Julian Robertson on CNBC

Julian Robertson is a hedge fund legend. Over 20 years, his Tiger Management Fund returns 25% on average each year. Now he presides over a $9 billion family of Tiger Cubs with returns of 20% so far in 2006. I sat down with him last night and I asked him how the markets look right now.

I would describe myself as extremely cautious on the market. I think there are so many things overhanging our economy which could come to break and to really put us into a bad situation for a long time that I'm extremely cautious at the present time.

You talk about things that could put us into a bad spot for a long time, like what?

Well, I think housing has already begun to deteriorate. And if, for instance, we had higher interest rates along with a continued oversupply of housing, that would exacerbate the problem here.

So if you were to invest money right now, what would you do? Where would you put it?

Well, I think I would definitely look towards areas where there is tremendous growth, and that would be the emerging markets, particularly in Asia. And the problem about that is that they are not undiscovered, but they should have growth for a while anyway.

Would you go into hedge funds now?

If you were in your thirties or forties, oh, sure. I mean, I think, uh, and, and I think as an investor, I would go in the hedge fund. And, and there are several reasons for that. One, generally speaking, the hedge fund manager has all of his net worth put in the hedge fund, so you know that the man working for you is working for himself, too. And the risks he's taking, he's taking for himself, too. And I think that is a good discipline to have on your manager. So I'm a big believer in the hedge fund. We will continue to have three or four of the hedge funds go bad every year. And people should not be shocked over that. I mean, there are thousands of them. But the hedge fund is a great way to manage money, the best.

Were you worried there's a bubble?

And when we started, I would be willing to bet that you couldn't find a billion dollars in hedge funds. Now I think there's a trillion dollars in hedge funds. So there has been great growth. But basically, what hedge funds run is a mere trickle in the overall investment pie. I think that it is not a bubble. And certain of the hedge funds will prove to be bubbles, but overall it is not a bubble.

No Long-Term Capital Management, just a bunch of Amaranths?

Well, I think the whole industry survived Long-Term Capital, and I think, anyway, Long-Term Capital was an unusual circumstance. In my opinion, not totally the fault of Long-Term Capital. They were so good that a lot of people followed them, and it was their followers who—they were responsible ultimately, but they're good folks. I'm actually invested with them now.

How is the way you're dealing in the hedge fund industry now different than the way many others are?

Well, I think let's look at the similarities first. The similarity to this and Tiger was we're getting great young people. I think just the best young people to run these hedge funds. We do seed them. We've got about 25 or 26 of these hedge funds now. And in return, these young people are doing a superb job for us. I was just looking at the figures. On the total approximately $9 or $10 billion, which is managed here, the total amount of money is being run now this year, the equity money, at just under a 20% return net, which is an awfully good performance this year. And I think these hedge funds have done well, and they're doing far better than I thought that they would.

So you heard it from Julian, cautious on the market, but there is no hedge fund bubble. Find out what he thinks of hedge fund regulation and how he's spending his money now. Keep it here. That's next on Street Signs. Well, here's how the hedge fund game works. Most managers get 2% of assets under management plus 20% of total returns. It is a hefty fee, especially when so many hedge funds aren't even outperforming plain old mutual funds. I asked Julian Robertson if that fee structure can last.

I think the fee structure will be determined by competition. But I think it's really the net return, the after-fee return that must be considered. As long as our people can return to people the kind of returns they have been doing, I would doubt if they'd be interested in accepting a fee cut.

So your guys don't take a fee cut, but industry-wide, likely a fee cut?

I think there may be some industry-wide.

Speaking of fees, fund of funds. Talk about fees, fees on top of fees on top of fees on top of fees. Fund of funds, do they make any sense at all? Do they provide value?

Well, they give diversification, and the fees are high. I think a well-run fund of funds provides the diversification. You say, well, a hedge fund gives you diversification. Why do you need further diversification? Well, you need mental diversification. You need diversification so that you aren't caught in an Amaranth situation.

Regulation of hedge funds. Do you support it for your $9 billion?

Yes, and I think that more regulation will be forthcoming, and I think hedge funds will live with that. I think it'll all work out fine.

So when you say regulation, you mean registration, more transparency of returns? Is there any specific place where you would draw a line?

No, unless it's going to be too onerous, otherwise the hedge funds would move off to somewhere else. There's a lot of people ready to greet them in practically any city in the world. I think if you look at the hedge funds here, they haven't been exactly terrible citizens of the city of New York. Look what Robin Hood is doing with the underprivileged people in New York; it's pretty fabulous. And I think that is a generality that is true of most hedge funds and is often forgotten.

Your foundation, the Robertson Foundation, is nearly $750 million. It's a rarefied club of people on the planet who are giving away that much money. I know you've put a lot of that into education as well. Is climate change going to become your number one cause?

Well, climate change is a huge cause for us now, particularly from somebody who really wasn't an environmentalist until I really started the foundation. And then when you look at the world and where you want to invest your money, you realize that maybe next to something spiritual or something of that nature, if we don't do something about climate change, we'll have no world. And so we really do have to consider that as a very strong basis of investment. And we have done that. We worked with the Ad Council and the Environmental Defense Fund on a series of ads.

Do you feel that this dedication to climate change has put you at odds with the Bush administration or with being a Republican more broadly?

I think that the Republicans who originally were the original environmentalists have dropped the ball terribly on this. And frankly, they have lost a lot of support because of their attitude on the environment. And I think it's something they will definitely have to rectify.

One other thing to ask you, just since we had mentioned Bill Gates and Warren Buffett, one thing that they share is they support keeping the estate tax. How do you feel about that?

I completely agree with them. I think it's one of the best taxes that we have. And I think it'll be better for the Gates children, and it'll be better for my kids, and it'll be better for Warren's kids, and it'll be better for everybody's kids. These big inheritances have not in the past brought happiness to many of the people who received them.

Well, in addition to philanthropy, Robertson is also spending some of his money on his other passions, golf and New Zealand. We're going to show you a snap. That's Julian playing on a course he built in New Zealand. One of his courses there, Cape Kidnappers, is ranked number 27 in the world. Julian also told me his top stock picks. Jim Cramer is going to be along to weigh in on those later today on Street Signs. But up next, did BP choose saving money over saving lives? New information about last year's deadly refinery explosion in Texas. And then our John Harwood looks at a race that is so hot, the president is doing two events there today. Street Signs back with all that in a moment.