Hedge Funds and the Making of a New Elite (Council on Foreign Relations Books (Penguin Press))

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.

Not sure why others are fawning over this book. Mallaby spends 90% of the book detailing 12 or so of the most famous hedge fund operators and how they amassed their fortunes. While their stories are interesting, they have been well-told and are available in simple internet searches. I didn't feel Mallaby was bringing any new information to light.

The author does touch on all the salient points as to why hedge funds are not evil (as the press would have you believe). Still, I was hoping for more from this book than just a history lesson on the industry's most famous participants.

Global hedge funds pay big time bonuses. Bonus money big enough to become a billionaire. If you want to know the wealth & power around them, then this book is for you. Author Sebastian Mallaby, has amazing access to top-tier hedge fund players. He does some really incredible research into this exclusive"Titans of Finance" style of industry. The names and numbers really made sense and hooked me in. It is from a few years ago when the industry was near its peak, but it still ignites envious bonus envy for the majority of professionals who only dream of millions, not hundreds of millions come bonus day.

He did not waste my time or my money on this very rich in detail volume that really give you a full meal of satisfying insight. This was one of the most in depth books on hedge funds that I have ever come across. The direct quotes and input from the greatest managers of all-time make it work. Their views on many of the biggest trades the world has ever seen, was very educational in its remarkable detail. It is not one man's thoughts. It is one man's great collection of quotes from the traders who have made the big money. Those are the traders I want to hear it "direct from the gut" from anyway. The author stays out of the way, and allows you to absorb it all.

You could feel that he not only developed excellent sources, but wished that you could have been there for the many of the conversations. For me, not a single page was drab. Every single line was worth my full attention. The wrap up on the industry in a big picture style worked for me too at the end. The author can really connect the dots perfectly. It many ways, he makes a good case that global investment banks were in fact, hedge fund partnerships themselves, but then got listed on various stock exchanges. A new wave of hedge funds will always come along to make money out of a never ending pattern of continuous market opportunities. Financial markets, like the sea itself, is never static. It is constantly moving in various directions.

The overall bigger picture is easy enough to understand, hedge funds evolve and adapt. The best ones grow and keep the kind of DNA that keeps on tinkering, like any inventor in a garage. They have to keep looking for the next new thing, new market, new strategy, new arbitrage, Bitcoin trade or whatever. Size matters, and institutional investors tend to look for asset size as a kind of comfort with hedge funds. Over time this can be flawed in many ways, but it is still an all too common practice. In a way, you get deja vu and hear that the old line, "nobody got fired for choosing IBM" , it works here too with large size hedge funds.

On the surface, a very large and well established hedge fund with US$1BN or more in assets, seems safe as an investment. however, the financial size is not really a comfort in the end, as the performance can end quickly. It is the professionals, the real human capital, within any hedge fund that are the real assets being invested into. If the real IP, the brain power that these traders have, can figure out the next new thing in financial markets, then top tier performance follows for all investors.

Ultimately, any hedge fund once successful, gets big. A few even get listed. and then make way for a newer wave of "Young Turks" to follow with the new new market sensation. Hedge funds really are about finding opportunities and the people behind them. That is where the big money is made, by seeing a new twist or tact, and creating profits by innovation around those new opportunities. These successes often come in waves and that reflect different strategies doing better or worse in different cycles.

The Top 3 Takeaways from this book that impact any reader are:

1) Never be between a central bank making a wrong move and a full conviction hedge fund. Take George Soros and the Bank of England, it did not end well for the UK pound or the BOE. Always best to get out of the way when the big boys bet in size!

2) A great observation was the comparison of Goldman Sachs when seeing their client Long Term Capital Management failing. It was like " a hyena feeding on a trapped but living antelope"! You gotta love that image of your helpful prime brokerage "partner"!

3) Winning and losing is very black and white. When a dejected trader says " I just want to kill myself" Hedge Fund founder Michael Steinhardt just asks "can I watch?". Such is the overall sympathy from deep within the hedge fund beast.

The author Sebastian Mallaby takes us on this journey in a very detailed fashion. It is full of the kind of glitz and bling from the big personalities that feel they certainly earned their big bonuses. It all keeps many of these things in a kind of fantasy land for the many others lower down in the financial income scale. At least it keeps your appetite always wanting a little bit more. This was a great read and a great insight in the hedge fund world. This book is Highly Recommended!

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Sebastian Mallaby is a Washington Post columnist and a fellow for the Council on Foreign Relations. He has also written The World's Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations (Council on Foreign Relations Books (Penguin Press)) and After Apartheid.

