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

Sebastian Mallaby

Softcover

ISBN 10: 1408809753 ISBN 13: 9781408809754

Publisher: Bloomsbury Publishing, 2012

Synopsis

Wealthy, powerful, and potentially dangerous, hedge-find managers have emerged as the stars of twenty-first century capitalism. Based on unprecedented access to the industry, "More Money Than God" provides the first authoritative history of hedge funds. This is the inside story of their origins in the 1960s and 1970s, their explosive battles with central banks in the 1980s and 1990s, and finally their role in the financial crisis of 2007-9. Hedge funds reward risk takers, so they tend to attract larger-than-life personalities. Jim Simons began life as a code-breaker and mathematician, co-authoring a paper on theoretical geometry that led to breakthroughs in string theory. Ken Griffin started out trading convertible bonds from his Harvard dorm room. Paul Tudor Jones happily declared that a 1929-style crash would be 'total rock-and-roll' for him. Michael Steinhardt was capable of reducing underlings to sobs. 'All I want to do is kill myself,' one said. 'Can I watch?' Steinhardt responded. A saga of riches and rich egos, this is also a history of discovery. Drawing on insights from mathematics, economics and psychology to crack the mysteries of the market, hedge funds have transformed the world, spawning new markets in exotic financial instruments and rewriting the rules of capitalism. And while major banks, brokers, home lenders, insurers and money market funds failed or were bailed out during the crisis of 2007-09, the hedge-fund industry survived the test, proving that money can be successfully managed without taxpayer safety nets. Anybody pondering fixes to the financial system could usefully start here: the future of finance lies in the history of hedge funds.

About this title

Review

Sebastian Mallaby on Hedge Funds

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)

About the Author

Sebastian Mallaby is the Paul Volcker Senior Fellow in International Economics at the Council on Foreign Relations and a Washington Post columnist. He spent thirteen years on The Economist, covering international finance in London and serving as bureau chief in Southern Africa, Japan and Washington. From 1999 to 2007 he was a member of the editorial board of the Washington Post, focusing on globalization and political economy. His previous books are The World's Banker (2004) which was named as an Editor's Choice by the New York Times and After Apartheid (1992), which was a New York Times Notable Book. He lives in Washington with his wife, Zanny Minton Beddoes, the economics editor of The Economist.

About this edition

• Publisher: Bloomsbury Publishing
• Publication date: 2012
• ISBN 10: 1408809753
• ISBN 13: 9781408809754
• Binding: Paperback
• Number of pages: 496