page of any paper for holding a conference."

Good investors make money on the way up and on the way down. With credit markets grinding to a halt and the stock market plummeting, one hedge fund decided to go long in warm-weather finance conferences. "SkyBridge—being a small, entrepreneurial, forward-looking firm—said, 'You know what, let's go and embrace that. We can fill that void. We will put on a conference,'" Nolte recalled.

And so they did. "About 500 people came to the first one," he said. "I don't think SkyBridge would have gotten 500 people to come if everyone else were still holding their conferences. It went very well. The decision was made to do the second one, and numbers expanded. Number three, four and this year's conference really exploded." SALT's eastern offshoot takes on Singapore for the second time in September, and the Bellagio has already been booked for 2014.

"And by the way," Nolte added, "what I think people missed was that by telling Wall Street they couldn't hold a conference in Las Vegas, it didn't hurt Wall Street. It hurt Main Street. It hurt all the people who work in this building. If you take 1,000 rooms out of occupancy, the people who come and take care of those rooms are unemployed. So SkyBridge's view is, let's go help the city of Las Vegas—which is struggling—and at the same time it will be good for us."

Yet like Gatsby's Long Island revelries, the official story of SALT diverges from the reality.

Despite what those in attendance want to believe, SALT is not the Who's Who of the hedge fund world. The man at the helm of the world's largest hedge fund, Bridgewater's Ray Dalio, was nowhere near the fountains of the Bellagio. The beleaguered Steve Cohen, a speaker the previous year, was ensconced in Connecticut, under fire from an aggressive District Attorney and investor redemptions. Bill Ackman and Carl Icahn didn't take their spat to Vegas for the week. The two hedge-fund headliners of the conference—Paulson & Co.'s John Paulson and Third Point's Daniel Loeb—were both featured speakers, likely there as a favor to Scaramucci. SALT, it is clear, is a conference of those dreaming of billions, not of those yet possessing them.

Also noticeably thin on the ground were the preponderance of end investors that hedge funds are so eager to court. While rich white men were once the overwhelming patrons of the hedge fund industry, they have been overtaken in the past decade by pensions, endowments, and sovereign wealth funds—for however rich Bill Gates and Warren Buffet are, the $255 billion California Public Employees' Retirement System is richer. To the cynics in the audience at SALT, it is also less savvy. 

Indeed, the fundamental reason for SALT's popularity is not entirely clear. For the Wall Street banks who sponsor the conference, a concrete logic exists: Hedge funds need a plethora of service providers, and many a summer home has been built on the fees hedge funds pay to these middlemen. Yet for all but the smallest fund, BNP Paribas or UBS would happily catch the train to Connecticut to meet hedge funds in their offices. So why do these hedge funds make the trek to the desert?

"I'm not entirely sure why I'm here," Daniel, a late-30-something soon-to-be hedge fund manager, said on the Bellagio's pool balcony, the site of the conference's opening-night cocktail party. (His opener: "Can I talk to you? I don't know a single person here.") Besides his relative anonymity, he was the quintessential SALT Man: Tall, firm, and blessed with a strong jaw-line. He wore the SALT uniform of designer jeans, button-down shirt, blazer, and sock-less loafers with buckles—known derisively as Darien Spurs, after the Connecticut locale that many on the balcony call home. His brown hair was closely cut and firmly in place. His Australian accent was one of the few deviations from the norm.

"I grew up in Perth, but I'm based in Europe—so I just popped over to New York, and now I'm here," he said. When small talk of the richest woman in Australia—mining heiress Gina Rinehart—arose, he grinned the grin that every man knows. "Funny you should mention Gina. I just came from New York, where I took her daughter out to dinner on Friday. She just got $300 million from Mommy, so her place is pretty nice. I left on Sunday to come here…and I'm not quite sure why." He was about to start a small hedge fund, he said, and had commitments from investors. Still, because of SALT being billed as a meeting place for, among others, hedge funds and potential investors, he had decided to attend. "I have yet to actually meet any investors," he mused. "Maybe I should have stayed in New York."

On the other end of the spectrum is Paulson. Few hedge fund managers have ever become as famous as the dour New Yorker, based almost exclusively on his prescient bet against the American housing market before its crash six years ago. Yet even giants stumble: Paulson was speaking at SALT, more than a few people suspected, because Scaramucci's fund-of-funds allocates millions to him at a time when Paulson has many nervous investors on his hands following some severe losses.

