- Hardcover: 496 pages
- Publisher: Penguin Press (June 10, 2010)
- Language: English
- ISBN-10: 1594202559
- ISBN-13: 978-1594202551
- Product Dimensions: 6.5 x 1.2 x 9.5 inches
- Shipping Weight: 1.8 pounds
- Average Customer Review: 4.5 out of 5 stars See all reviews (129 customer reviews)
- Amazon Best Sellers Rank: #67,575 in Books (See Top 100 in Books)
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More Money Than God: Hedge Funds and the Making of a New Elite Hardcover – June 10, 2010
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I set out to write the history of hedge funds for two reasons. Explaining the most secretive subculture of our economy posed an irresistible investigative challenge; and the common view of hedge funds seemed ripe for correction. Hedge funds were generally regarded as the least stable part of the financial system. Yet they managed risk better than banks, investment banks, insurers, and so on—and they did so without a safety net from taxpayers.
Four years on, the book is done; and both my original motivations have been vindicated. Unearthing the story of hedge funds has been pure fun: From the left-wing anti-Nazi activist , A. W. Jones, to the irrepressible cryptographer, Jim Simons, the story of hedge funds is packed full of larger than life characters. Getting my hands on internal documents from George Soros’s Quantum Fund; visiting Paul Tudor Jones and reading the eureka emails he wrote in the middle of the night; poring over the entire set of monthly letters that the Julian Robertson wrote during the twenty year life of his Tiger fund; interviewing Stan Druckenmiller, Louis Bacon, and hundreds of other industry participants: my research has yielded a wealth of investment insights, as well as an understanding of why governments frequently collide markets. Meanwhile, the financial crisis of 2007-2009 vindicated my hypothesis that hedge funds are the good guys in finance. They came through the turmoil relatively unscathed, and never took a cent of taxpayers’ money.
Since the book has come out, many readers have posed the skeptical question: Do hedge funds really make money systematically? The answer is an emphatic yes; and without giving the whole book away, I can point to a couple of reasons why hedge funds do outsmart the supposedly efficient market.
First, hedge funds often trade against people who are buying or selling for some reason other than profit. In the currency markets, for example, hedge funders such as Bruce Kovner might trade against a central bank that is buying its own currency because it has a political mandate to prop it up. In the credit markets, likewise, a hedge fund such as Farallon might trade against pension funds whose rules require them to sell bonds of companies in bankruptcy. It’s not surprising that hedge funds beat the market when they trade against governments and buy bonds from forced sellers.
Second, the hedge-fund structure makes people compete harder. There is an incentive to manage the downside: hedge-fund managers have their own money in their funds, so they lose personally if they take losses. There is an incentive to seek out the upside: hedge-fund managers keep a fifth of their funds’ profits. This combination explains why hedge funds were up in 2007, when most other investors were losing their shirts; it explains why they were down in 2008 by only half as much as the S&P 500 index. People sometimes suggest that hedge funds survived the subprime bubble by fluke—perhaps their ranks include wacky misfits who are naturally contrarian. But there is more to it than that. John Paulson poured $2 million in the research that gave him the conviction to bet against the bubble. The hedge-fund structure created the incentive to make that investment.
Financial risk is not going away. Currencies and interest rates will rise and fall; there will be difficult decisions about how to allocated scarce capital in a sophisticated and specialized economy. The question is who will manage this risk without demanding a taxpayer backstop. The answer is hiding in plain sight: To a surprising and unrecognized degree, the future of finance lies in the history of hedge funds.--Sebastian Mallaby (Photo of Sebastian Mallaby © Julia Ewan)
From Publishers Weekly
Journalist Mallaby (The World's Banker) gives unusually lucid explanations of hedge funds and their balancing of long and short positions with complex derivatives, but what really entrances him is their freedom from regulation, high leverage, and outsized performance incentives. In his telling, they empower a heroic breed of fund managers whose inspired stock picking, currency trading, and futures contracting outsmart the efficient market. In engrossing accounts of epic trades like George Soros's 1993 shorting of the pound sterling and John Paulson's shorting of subprime mortgages, the author celebrates hedge titans' charisma, contrarianism, and market insights. Mallaby contends that hedge funds benefit the economy by correcting market anomalies; because they put managers' money on the line and are small enough to fail, they are more prudent and less disruptive than heavily regulated banks. Mallaby's enthusiasm for an old-school capitalism of unfettered risk taking isn't always persuasive, but he does offer a penetrating look into a shadowy corner of high finance. (June)
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If you want to learn on how big names invest this is the way to go
Sebastian Mallaby is currently the Paul Volcker Senior Fellow for International Economics at the Council on Foreign Relations. He's also a columnist at the WA Post and spent over a decade with The Economist responsible for international finance coverage - serving a bureau chief in Washington, Japan and southern Africa. He is the author of several noteworthy books on the political economy.
This work is an epic contribution to the historical evolution of certain financial products and the global industry(s) spawned therefrom in primarily, the western world. Welcome to the hedge fund industry, including an amazing cast of characters, their thought processes, training, relationships and the outcome of their work - The Making of A New Elite - with More Money Than God.
Admittedly, it is rare for me to dedicate myself to the reading of 400+ pages contained in any one volume, on any subject. Yet, the manner in which this book develops contains the unique qualities that inflame the desire within reader to come back for more. Incredibly well-written, researched, balanced and apolitical. This work is REQUIRED READING as an essential component in developing an understanding of global financial markets, risk assessment, risk management and the art of speculation.