He begins this 2010 book by describing Alfred Winslow Jones ("the first hedge-fund manager"), whose firm established characteristics of later hedge funds, such as: "he insulated his fund at least partially from general market swings; and having hedged out market risk in this fashion, he felt safe in magnifying, or 'leveraging,' his bets with borrowed money." (Pg. 2) He observes, "in the bubbly first years of this century, the top hedge-fund managers amassed more money than God in a couple of years of trading. They earned more---vastly more---than the captains of Wall Street's mightiest investment banks and eclipsed even private-equity barons." (Pg. 3)

He argues, "The cataclysm [of 2007-2009] has indeed shown that the financial system is broken, but it has not actually shown that hedge funds are the problem... The Fed allowed this binge of borrowing because it was focused resolutely on consumer-price inflation, and because it believed it could ignore bubbles safely. The carnage of 2007-2009 demonstrated how wrong that was." (Pg. 3)

He observes, "A world in which hedge funds could corner a Treasury auction was a new kind of world: a world built on breathtaking leverage. The American system was pyramiding debt upon debt: The government was borrowing from hedge funds, which in turn borrowed from brokers, which in turn borrowed from some other indebted somebody. In one player in this chain collapsed, the rest could lose their access to those borrowed funds. That could force them to dump assets fast. A bubble could burst instantly." (Pg. 176)

About the 1994 failure of a hedge fund, he states, "And so the search for a regulatory response fizzled... little was done to prod the banks to be cautious. The upshot was that when Long-Term Capital Management failed four years later, the crisis that ensued made 1994 look trivial." (Pg. 190) Later, he adds, "LCTM's failure had provided an object lesson in the dangers of leveraged finance. And yet the world's response was not only to let leveraged trading continue. It was to tolerate a vast expansion." (Pg. 247) He notes, "commercial banks have government insurance to reassure depositors and access to emergency lending from the Federal Reserve. But investment banks have no such safety net. Believing that they were somehow invincible, they had behaved as though they did have one." (Pg. 362)

He concludes on the note, "government should encourage [hedge funds] to thrive and multiply and absorb more risk, shifting the job of high-stakes asset management from too-big-to-fail rivals. And since the goal is to have more hedge funds, burdening them with oversight is counterproductive. The chief policy prescription ... can be boiled down to two words: Don't regulate." (Pg. 381)

A detailed and fascinating account, with cautiously-stated conclusions, this book will be of considerable interest to anyone interested in the 2008 financial crisis, or modern capital methods.

This book reads like a financial thriller. It describes the investment strategies, rise and sometimes fall of some of the biggest names in finance. It is partly based on interviews with relevant people. The role of the Efficient Market Hypothesis is also discussed throughout. The author basically concludes that hedge funds should be deregulated except for dangerously large and / or leveraged funds - although it is sometimes difficult to measure this.

I have given the book an average rating because I personally found it to be somewhat long-winded, although I think the right kind of reader may find it to be a real page-turner. I also don't like the authors interjected opinions which sound like moralising sometimes for and sometimes against hedge funds.

Sebastian Mallaby is a Washington Post columnist and a fellow for the Council on Foreign Relations. He has also written The World's Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations (Council on Foreign Relations Books (Penguin Press)) and After Apartheid.

He begins this 2010 book by describing Alfred Winslow Jones ("the first hedge-fund manager"), whose firm established characteristics of later hedge funds, such as: "he insulated his fund at least partially from general market swings; and having hedged out market risk in this fashion, he felt safe in magnifying, or 'leveraging,' his bets with borrowed money." (Pg. 2) He observes, "in the bubbly first years of this century, the top hedge-fund managers amassed more money than God in a couple of years of trading. They earned more---vastly more---than the captains of Wall Street's mightiest investment banks and eclipsed even private-equity barons." (Pg. 3)

He argues, "The cataclysm [of 2007-2009] has indeed shown that the financial system is broken, but it has not actually shown that hedge funds are the problem... The Fed allowed this binge of borrowing because it was focused resolutely on consumer-price inflation, and because it believed it could ignore bubbles safely. The carnage of 2007-2009 demonstrated how wrong that was." (Pg. 3)

He observes, "A world in which hedge funds could corner a Treasury auction was a new kind of world: a world built on breathtaking leverage. The American system was pyramiding debt upon debt: The government was borrowing from hedge funds, which in turn borrowed from brokers, which in turn borrowed from some other indebted somebody. In one player in this chain collapsed, the rest could lose their access to those borrowed funds. That could force them to dump assets fast. A bubble could burst instantly." (Pg. 176)