Not that Paulson wanted anyone beyond the conference walls to hear what he had to say. The press-shy manager's soft-ball interview the next day was off-the-record, as were, invariably, the more interesting speakers the host had flown in to spice up his agenda. Yet the billionaire could still sporadically be seen in the hallways of the Bellagio, draped in a dark suit and tie, shoulders hunched. Early one evening, Paulson was spotted nearing the almost-timely "Cinco de Mayo" poolside celebration that was the night's official soiree, slouching his way onto a balcony that overlooked the revelers. Nearing its edge, he looked down. Empanadas, Flamenco girls, tequila shooters, and Brooks Brothers met his glare. The Kings of Leon's "Sex on Fire" screamed from speakers. Ever so slightly, Paulson shook his head. He then turned around and walked away. 

“Half of the people in this room are assholes.” That room, a bar masquerading as a library in the Cosmopolitan Hotel, hosted a private pre-party for the poolside extravaganza that came later. Paulson wasn’t at this one, either. 

The man quoted had paid dearly to be in that room, to be at SALT. As a service provider, his badge was pricier than any other. The "exclusive" pre-party was also a well-appointed feeding frenzy: Not only did sponsors and service providers jockey for access to the moneymen, but more than a few attendees were not even part of SALT. An investment banker from Los Angeles had flown in to network, later sneaking past security and turning up at the conference's final party. He opened his jacket to reveal the SALT-blue lanyard around his neck with nothing clipped to it except his jacket pocket. A securities lawyer had also been invited, "because other than investors, we're the closest people to these hedge funds." A good word from a trusted attorney on a certain accounting firm or data manager, and you were in.

People left the "library" in pairs and little groups, the successful ones with better company than they arrived with. But between the duck breast tacos of the Cosmopolitan and a fashionably late arrival at the pool party, these Madison Avenue financiers passed through a scrum of low-rent sex trade. "You need a girl tonight?" one shill asked two men in SALT uniform, thrusting at them a card depicting a busty and "Barely Legal!!!" young lady and a phone number. Canadian taxpayers may rest easy: A representative from one of their nation's public pension funds had no interest in "investing" with any of the women on offer.

That's not to say men at SALT—and it's mostly men—aren't interested in the opposite sex. When a young and/or attractive woman would rise during a panel and walk the aisle to a better meeting, undisguised gazes followed her from seat to door, head to toe. Female attendees skewed tall (aided by four-inch heels), slim, expensively dressed, and impeccably groomed; during the day, a row of couches on the patio drew SALT women like animals to a watering hole, eager to take a load off their Louboutins. The hostesses of sponsors' poolside cabanas seem to have been selected as much for their physical endowments as industry expertise. It is, by all accounts, a man's paradise—so much so that one young, single, female hedge fund manager offered a unique complaint: "Meeting men here is difficult," she said, "because it's hard to know who is actually single—and who just has their wedding ring in their pocket." Unlike Davos, SALT is not a bring-your-spouse affair.

At the pool party, minimally dressed cocktail waitresses waited patiently as middle-aged men fumbled through their opening lines ("I manage a hedge fund," being the default introduction). Dancers worked poolside platforms and circulated among the crowd, their crimson plumage and yellow sequins in high contrast to the clustered gray blazers and oft-gray heads. Men smoked cigars and indulged both in the tequila shots and the sight of the women offering them. Partiers lingered longer than might be expected for a group who'd spent much of the night discussing "what's going on next". Banks and other service providers took out groups of clients, and SALT sprinkled out over Las Vegas. Few returned to their rooms for bed. "We went everywhere," one family office manager said, smiling as he recounted the night prior. "Hyde, the Wynn, the Cosmopolitan—everywhere. Just jumped from club to club. I think I got home at about 5:30 a.m." Las Vegas offers endless venues for debauchery, and SALT attendees have the money and attire to unclip any velvet rope.

These men and women have the cojones to ride out a down market with their kids' college funds, but as night fell in Las Vegas, SALT was all speculators and hedged commitments. Scaramucci hosted his private dinners, and sponsors invited clients to their private suites and events. Nobody wanted to reveal if they had a less-than-packed dance card. Everyone was open to a better offer.  

"Tonight? Everyone spreads out and goes to the clubs. The hottest tonight is Surrender," said Evan Rapoport—conference veteran, CNBC mainstay, and founder of the hedge fund research and service firm HedgeCo—over lunch with potential clients. He did SALT better than most. "I don't stay at the Bellagio any more—the rooms are too far away from the conference. At the hotel just behind us, you're closer and can get a whole suite for the price of a room here." If he had firm plans for the evening, he wasn't tipping his hand.

