A FAREWELL TO HEDGES

By John Moody

WHEN IT COMES TO LEISURE, Michael Steinhardt speaks a language all his own. In 1978 he was determined to escape the stress of his hedge-fund management job and took a year's sabbatical from Wall Street. However, he used that time to start a real-estate and construction business in Israel. Steinhardt's notion of a vacation, he admits, is "screaming into an antiquated telephone, trying to find out what's going on." Time off hasn't always been fruitful. In 1994, after a rare three-week vacation in China, Steinhardt returned to New York to find that his investment funds had lost 4% of their value while he was gone. He lost his legendary temper, then sat down and did what he has always done: work.

So investors were stunned last week when Steinhardt, 54, announced that he was winding down the four high-performing hedge funds he has guided almost flawlessly for 28 years. Wall Street struggled to imagine what his definition of retirement might be. Not one to disappoint, the financial whiz explained that although he is an atheist, he hopes to infuse American society with secular Jewish values.

That kind of counterintuition has served Steinhardt well over the years. His funds produced an average annual return of 24%, netting him a personal fortune of $400 million and providing his investors, whose assets total $2.6 billion, with huge profits. Unlike mutual funds, which handle investments of varying sizes from an unlimited number of clients, hedge funds are private limited partnerships of no more than 99 investors, usually with a minimum stake of $1 million. As such, they are not subject to the same regulations imposed on mutual funds by the Securities and Exchange Commission. By selling short securities whose prices they expect to fall and taking highly leveraged positions, hedge-fund managers can take bigger risks and, they hope, reap bigger rewards.

Few have performed as consistently as Steinhardt, a jeweler's son from Brooklyn whose first shares of stock were a bar mitzvah present from his father. He broke into Wall Street as a research analyst but, by the age of 26, had started his own firm and kicked off his winning streak. One dollar invested with Steinhardt in 1967, the year he founded his firm, would be worth $462 today. That compares with a $17 value today for a dollar invested the same year in the stocks listed in the Standard & Poor's 500. Richard Cooper, an investor who entrusted $500,000 to Steinhardt 28 years ago, has seen his investment bloom to $100 million. Says Cooper: "Thanks to him, I never had a sleepless night. I knew Steinhardt was always there, standing guard. Every investor loves him."

Well, almost every investor. Last year Steinhardt hit a speed bump, as did most other big hedge funds like George Soros' Quantum Group and Julian Robertson's Tiger Management. Neither however, suffered as badly as Steinhardt's funds, which lost 29% of their value during 1994, owing largely to the plummeting price of European bonds, in which Steinhardt had invested heavily. Says he: "I made a vast amount of money in 1993 on the same bet. Nevertheless, the pain in 1994 was far greater than the pleasure of 1993."

This year Steinhardt is back on form, with returns around 20%. In Steinhardt's lexicon, therefore, now is the time to get out, make sure his investors get their principal and profits and pursue his new dream. He says, "The Jewish generation I'm part of was at the confluence of two great rivers: East European Jewish religious traditions and the openness of secular America. That led to an extraordinary explosion of achievement. Just look at the number of Nobel Prizes, academics, writers, successful businessmen it produced. Not only that, this generation gives more philanthropically than any other group. And it has allowed itself to get kicked in the pants by the very minorities it feels so strongly about helping. But the present generation doesn't have the same commitment to Judaism and Jewish values." Steinhardt's idea is to create a nondenominational school to transmit those values.

Even if his latest endeavor does not pan out, Steinhardt will never be short of interests. He is a major contributor to the Democratic Leadership Council, which seeks a third road for American politics outside established political parties. Once an enthusiastic backer of Bill Clinton, Steinhardt now says, "I have my problems with our President. He doesn't believe in very much. His promise has been a failed promise."

Steinhardt's other pet project is, well, pets. The menagerie at his 54-acre estate north of New York City includes rheas, ostrich-like flightless South American birds; capybaras, the world's largest rodents; and even such mundane creatures as longhorn cattle. Competing for the time he spends with his wife Julie and their three children is Martha, a blue crane that has taken a romantic shine to her owner. Says Steinhardt: "She follows me around the grounds. Sometimes we dance: she jumps up and down, and I flap my arms. We've developed a close relationship." Retirement, in Steinhardt's way of looking at the world, is for the birds--and still a lot of fun.

--With reporting by Sribala Subramanian/New York

With reporting by SRIBALA SUBRAMANIAN/NEW YORK