About the 1994 failure of a hedge fund, he states, "And so the search for a regulatory response fizzled... little was done to prod the banks to be cautious. The upshot was that when Long-Term Capital Management failed four years later, the crisis that ensued made 1994 look trivial." (Pg. 190) Later, he adds, "LCTM's failure had provided an object lesson in the dangers of leveraged finance. And yet the world's response was not only to let leveraged trading continue. It was to tolerate a vast expansion." (Pg. 247) He notes, "commercial banks have government insurance to reassure depositors and access to emergency lending from the Federal Reserve. But investment banks have no such safety net. Believing that they were somehow invincible, they had behaved as though they did have one." (Pg. 362)

He concludes on the note, "government should encourage [hedge funds] to thrive and multiply and absorb more risk, shifting the job of high-stakes asset management from too-big-to-fail rivals. And since the goal is to have more hedge funds, burdening them with oversight is counterproductive. The chief policy prescription ... can be boiled down to two words: Don't regulate." (Pg. 381)

A detailed and fascinating account, with cautiously-stated conclusions, this book will be of considerable interest to anyone interested in the 2008 financial crisis, or modern capital methods.

Mallaby is, without a doubt, a great writer. He details the history of the hedge fund industry with a storyteller's flair and a practitioner's grasp of the technical details. From its beginnings with Alfred Winslow Jones to its growth through giants like Soros, Robertson and Paul Tudor Jones to the role of funds during the recent crisis, Mallaby does a great job weaving together history with modern pratice to create an entertaining book.

The reason I don't give this book 5 stars is that Mallaby wants to make an argument about why hedge funds shouldn't be regulated in the last chapter. This argument ultimately falls flat, and I suspect Mallaby's too smart not to realize it. He talks about how incentives at hedge funds are ultimately aligned properly, managers tie their own money into the funds, and the funds are rarely too big to fail. The first part of the argument is only partially true, the second is theoretically but not entirely true, and the last is far from true.

Sure, funds don't get the kinds of golden parachutes for executives and liquidity support that Fed-regulated banks do. On the other hand, fund managers take a commission based on the amount of assets under management (2% standard, but at plenty of funds it goes up to 3%) that gives managers an incentive to solicit more and more assets that could limit their clients' returns (which is a problem for a fiduciary). Granted, more assets make it harder for funds to enter and exit positions quickly in a turbulent market, but there is still an incentive, at least on the margin, to accept more funds than is optimal to maximize returns.

Second, funds have been "too-big-to-fail" in the past, and can be so in the future. Look at Long-Term Capital Management, which had to be bailed out when it imploded in 1998. Granted, that bailout didn't cost taxpayers any money... but it's not hard to imagine government money being on the table if a big fund that trades with thousands of counterparties like a D.E. Shaw were to start teetering. Last, Mallaby seems to assume that "sophisticated" investors will check to make sure that funds aren't being misused. The Bernie Madoff saga seems to disprove this a priori. Many of Madoff's "investors" were supposedly sophisticated "funds of funds" which were supposed to do due diligence on their managers. The investors into these funds of funds, in turn, were largely unsophisticated. Their failure to perform their duty seems to disprove Mallaby's argument about incentives. Granted, Ponzi scehems are not the norm, and most funds almost certainly do thorough due diligence. But the presence of swindlers and crooks in the market makes a strong case for the kind of regulation of the industry that Mallaby opposes.

If you are a frequent reader of Wall Street texts, a sizeable amount of the material in More Money Than God will be redundant. The author discusses famous managers such as Alfred Winslow Jones, Julian Robertson, Paul Tudor Jones, George Soros, John Paulson, Ken Griffin, Stan Druckenmiller and Jim Simons. These managers and their notable trades are covered in much greater detail in books such as The Greatest Trade Ever, Hedge Hogging, Market Wizards and When Genius Failed. Yet, it is nice to read a book that defends the rationale of hedge funds while detailing their evolutionary path. For these reasons, I would recommend the book even if you are scholar of the hedge fund industry.

Unlike some of the more popular books on the subject of hedge funds, More Money Than God covers the history of the industry dating back to the late 1940s. It includes an interesting look at the life and work Alfred Winslow Jones, who is arguably the father of modern hedge funds. The author goes on to describe how great managers and their funds have spawned other great funds started by former employees, strongly suggesting that this chain of success supports that idea investing prowess is indeed NOT random.