Rapoport was correct about Surrender, the enormous outdoor pool club at the Wynn. It was a perfect set-up for SALT attendees: opulent, and all the action happened in the private bungalows and cabanas that ring the swimming pool. Depending on the DJ in attendance, each of these white-tiled playpens ran about $3,000 for the night. On that night at SALT, none went unused. 


The politics of a SALT Man are not simple. By definition or aspiration, this is the 1%. Yet the hedge fund industry is not solely the domain of default Republicanism, despite what those outside the Bellagio walls might assume. The political leanings of this group are much more nuanced, expedient, and malleable. Take, for example, Anthony Scaramucci.

His history of campaign contribution maps a common political progression. Until 2008, he donated relatively little. His money tended to flow towards Democrats, but the true targets seemed to be local politicians (Senators Joe Lieberman of Connecticut and Chuck Schumer of New York) and balance (he gave to the Bush/Cheney ticket in 2004). Between 2000 and 2006 he gave a significant, but not astounding, total of $34,000 to political campaigns, according to public records.

That changed in 2008. With Barack Obama—a classmate from Harvard Law School—on the ticket and the economy collapsing, Scaramucci upped his involvement. He also took sides. With just two donations—$28,500 each for Obama and the Democratic National Committee—he surpassed his previous eight years of donations. He was now, by any measure, an enthusiastic supporter of Democrats in Washington.

This would not last. By 2010, his largesse began to turn. While Senate Majority Leader Harry Reid of Nevada and Schumer were still included, Senator Scott Brown of Massachusetts and other rising Republican stars were the major beneficiaries of Scaramucci's wallet. By 2012, the turn was complete: Nearly $75,000 flowed towards Republican political action committees, Brown, and Presidential Candidate Mitt Romney. Additionally, Scaramucci was named one of eight national finance committee co-chairs for Romney, a role typically reserved for those who can attract large campaign contributions from wealthy acquaintances.

Scaramucci's rapid embrace and rejection of Obama is superficially unsurprising. In 2008, the world economy was collapsing and many prominent financiers backed Democrats. By 2010, however, these financiers largely felt that an ungrateful Obama had used them as a political foil instead of relying on them for guidance. A televised exchange between Scaramucci and President Obama in September 2010—two years after Lehman Brothers fell and the Dow Jones Industrial Average started sliding towards its March 2009 nadir—explains the hedge funder's pivot.

"This is something a lot of my friends are thinking," Scaramucci said, addressing the president at a CNBC forum. "I represent the Wall Street community. We have felt like a piñata. Maybe you don't feel like you're whacking us with a stick, but we certainly feel like we've been whacked with a stick… When are we going to stop whacking at the Wall Street piñata?"

Obama's response was pointed. "I have been amused over the past couple of years [by] the sense of me beating up on Wall Street. I think most folks on Main Street feel that they got beat up on," he said to applause. "I hear folks who say that somehow we're too tough on Wall Street, but after a huge crisis the top 25 hedge fund managers took home a billion dollars in income that year." He then added, incredulous: "A billion, that's the average for the top 25."

Yet politicians and financial regulators have focused recent reform efforts not on Scaramucci's set, but on large banks and their proprietary trading desks. The much-maligned Volcker Rule, which decreed that the two must part ways, is the most prominent example. Hedge funds largely have been left alone. SALT panelists noticed. "The regulatory environment creates fewer competitors and more opportunities. It's been great," one hedge funder noted on an opening day investment strategy panel. "If you look at the prop desks, they used to be one of our biggest competitors. Now, with the Volcker Rule, they're pretty much gone." Another added: "Prop desks are an abundant resource for recruiting—there's a lot of talent there."

And while the president's opponents will argue causality, America's anti-austerity fiscal and monetary policies have coincided with a financial-market recovery of historic proportions—a tailwind that helped all but the most bearish of SALT attendees. Despite national unemployment remaining stubbornly high and economic growth indolent, stock markets are booming. Piñata or not, any "whacking" taken by hedge funds has been largely rhetorical, not financial, in nature.

This tension was apparent throughout SALT, but never more so than on the third day of the conference. On the morning of May 9, Third Point's Dan Loeb—a man worth $1.5 billion who in 2010 claimed that President Obama was intent on "redistribution rather than growth"—joined Anthony Scaramucci onstage for an intimate discussion. As their conversation wrapped up, at 11:00 a.m. Pacific Time, the Dow Jones Industrial Average crested to a new all-time high of 15,135.

So why do some people not attend SALT?

Larry Schloss could give Scaramucci a run for his money as SALT's Most Popular Person—if Schloss had come to the conference. As the man in charge of investing New York City's $140 billion pool of pension money, he doesn't have to go to managers. They come to him.

