Customer Reviews

More Money Than God: Hedge Funds and the Making of a New Elite

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Sebastian Mallaby, a former correspondent for The Economist magazine, is clear on where he stands on the issue of hedge funds regulation. He is against it. With the possible exception of a few systemically significant funds, he thinks regulation would bring more harm than good, and that there are more pressing concerns for fixing the global financial system. Not that hedge funds are a sideshow. Mind you, they manage close to two trillion dollars, and their management style and compensation practices tend to define the zeitgeist on the trading floors of financial institutions. Hedge funds are cool: as Mallaby shows, they are definitely the place to be for smart people bent on making serious money, or for those with the ambition to rewrite the rules of financial theory.

Hedge funds are defined by four characteristics: they stay under the radar screen of regulatory authorities; they charge a performance fee; they are partially isolated from general market swings; and they use leverage to take short and long positions on markets. Most importantly, in a financial system riddled with conflicts of interests and skewed incentives, hedge funds get their incentives right. As a result, according to Mallaby, they do not wage any systemic threat to the financial system, and they may even provide part of the solution to our post-crisis predicament.

The first set of well-aligned incentives deals with the issue of ownership. Hedge fund managers mostly have their own money in their funds, so they are speculating with capital that is at least partly their own--a powerful incentive to avoid losses. By contrast, bank traders generally face fewer such restraints: they are simply risking other people's money.

Partly as a consequence, the typical hedge fund is far more cautious in its use of leverage than the typical bank. The average hedge fund borrows only one or two times its investors' capital, and even those that are considered highly leveraged borrow less than ten times. Meanwhile, investment banks such as Goldman Sachs or Lehman Brothers were leveraged thirty to one before the crisis, and commercial banks like Citi were even higher by some measures. As Mallaby notes, hedge funds are paranoid outfits, constantly in fear that margin calls from brokers or redemptions from clients could put them out of business. They live and die by their investment returns, so they focus on them obsessively.

The second set of incentives deals with how hedge funds operate. They are usually better managed than investment banks. Their management culture tends to encourage team spirit and collaborative work as much as individual performance. Alfred Winslow Jones, the originator of the first hedge fund and the "big daddy" of the whole industry, invented a set of management tools and compensation practices to get the most from his brokers and managers. These innovations quickly paid off: whereas investors usually waited for company filings to arrive in a bundle from the post office, Jones' employees were stationing at the SEC's offices to read the statements the moment they came out. At a time when trading was considered a dull, back-office task, not something that a brilliant analyst would get involved with, Michael Steinhardt, another pioneer of the industry, would sit on his own trading desk and initiate the trading of large blocks of stocks with the seniority to risk millions on his personal authority.

Other funds introduced a more scholarly approach to management. At the Commodities Corporation, which combined econometric modeling and chart reading, anyone who blew half of his initial capital had to sell all his positions and take a month off. He was required to write a memo to the management explaining his miscalculations. At LTCM, John Meriwether recruited young PhDs and encourage them to stay in touch with cutting-edge research; they would visit finance faculties and go out on the academic conference circuit. At Renaissance Technologies, the holding company of the flagship fund Medallion, Jim Simons gathered a team of mathematicians, astronomers, code breakers and computer translation experts that were so well ahead of the curve that they gave up reading academic finance journals altogether. Their office spaces bore signs claiming that "the best research never gets published" and papers explaining "why most published research findings are wrong".

Hedge funds have a powerful incentive to improve upon existing knowledge, and market practitioners have often been ahead of academic theorists. They poked holes in the efficient-market theory long before the hypothesis came into disrepute among researchers. As Mallaby notes, innovation is often ascribed to big theories fomented in universities and research parks. But the truth is that innovation frequently depends less on grand academic breakthroughs than on humble trial and error--on a willingness to go with what works, and never mind the theory that may underlie it. A.W. Jones, the founder of the industry, had anticipated the rules of portfolio selection before Harry Markowitz formalized them in 1952. By the time William Sharpe proposed a simple rule for calculating the correlation between each stock and the market index in 1963, Jones had been implementing his advice for more than a decade.