The dark side of industry is also discussed as major failures are recounted along with some questionable activities by other funds. While not quite a riveting as a book like When Genius Failed, the books covers blowups such the collapse of Amaranth and the involvement of Citadel in the rescue. This is the first book that I have seen that gets into any detail about Citadel, which was a nice plus.

In era of Wall Street bashing, Sebastian Mallaby gives a refreshingly balanced view of the industry. Specifically he explains the following: 1) the government has not bailed out hedge funds during any financial crisis 2) hedge funds did NOT cause the mortgage crisis 3) hedge funds have outperformed the market (one caveat - possibly incomplete data) 4) the performance fee structure and managers' personal wealth invested in funds align their interests with investors. On #4, the author does acknowledge that hedge funds do have a problem that the fund can be just be shut down by managers after a bad year, allowing them to slink away without any recourse by investors to claw back managers' earnings.

In total, the book is both educational and entertaining. At the same time, it is a casual read that could be completed on a long flight. It is a great addition to any Wall Street history book collection.

More money than God : [hedge funds and the making of a new elite]Mallaby, Sebastian. **** NY Times Top Books of 2010 review, SPL 332.64524 M
I thought this was a great overview of the hedge fund industry. In truth the older stuff, like A.W. Jones, is vastly less interesting to me that the more current history, I could have used a bit less of that, but it does provide valuable context I suppose.
The stories about Steinhardt does much of the same, and you do get a feel for how the industry has changed which is helpful in understanding trends and thus how to project out to the future.

One of the most thoughtful analyses of the conflicts behind regulation and the lessons from LTCM. Analysis of leverage is not straightforward, let alone regulation of it. Capital at risk v. value at risk calculations need to be and are rarely straightforward. The LTCM partners had their own capital at risk, which shows my "skin in the game" theory is not an adequate protection. Brokers didn't adequately police (although I would argue that short term thinking there was a part of the culprit). A lot of this does support Taleb's black swan thinking generally.

The one area I felt was perhaps the least fair and balanced is the one, perhaps not coincidentally, that I'm most familiar with, namely John Paulson and the Goldman Sachs SEC investigation regarding CDOs. I think there's real evidence that Paulson was fairly unscrupulous, although perhaps not illegal in the way he participated in influencing the creation of CDOs he subsequently bet against, and this book makes no mention of that at all. Given this omission in the area I'm most familiar with, I can't help but feel there are others as well.

I found the mixed strategy funds the most confusing, I'm not sure whether this is due to the fact the are less philosophically coherent or just that the explanation was less complete.

He concludes with a well reasoned recommendation for regulating Hedge funds, noting that "Between 2000 and 2009 5000 hedge funds have failed and not a single one of them required a gov't bailout." But also notes that going forward they are heading in the direction that will cause them to get larger, go public and thus lose not just the incentive structure, but their "small enough to fail" status as a result of their size and leverage.

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.

This is a great history: succinct, readable, peppered with colorful characters and with a dose (but not too much) of policy advice. Mallaby manages to bring order to the very chaotiic world of hedge funds, and his strength as a writer is that -- unlike many journalists -- he has taken the time to understand many of the investment strategies and why they worked (or didn't). He clearly is sympathetic to his subject, and his treatment of certain characters -- presumably people who granted him greater access -- seems particularly favorable: Geroge Soros, Julian Robertson, Ken Griffin and Paul Tudor Jones. Likewise there are gaps; we don't hear much about some of the largest funds operating today, such as Bridgewater, Baupost or Highbridge. I think this is a must-read for anyone interested in the industry, perhaps as a companion to the likes of Hedge Fund Wizards which allows the "New Elite" to speak for themselves.

As hedge funds increase in size, variety and number, they also exercise growing power over central banks and national governments, as well as companies and industries. Unfettered by a fixed investment philosophy, hedge fund managers bank on the flexibility to buy assets and sell them short as dynamic markets dictate. Some hedge funds have succeeded spectacularly and some have failed, such as those holding too many mortgage securities when the U.S. housing industry collapsed in 2007. But over its history, the hedge fund industry's performance has been remarkably good. Here, business journalist Sebastian Mallaby forcefully argues that hedge funds contribute to economic stability by chasing the true value of mispriced assets. His richly detailed book centers on the successes and occasional missteps of famous hedge fund managers, including such luminaries as Stanley Druckenmiller, Paul Tudor Jones II, Michael Steinhardt, Julian Robertson and George Soros. getAbstract recommends this book as a vivid introduction to hedge funds for those who are unfamiliar with them, and as a valuable, often entertaining, reference for financial professionals. And if you want to know even more, read the illuminating footnotes.