"I have the luxury of not having to travel," Schloss judiciously noted in late May when asked why he didn't attend. "There are a lot of great conferences in New York, and managers are happy to come by and share with us what they're doing." 

Since mid-2011, Schloss has allocated more than $2 billion to hedge funds. These lucky firms pocket 1.5% to 2% of that—$30 to $40 million—simply as an annual management fee. But big investors expect market-beating performance, and that is how hedge fund managers can get very rich. If one manager could turn New York City's $2 billion into $3 billion over a year, he would take home an extra $180 million. Schloss would smile as he signed that bonus check, because the manager would have earned New York's retired teachers and police officers a much bigger one.

A potential problem, however, lies with the chance that the initial $2 billion could shrink to something smaller. Hedge funds usually take 20% of any gains; they invariably take 0% of any losses. Because they also collect a management fee, they rarely lose money. They thus have an incentive to gamble. It's the equivalent of a SALT attendee striding up to a Bellagio roulette table knowing that whatever happened, the casino pays. He may only make a small amount, but he will never owe the house money. So why not shoot for the moon and bet everything on red?

But this isn't actually why Schloss didn't attend SALT. For a certain set of hedge fund managers, the vast majority of their personal fortune is invested in their funds. With these elite managers, the alignment of interest is better—as good as it gets in asset management, Schloss believes. "My definition of alignment is: 'How much money can the manager lose when I lose?'" he said. Elite managers will have the bulk of their wealth—hundreds of millions or billions—invested alongside New York City's blue-collar set. Schloss wants to know these managers. "We want to meet good managers and build strong relationships. They are important to what we do," he said. But these managers rarely fly to Las Vegas for a conference.

"Looking back, over time the market develops bubbles," Schloss added. "Some of these bubbles you can pick out by where the conferences are held and how extravagant they are. These are not good signs. People don't like to be associated with those, because it suggests you have lost your bearings and lost touch with reality. Unlike conferences, extravagant boondoggles can be an indication of the go-go days."

The air had come out of SALT's tires by Friday morning, the final day of the conference. Scaramucci still roamed the hallways—"Thanks for coming, I really appreciate it, see ya next year"-but even his pressed suit and slicked hair failed to mask his fatigue. Ehud Barak could be seen departing the Bellagio, flanked by a pair of bodyguards. Wrinkled men limped toward McCarran International Airport, hoping to find sleep in the claustrophobic arms of whatever carrier was shuttling them home.

Back in the main conference room, seats had been rearranged to give a sense of consistency with previous days—but nobody would deny that the audience for "Call of Duty: Military Challenges at Home and Abroad" was a small fraction of Nicholas Sarkozy's the night before.

Perhaps it was a coincidence that SALT's most open critic of Wall Street excess was the last speaker on the agenda. Perhaps this friend of Scaramucci and creator of Gordon Gekko had been saved—best for last. The host himself introduced Oliver Stone, who looked loose and authentic to Scaramucci's labored polish.

A clearing-house quality prevailed on the final half-day: sponsors to be given airtime, crowded panels shouting pitches to resigned attendees. Introducing the Wall Street director gave Scaramucci a pretext to plug his book. Stone dutifully played along. "I have had the pleasure of knowing Anthony for quite some time," Stone said, "and I know what he means by the title of his book, Goodbye Mr. G… Mr."—The moderator intercepted: "Goodbye Gordon Gekko." Stone had a rhetorical reason for coming to SALT, but it wasn't to sell Scaramucci's book.

"This obsession with money is very dangerous for the soul of the country," Stone said. The 1980s depicted in Wall Street "were all about individual selfishness and hustling, hustling." Audiences didn't catch Stone's satire in the first film, he has said. Gekko—who famously proclaimed: "Greed is good."—became a hero to legions of aspiring financiers. Stone revisited the franchise in 2010, when he felt the era had ended for good. "I wouldn't have done the picture without the meltdown," he said at the time of release. "There was a sense of karma and ending and definition to this horrible excess and greed we went through."

Three years later—to a hungover audience striving to be, if not Gekko, then Icahn or Dalio—Stone had changed his mind. It wasn't over. And while he previously criticized via satire, he has since changed his tack: Stone and a partner have spent four years and at least $1 million of the director's money producing a 15-hour documentary to discredit American exceptionalism, economic domination, and excess.

"We are a society at risk, and we don't know how to fix it," Stone told SALT, pointing out the nation's deepening divide between rich and poor, Occupy Wall Street, and the financial crisis itself. "This is the Roman Empire. Think about the French Revolution."

Many in the audience rested their elbows on the tables with faces in hands. One man slept in his chair, head tipped back, mouth agape.