The most important set of incentives is that hedge funds are not too big to fail, and therefore they do not cast systemic risk over the stability of the whole market. The great majority of hedge funds are too small to threaten the broader financial system. They are safe to fail, even if they are not fail-safe. There is no precedent that says that the government stands behind them. Even when LTCM collapsed in 1998, the Fed oversaw its burial but provided no taxpayer money to cover its losses. By contrast, the recent financial crisis has compounded the moral hazard at the heart of finance: Banks that have been rescued can be expected to be rescued all over again the next time they blow up; because of that expectation, they have weak incentives to avoid excessive risks, making blowup all too likely.

According to Mallaby, some of the perverse incentives that banks face come from regulation. Rather than running their books in a way that rigorous analysis suggests will be safe, banks sometimes run their books in a way that the capital requirements deem to be safe, even when it isn't. By contrast, hedge funds are in the habit of making their own risk decisions, undistracted by regulations and the false security provided by credit ratings. As a result, the hedge fund sector as a whole survived the subprime crisis extraordinarily well. By and large, it avoided buying toxic mortgage securities and often made money by shorting them.

As Mallaby shows, hedge funds are a diverse lot. Following the fall of Askin Capital Management in 1994, George Soros declared to a Congress hearing that "there is as little in common between my type of hedge funds and the hedge fund that was recently liquidated as between the hedgehog and the people who cut the hedges in the summer." Nowadays hedge funds operate in merger arbitrage, long/short equity investing, credit arbitrage, statistical arbitrage, subprime assets, and all the other segments of market investment. And yet hedge funds have been equally vilified, mostly by people, institutions, and countries that stand at the other end of their investment strategies. Conversely, as Mallaby notes, "the countries that like hedge funds the best are also the ones that host them." One may also conjecture that countries that use hedge funds for their sovereign wealth investments will also develop a liking for them, as did universities endowments and other institutional investors looking for higher returns.

I read this book after a series of popular essays on financial markets and the recent subprime crisis. I have no direct knowledge of the hedge fund or banking sector, and no practical experience of portfolio management. The names and faces of the people presented in the picture portfolio were all unfamiliar to me, with the possible exception of George Soros. More Money Than God therefore provided a useful introduction to a set of financial institutions that often appear collectively in the news, but that are not commonly analyzed as distinct managing entities or put in a historical perspective. Sebastian Mallaby revisits key episodes of recent financial history, from the Black Monday market crash of October 19, 1987, to the breakup of the sterling peg in 1992, the attacks on the Thai baht during the Asian crisis of 1997, the LTCM collapse in 1998, and the less well-reported quant quake of August, 2007.

As of the debate whether hedge funds should be regulated or not, although I tend to err on the side of regulation in general terms, I must confess that Mallaby presents cogent arguments, and I am convinced that his voice will have to be reckoned with in future discussions on the matter.

If you have read "Too big to fail", "House of Cards", "Big Short", "Lords of Finance", "Fool's Gold", etc. you will like this book better. More wisdom based on incredible research and interviews. I was initially resistant to Mallaby's recommendations about financial reform, but he sold me based on reasoning well supported by evidence. The clearest, most readable and reasoned discussions of the efficient-market theory and Soros' reflexivity. If you don't know those terms, read this book anyway. He will at the end and you'll be glad whether you interest is investing or just voting. This is scholarship dressed up as popular non-fiction. On a par with Tom Wolfe and Malcolm Gladwell for brining non-fiction to a wide audience.

First of all, the book is very well researched and well written. It's an easy read and gives a good general overview of the history of hedge funds. The author takes us via A.W. Jones's first hedge(d) fund (later: hedge fund) creation from 1949 through the 60s and 70s into the 80s and 90s and through the recent financial "crisis" (I would say it was a correction after a major boom/hausse) in 2008/09.

The reader is introduced to various legends of the industry like George Soros and Stan Druckenmiller as well as to Julian Robertson (Tiger), Paul Tudor Jones, the Commodities Corporation, Citadel, Jim Simons and others, as well as also to some hedge-fund implosions of Long Term Capital Management, Amaranth, etc. and to the bankruptcy of Bear Stearns and Lehman Brothers. Also some short sellers like Jim Chanos and David Einhorn are mentioned. Of course, there are many top guys missing, and the words SAC (Cohen) and ESL (Lampert) or Blackstone are only in the text without any details, ... and there's no mention whatsoever of Cerberus, BlackRock, Icahn, Apollo, etc.