Reads like a mystery novel and if you are interested in finance there is nothing else which can come close.

What this documents are the intricate actions of the best and brightest in the field on what they did and why they did it.

What I find so extraordinary is that one of the best fund managers like Michael Steinhart and Julian Robertson were just as fallible and to keep beating the market year over year requires fair amount of luck.

I was surprised to know that Stanley Druckenmiller was one of the main figures behind Quantum's success.

One more thing I found out is the subtle difference between a value investor and a macro trader.
I am a big fan of taleb and his trading methodology but taleb hates buffet. After I read this book I can see why the macro traders hate value investors and vice versa. It basically comes to your personality types - Are you contrarian or a trend follower.

When you are a trend follower you lever up your position but have strict stop losses.
In a value mindset you dont lever up average down but you have to have strong conviction to do this.

Mallaby has done an outstanding job researching this book. The title may be misleading which perhaps has contributed to its lack of great popularity. His book is much more than just a history of hedge funds. There is a lot of excellent analysis of various financial crises around the world. Mallaby examines these crises through the eyes of various hedge fund managers. In the end, he has come up with a very enjoyable, interesting and insightful book. In the final chapter he tackles the subject of hedge fund regulation.

If you have enjoyed "Liar's Poker", "When Genius Failed", "The Big Short", or "Fool's Gold", you will not be disappointed with Mallaby's book. Besides its historical value, investors can also learn a lot from this gem. Highly recommended.

I've been looking forward to reading this book for some time and I think any serious student of stock market history should enjoy this read. Basically it's a summary of the conquests from history's movers and shakers in the hedge fund world. If you watch the markets at all some of these people should be quite familar to you. This book doesn't really come up new information about the hedge fund manager's techniques but it's a great summary. In summary, this is a very good summary of biggest names in the hedge fund world and worth your time to read if you are really into stock market history.

Sebastian Mallaby, the Paul Volcker Senior Fellow in International Economics at the Council on Foreign Relations and a Washington Post columnist, has written a most illuminating book on hedge funds.

The top three hedge-fund managers in the USA get $1 billion each a year. The money comes from fees (often a fifth of the profits), short selling and leveraging bets with borrowed money. Then they apply the whole package to bonds, futures, swaps and options. Mallaby calls it a `carnival of creativity and greed'

Hedge funds claim that they make the market work. They believe the myths that the markets are always right, that they correct themselves, that the chaos after the credit crunch could only happen once every billion years. They base their models on assumptions of `rational expectations' and `efficient markets'.

But the efficient-market theory crashed with the 1987 crash, the bond market meltdown of 1994, the Long-Term Capital Management bust in 1998 and the crisis that started in 2008. Currency markets, like equity markets, do not tend towards an efficient equilibrium. As Keynes said of those gambling on bubbles, "the market can stay irrational longer than you can stay solvent."

In reality, hedge funds are not about making markets more efficient or prices more accurate. They are all about seizing profits from other people's wealth-creation. They are parasites.

Michael Steinhardt, for example, made his fortune by milking discounts offered by pension funds and mutual funds. His collusion with brokers harmed the funds, which would have got better prices for their stock if insiders hadn't fixed the market. So the losers were millions of ordinary Americans, the winners were the millionaires who invested with Steinhardt.

Britain's membership of the Exchange Rate Mechanism (1990-92) gave speculators an opening. The Major government spent $27 billion of reserves trying to save the overvalued pound. After we left the ERM, the pound fell 14 per cent, losing the taxpayers $3.8 billion. The great philanthropist George Soros got $1 billion, in a `vast transfer of wealth from taxpayers to traders'.

In 1997, the hedge funds caused Asia's financial crisis. Soros' fund sold the overvalued Thai baht short. His fund made $750 million from the forced devaluation; Thailand's output fell by 17 per cent, plunging millions into poverty. Then Soros told South Korea it must `restructure' by making it easier for employers to sack workers.

As Mallaby sums up, "During the crises of 1997, hedge funds had profited by betting against governments that set illogically high prices for their currencies. In the hangover from those crises, hedge funds would profit by betting against governments that set illogically low prices for the broken jewels of their economies."`

Morgan Stanley and Goldman Sachs boasted of their independence from governments, yet when in trouble in 2008 begged for government funds. The International Monetary Fund said the bailouts cost the taxpayer $10 trillion.