As I read the book, Mallaby makes some points that have been central themes of other authors (See The WSJ's Scott Patterson's - The QUANTS), regarding the miscues that fueled poor investment/risk management strategies. Listen to Mallaby to garner the essence of this observation as it relates to the "art of speculation" - "The art of speculation is to develop one insight that others have overlooked and then trade big on that small advantage." P.91
"After the 1971 debacle, Weymar set about rethinking his theory of the market. He had begun with an economist's faith in model building and data: Prices reflected the fundamental forces supply and demand, so if you could anticipate those things - you were your way to riches. But experience had taught him some humility. An exaggerated faith in data could turn out to be a curse, breeding the Sol of hubris that leads you into trading positions too big to be sustainable."
"The real lesson of LTCM's failure was not that its approach to risk was too simple. It was that all attempts to be precise about risk are unavoidably brittle." P.231
(LTCM) Had misjudged the precision with which financial risk can be measured."p.245.
The point is that an unrepentant belief in the quantitative modeling that provides that "one insight that others have overlooked and then trade big on it" can have enormous consequences in either capturing returns or accelerating a cataclysmic demise of the capital under management.
How has that all worked out, in recent years? According to Mallaby, "Between 2000 and 2009, a total of about five thousand hedge funds went out of business, and not a single one required a taxpayer bailout."
Ah yes, "bailouts" - what is Mallaby's take on this issue? Listen to the following: "Capitalism works only when institutions are forced to absorb the consequences of the risks that they take on. When banks can pocket the upside while spreading the cost of their failures, failure is almost certain." P.13. Mallaby is clearly not a proponent of "privatizing the gains and socializing the losses."
What about our affection with history that drive financial and other forms of socio-economic modeling. Mallaby has some succinct insights:
"Projections are based on historical prices, and history could be a false friend." P. 233.
"In 1997, Merton and Scholes (LTCM) received the news that they had won the Nobel Prize for economics. The award was greeted as a vindication of the new finance: The inventors of the option-pricing model were being thanked for laying down a cornerstone of modern markets. By creating a formula to price risk, the winners had allowed it to be sliced, bundled, and traded' l thousand ways the fear of financial losses, which for centuries had acted as a brake on human endeavor, had been tamed by an equation." P.231.
So, where does Mallaby leaves us at the end of this magnum opus? His analysis leads him to conclude "The worst thing about the crisis is that it is likely to be repeated." P. 377. However, to suggest that the hedge fund industry was the primary culprit in either the creation or magnitude of the Great Recession would be erroneous. Again, between 2000 and 2009, 5,000 hedge funds are to have ceased operations - none of which required a taxpayer bailout. Mallaby also takes a rather benign approach to the plausibility/practicality of regulating this industry ("The record suggests that financial regulation is genuinely difficult, and success cannot always be expected." P. 379).
Yet, at the conclusion of this work, one quote from Mallaby continues to resonate with me: "It is the nonintuitive signals that often prove the most lucrative." p.302. However, the term "lucrative" as is as applicable to assessing risk and thereby avoiding potential losses, as it is to capturing returns on investment.
Like I said, an epic contribution to the historical evolution of the hedge fund industry. An uncanny, incredibly thorough, balanced treatment - written in a way that is appropriate for both industry insiders, and the lay-person. A perfect volume for graduate coursework in finance -- one that focuses on human beings, as well as the quantitative financial services products they develop and deploy in the global markets today.
What are some lessons (mine not Mallaby's):
The breaking of the pound in 1992 demonstrated that hedge funds were now of sufficient size to stand against central banks and take down a currency.
The bond crash of 1994 demonstrated that central banks when making monetary policy had to account for the actions of hedge funds. It also demonstrated how hedge funds, due to their leverage, had to sell into a panic which can turn a downturn into an acapulco cliff dive.
The Asian Crisis deepened this lesson as hot money flows wrecked these economies and given, in the years afterwards, how these countries built huge warchests of US dollars in currency reserves to ward off the speculators, the unintended consequences (imbalances in saving and trade) continue to this day for the US and the world.
Mallaby points out the financial crisis of 2008 was not caused by the hedge funds. This is true as long as one does not include the unintended consequences of the Asian crisis. That said the truest key to the financial crisis of 2008 is that ours has been a time of deregulation and freer markets. Market economies have an inherent feature that leads to periodic financial crises. The more free the market the greater the potential for increases in the magnitudes of upheaval. Markets are essential for a vibrant economy but a balance must be kept to keep the turbulance from out weighing the benefits.
The Asian countries tend to prefer a balance with more regulation of financial markets than the US and this has not changed ever after the 2008 crash and burn.
Just recently a large pension fund, Calpers, announced it is pulling its money out of hedge funds. Hedge funds are mostly unregulated therefore fund performance is difficult to attain but most studies find that the average fund after fees performs little better than the S&P 500 (Mallaby by way of a study done by Ibbotson disputes this). The bulk of funds, it seems, provide merely normal returns for their investors but for their managers more money than god.
Mallaby brings out that the 2&20 pay structure, which allows these outsized returns for managers, was designed partly to avoid paying income taxes, a loophole that persists to this day.
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