One thing I didn't like in the book, was that quite some time was spent on George Soros, probably due to the author's background, ... but at least Soros wasn't portrayed as the hero/savior he holds himself so often out to be, but instead the author also shows the reality of the very dark side of Soros and it makes you dislike the guy even more.

But the book is an essential book and an absolute "MUST" read for every trader and money manager, and for everyone working at a hedge fund. Not only is the book interesting for a general reference for an overview of the evolution of hedge funds, but also the various trading techniques, and also about the fact that each superstar hedge-fund manager/trader in his time is just human and has made major mistakes along the way costing them at least many hundreds of millions and even billions of dollars. Some traders will get additional confirmation that they're on the right track with their strategies, even though they'll have to fight the same "demons" like everyone else in the biz, ... and others will get a good thought here and there and most likely will be able to improve on their strategies, to fine tune them and to become even more successful in their approach.

The author has a good categorical and chronological approach as well a rare somewhat easy recap feature so that the reader understands the whole picture and understands the rich substance of the context rather easily. There's also extensive and helpful appendix and index. Although I've read thousands of books and have written a number of books myself, I haven't found many good books over the past few years, but I can say that I'm glad that I've come across this book and I think it will be very beneficial to every reader interested in the subject. You could say that the book is even inspiring to those who are interested in this field. I would have given it almost five stars, but because major players were left out I couldn't go for the five, and if there was the possibility of 4 1/2 stars this book would have well deserved it.

The splashy title "More Money Than God" doesn't do Sebastian Mallaby's hedge fund chronicle justice. It sounds like a gossipy tour of New Gilded Age wealth. Hedge fund managers are among the nouveau mega-riche, but that's not what Mallaby's book is about. This is a history of the major developments in hedge funds from Alfred Winslow Jones' pioneering "hedged fund" in 1949 through John Paulson's 2007 coup in shorting sub-prime mortgage securities and beyond. Mallaby defends hedge funds against the rash of criticism that their successes and failures in the past few years has unleashed by chronicling the changing role and increasing power of hedge funds over the past 60 years. He presents both views of hedge funds, with examples: They make markets more efficient and stable and led the flow of capital to the developing world. Their aggression and high leverage can be a destabilizing force, and their history is not free of underhanded tactics.

Mallaby lets the larger-than-life personalities of hedge fund magnates lead us through his history. He chooses hedge fund managers whose innovations influenced the industry: Alfred Winslow Jones' hedged fund that made 5000% in 20 years of the post-war era, Michael Steinhardt's success in the 1960s and 1970s with contrarian ideas, monetary analysis, and block trading, the econometrics of Commodities Corporation, Bruce Kovner's "carry trade", George Soros and Stan Druckenmiller's currency speculation in the 1990s, the superior stock-picking of Julian Hart Robertson's Tiger Fund, Paul Tudor Jones II's market moving, Long-Term Capital Management's lesson in leveraged finance, James Simon's Medallion Fund and David Shaw's fund as different styles of quantitative trading, Ken Griffin's multi-strategy Citidel, Amaranth's 2006 blow-up, August 2007's "quant quake", and more.

Mallaby admires hedge funds, because they find more success than investment banks with less systemic risk and no taxpayer-funded bailouts, but he doesn't avoid legitimate qualms about their role. Mallaby concludes by making a case against regulating funds with fewer than $120 billion in assets. He points out the hedge funds blow up all the time (5,000 failed between 2000 and 2009) but still fare better than investment banks or the S&P, even after correcting for survivorship bias. Mallaby's approach to the good and bad of hedge funds is thoughtful and engaging. I was surprised how much I enjoyed this book. It's a gold mine of information for those who are not sure what a hedge fund is or what they do, and it can serve as a (patchy) introduction to global finance. For those who read the Financial Times every day, "More Money Than God" is a compelling history of the industry and a fun read, even if some of it will be old news.

