In the Fall of 1998, as a senior in high school, Tim Sykes took $12,415 in Bar Mitzvah gift money and began investing in the stock market.
One year later, as a freshman at Tufts University, his portfolio had grown to more than $120,000 — a one thousand percent increase — making him a campus celebrity and launching his reputation as a young and incredibly gifted stock trader.
By late 2006, however, Sykes was running his own hedge fund, and finding himself in over his head. His earlier success seemed a distant memory, leaving him near rock bottom — and with a lot of people asking pointed questions about his qualifications to run his own hedge fund.
In his new memoir An American Hedge Fund: How I Made $2 Million as a Stock Operator and Created a Hedge Fund, Sykes chronicles this arc and how it came to pass.
He begins by examining his first experiences in the speculative stock market environment developing in the Fall of 1998:
I was about to discover I was in the perfect place with the perfect naivete at the perfect time in stock market history. The Dow and the NASDAQ were coming off large drops in the summertime and the stage was set for a rebound and maybe more. Internet and technology plays were the hottest sectors and drove the market rebound in the winter on its way to a year long record shattering stratospheric breakout. The stage was set for me to shine (34-5).
An American Hedge Fund by Timothy Sykes
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By the end of 1999, after his first semester at Tufts (he would later transfer to Tulane), Sykes had grown his account to well over a hundred thousand dollars. He describes his strategy at the time:
The particular companies I played didn’t even matter because I played all sorts of companies; all that mattered were their stock charts. I bought the stocks of companies with solid chart bases when their trading volume spiked along with their stock prices (71).
A month into 2000, he had more than doubled his account — making him a college freshman with a net worth of a quarter million dollars.
You can imagine the reaction of his classmates:
My popularity on campus was at an all-time high because many students had heard my story and had begun spending their days in my dorm room watching me trade. I’d put on little shows for my disciples.... Frequently, there were nearly a dozen college students staring at me in awe while they watched me make $10,000–$30,000 in one sitting. We all shared a good laugh when we discussed how little money they earned from their low paying summer jobs (75).
After a $123,000 gain on a trade in Illinois Superconductor, Sykes rounded up the entire dorm and took them out for a fancy dinner in downtown Boston. The bill wasn’t too bad at $800 since, “after all, other than one flask that somebody had snuck in, there was no alcohol involved, since we were all freshman” (91).
During his senior year at Tulane (2002–03) Sykes decided to start up a hedge fund focused on shorting microcap stocks. He called it The Cilantro Fund “since the spice was known for being somewhat atypical, similar to my niche trading strategy” (140).
Timothy Sykes (view Atlasphere profile)
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The decision that initially brought him his first real clients and ultimately proved to be his undoing was an investment in a company at which the father of a close friend was the Chief Financial Officer: Cygnus Entertainment, a company providing software for online ticketing.
In early 2004, Sykes agreed to lend Cygnus $25,000 at an attractive rate of interest.
In July, Cygnus gave its early investors a chance to invest before going public. Sykes decided to invest another $120,000, 10% of his fund, into restricted shares.
In April 2005, Cygnus executed a reverse merger and debuted as a public company on the pink sheets with the ticker CYGT. The stock opened at 50 cents and surged all the way up to $1.20 a share at the close — representing more than $300,000 in paper profits for Sykes and his Cilantro Fund!
Cygnus stayed strong in the following months and Sykes’s fund posted strong numbers. On that basis, he was able to attract new clients. On the day Cygnus hit its all-time closing high of $1.58, in September 2005, a check from a new client put The Cilantro Fund over $3 million in assets. “The future never looked brighter,” Sykes wrote.
But Cygnus still wasn’t profitable and Sykes agreed to loan them another $250,000 due to be repaid December 31st.
As December 31st approached, Sykes couldn’t get ahold of anyone at Cygnus.
Eventually he spoke with the CEO, who said that everything was fine but they needed another month to pay back the loan.
Cygnus’s stock started to fall, hitting 75 cents in February 2006. Cygnus asked for, and Sykes obliged with, another $75,000 investment.
In late March, Sykes invested another $100,000, bringing his stake in Cygnus to one-third of his hedge fund’s total assets.
Cygnus’s stock price continued to fall, to the 40 cent range in June and then 30 cents in July.
The Cilantro Fund was going right down the tube with it.
Ironically, in August 2006, Sykes was named to Trader Monthly’s “30 Best Under 30” list.
This led to an appearance on CNBC and Sykes became a pseudo-celebrity. He starred in a reality show called Wall Street Warriors and gossip blogs started writing about him.
Things weren’t as rosy as they might have seemed, however:
Little did they know that I still worked in a bathrobe from my apartment, my strategies worked much better when I was more comfortable taking large risks during the mania days, my target niche wasn’t very scalable, my one major investment had just about failed, and nobody was interested in investing anything substantial anytime soon (231).
Cygnus continued to fall throughout 2006, finishing the year around 15 cents a share.
His negative returns scared off new investors — and most of his existing clients pulled their money.
The Cilantro Fund finished 2006 down 26%, with assets barely above $1 million.
Sykes’s hedge fund was finished.
An American Hedge Fund is a great story and an easy read — but it is also a cautionary tale of young success. Those who achieve success and fame at a young age sometimes fail, it seems, to realize the role good fortune played in their ascent. They become overconfident and their fall can be even faster than their meteoric rise.
As I write this, Tim Sykes’s reputation on Wall Street is in shambles. Commentators on investment web sites frequently poke fun at his failures and attribute his early success to luck.
In my opinion, this is taking things too far. Sykes made mistakes with his fund, but his early success was mostly the product of exceptional intelligence and maniacal devotion.
In an attempt to answer his critics and redeem himself, Sykes recently announced the “TIM project” — in which he vows to start over with $12,415 and once again turn it into millions.
Critics who write him off and say that he’s finished are premature. Sykes is still just 26 years old. They could be right; but this memoir documents only the first chapter. The second is still to be written.
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