I tell my kids there are two ways to make money in this world. The hard way is to develop a new product or service that adds to the well-being of the world, like Bill Gates or Henry Ford. The easy way is to take advantage of the stupidity of government.

Genius is a sometimes thing, but stupidity is a constant. You just have to keep your eyes open. The majority of the stories that Mallaby tells so well have to do with pricing anomalies resulting from government policy. Currency pegs that no longer made sense; restrictions on short selling; the regulations that allowed banks to equate AAA rated mortgage debt with treasury bonds in terms of risk; the sudden reversals, such as the ban on short selling in 2008. The policy trap that virtually required the government to bail out the banks that were too big to fail, saving them from their own stupidity.

I hope my kids are geniuses, but I will be satisfied if they can feed themselves and their families. I will encourage them to look for stupid things that governments do and to line up at the trough. If they do turn out to be bona fide geniuses, then I would encourage them to emulate the real heroes of Mallaby's opus, the guys like Jim Simon and Julian Robertson who are able to use pure intellect to capitalize on pricing anomalies left by other investors

Regulation is an arena in which government stupidity is on constant display. The banks had been regulated since the Glass-Steagall act of 1933. Prior to deregulation the banks were pretty clever about getting around it, then they were clever at manipulating the political process to have it removed, and clever once again at circumventing whatever restrictions were still imposed on them. Campaign finance reform, which might have restricted the flow of Wall Street money to members of Congress who oversaw the financial sector, was a predictable fiasco, actually designed by the legislators to fail.

Mallaby argues that the hedge funds are better off largely left unregulated. While in an ideal world this may not be totally true, given the sad history of regulation and regulators, I am sure he is right.

Other reviewers have noted that Mallaby tells his story by choosing a select group of successful hedge fund operators. I believe that this selection works well. It shows the great variety of strategies used by hedge funds, and illustrates the fact that there would be no form of regulation that would be anywhere nearly applicable to all of them. He concludes in saying that the hedge funds today fill the role that was once played by the privately held merchant banks such as Lehman Brothers and Solomon, rapidly and efficiently deploying private capital to the benefit of both society and the capitalists. I agree with his conclusion.

When I read through page#97, my first thought is this book will rank as high as the Remini of a stock operator and two market wizards book. Now I am in page#179 and I still think so. This is one of the best trading books I read in the recent five years.


I was a history and war buff, the one thing I notice is that a thick detail history or biography books often are not as good as books that are writen from a high level but with a lot of details to illutrate the pointd made. This is one of those books. For example, the details regarding 1992 pound sterling is the best one I read so far. It fully make the points regarding Soro's character. Better than any Soros's biography or the books writen by himself.

The traders the author chose cannot be better.

From a trader's prespective, this book will go down in history as top five trading books all time.

I believe this is the 2nd Amazon review I wrote ever. and it deserve the time I spent.

A developer from <[...]>The Options Lab</a>

Inverting Franklin Roosevelt "...investors should fear the lack of fear itself". This is just one insight Sebastian Mallaby gives us in `More Money Than God'. In fact, he gives a nuts and bolts feel for Hedge Funds, their history and the people - the masters of the universe - who operate them. It is a history of leverage, short selling and size characterized by major success and catastrophic failure.

Strangely, it also gives the small investor an insight into the share market. Is the market efficient? Can the market be beaten? If the market is not `efficient', hedge funds (and the small investor) can be successful. But sadly for an ongoing hedge fund, success removes the imperfections that it was profitably exploiting. "Sooner or later, every great investor's edge is destined to unravel" and often "quant brainiacs follow their computers to a well-deserved doom" because "the rocket scientists had blown up their rockets".

Success means a flood of money into the hedge fund. But "an analyst might identify a promising small company and figure that its value could double over three years, but if there were only $20 million worth of shares available to buy, it was hardly worth bothering with." Not so for the small investor, but then again the hedge funds seem to be able to short sell flexibly at will - a facility that should democratically be available to the small investor.

Starting in the 1990's, hedge funds became large enough to move markets of all kinds. They could even overpower governments. This allowed the Tiger Fund in 1998 to approach "Russian friends...to buy the entire stock of nongold precious metals held by the central bank and finance ministry...take the palladium, the rhodium, and the silver. All of it." leaving the logistics problem of getting it into a Swiss bank with Tiger's name on it.

For the small investor there is sound advice:

- it is often dangerous to trade on statistical evidence unless it can be intuitively explained". "Visceral" is the word meaning deep inward feelings rather than just an intellectual focus.

- "The whole point of leverage, the very definition of the term, is that investors feel ripples of the economy in a magnified way."

- We all rationalize success. One position by the Chanos Fund only worked out because the April 1989 Tiananmen Square demonstration broke out. This earned the comment "The way Ah see it, is that it took a revolution of a bihl-lion people for your darn short to work out."

- "Event driven" investing at Farallon Fund specialized in predicting events that cause existing prices to be wrong e.g. takeover announcements, demergers, avoiding bankruptcy, meeting banking covenants, major economic events, hybrid security maturity dates etc.

- `Pattern investing' used by the Medallion fund looking for patterns in the market. This applies research on French/English translation where the computer finds the grammatical rules not the programmer (using the Canadian Hansard which is conveniently in both languages).

- A Tiger Fund manager "should manage the portfolio aggressively, removing good companies to make way for better ones; should avoid risking more than 5 percent of capital on more than one bet; and should keep swinging through bad times until luck returned".

- Remember that "...the market can stay irrational longer than you can stay solvent".

- "If one of these stocks fell ... it was probably being pushed by an institutional block trader that needed to raise cash...the price would soon revert, creating an opportunity to profit." In other words, why is the seller selling?

- "the biggest danger for buyers of illiquid assets is that in a crisis these assets will collapse the hardest."

- "...the larger an investment fund, the harder it was for a fund manager to generate returns" meaning the small investor has more opportunity.

- And remember, "LTCM calculated that this loss should have occurred less than once in the lifetime of the universe. But it happened anyway." The market does not follow a normal distribution; often it is not random; but then is it often predictable?

Mallaby grapples with the variety of thought behind the success of the hedge funds giving us a workmanlike insight. This attempt to describe how the hedge funds actually operate - as far as he is able (and he tells us when he cannot) - makes this a valuable book indeed.

It can become a guily pleasure reading about Hedge Fund managers success and extrodinary wealth. Mallaby's book does something bold in that is stands up for what is often a villified segment of the investment world. Mallaby humanizes characters like George Soros and Julian Robertson but also gives tremendous insight into their strategies, why those strategies worked, and how they occasionally failed. Whether you work in finance or are just a casual follower of the markets this book has a narrative flair that makes it an easy read but the depth to leave you with some important lessons and views.

I've been in the Hedge Fund Industry since 2002 and have worked on both sides (HF and FoF), and this is a terrific read. It has about 15 distinct stories and each story is ~20-35 pages. Mallaby does a good job of both giving background on the trader/investor and the particular "bet" or series of investments that made/broke the managers. There are a few points that stick out: 1) Some of the insider stories from the late 90s and mid 2000s that are funny, sad, pathetic, and amazing aren't told 2) The emphasis of this book is primarily Macro traders (Commodities Corp, Moore, Tudor, Quantum) though there are some stories of fundamental and EV driven (Steinhardt, Tiger, Farallon) 3) Due to #2, this is definately not an all encompassing HF story book. Most good Convert Arb shop stories have not been told (very popular in mid 90s and 2000s, then had the bad 2005) nor the stories of many Tiger cubs or even the large launches of ELS and Event Driven shops from prop desks . All in all, this is a good read and a fun read (you should get through it quickly, or at least not put down the book mid-chapter) and has some more detailed descriptions of trades. It made me want to raise some money now and look for market discrepancies. Happy Readings.

If you have read books like "stock Market wizard" and still feel that you don't have good idea how those people made so much money, this book is for you. Initially, I thought this book was just another hedge fund book without much substance. However, the author beautifully explains the trading methodologies of these star traders(and also their misses)- I was blown away. The author's insight into trading, leverage/economic history is remarkable, and by the reference list it is clear that he has put enormous efforts into this book. Compare this book with other hedge funds books and you will soon see the difference. I think this book may soon become a classic.