Future crises are bound to happen. As Mallaby writes, "When banks can pocket the upside while spreading the cost of their failures, failure is almost certain."

As he notes, "government insurance encourages financiers to take larger risks; and larger risks force governments to increase the insurance. It is a vicious cycle", which, he warns, "will go on until governments are bankrupt."

This is a great book for someone getting into the industry or area that needs to catch up in the background. Some outstanding stories about the players and factors in the industry as well. Very well structured and covers the majority of the players with very specific data and anecdotes of the what is relevant.

This book not only tells the stories and history about various hedge funds, the author really did tons of homework to understand the niche each fund and try his best to answer why these funds made money. Considering the nature of hedge fund industry, it is not easy to retrieve such information and really understand the competitive advantage of these funds. I bought and read almost all hedge fund books I can find, this one distinguishes itself and beat all of the other books in a large gap.

What a great book. I have always been fascinated by Wall st and the people who work there. I read Ugly American's and I was hooked. This book is so great for so many reasons. 1. The story telling is wonderful. 2. It really breaks down what a hedge fund is, which if your like me and have zero back ground in finance, money, or anything related to it then this is a great education. 3. Mallaby not only discusses what happened but then helps you understand the after math.
Excellent read, get it today.

I recommend Sebastian Mallaby's book, More Money Than God, if you are at all curious about how hedge funds work. The writing style resembles Malcolm Gladwell or Michael Lewis in that a technical subject is made interesting and straightforward by anecdote-driven narrative. It made me want to join a hedge fund or at least start actively investing my own money. Mallaby also focuses on the two things every economist wonders about hedge funds- do they produce social value, and how can they make money if markets are efficient.

There are over 8400 hedge funds in the world today. Despite a worldwide economic downturn, the managers of the top 25 hedge funds made over $400 million each. Hedge funds are actually set up to reduce risk, but just about every fund is focused on maximizing a hefty return on investment.

Money can be made in this lucrative venture and Sebastian Mallaby, will give you an education you won't find in any college. If you want to make a million, don't talk to an economic professor, go talk with a millionaire. If you want to make money with hedge funds, buy this book and do what Sebastian Mallaby tells you to do.

James Garton
Author of: 25 Ways to Make Money Online

Though Mallaby seems to use the exceptions to prove the rule -- tens of thousands of hedge funds since A. E. Jones started the first one in 1949 and the book focuses on a mere dozen of the most successful -- his arguments are persuasive, comprehensive, and his style is most enjoyable. If you have any interest in the hedge fund interest, regardless of your bias, I recommend this book

I'll try to avoid harping on irrelevant-but-obnoxious (to me) traits of his book, but one is that this is a book of devotion to the almighty dude: I'm a man, and I found the male chauvinism nauseating. He makes little effort to hide the fact that he's genuinely, madly, hotly in lust with several of the hedge fund principals, including Salomon Bros. government bond trader, Craig Coats Jr.--whom Mallaby introduces as a "tall, handsome, charismatic stud... whose main tool was a firm belief in his own instinct" (p.222). Women in the book are at best worshipful supporters and at worst, queens (such as Mary Meeker, analyst for Morgan Stanley, p.259). Probably because she was an indispensable source of information, Carole Loomis is treated neutrally.

This gets more irritating when you consider the sympathy, even vicarious anguish, that Mallaby feels for billionaires he likes when they lose a billion or two. Their prior winnings are evidence of their status as superlative beings, but their subsequent misfortunes are heart-wrenching tragedies. It's probably why narrative journalism and investing are especially bad together: in financial markets, every loss is somebody's win, but if the winner is in the room, it's joyful.

Mallaby often "steps back" from the narrative to describe what lesson the reader is supposed to have learned from what has just "happened." Nearly always, this lesson is spectacularly wrong. For example, Mallaby describes the manner in which the Quantum Fund (led by Druckenmiller and Soros) shorted the UK pound in 1992, thereby wrecking the ERM, then, in 1997, squashed the Thai economy--the entire economy--like an unsuspecting kitten. That's how Mallaby describes it, and so far, it holds up in court. The team from Quantum shows up like Columbo, discovers the Thai authorities have been concealing the true nature of their balance sheet, and bust them--in the process, ruining the vast majority of Thai households and enriching Soros, among others.

Like a psychopath's best groupie, Mallaby accepts without reservation that 100% of blame for the catastrophe goes to the Thai authorities for failing to do what the people at Quantum wanted them to do in the first place--viz., devalue the baht and make good the Quantum short on the baht. He repeats this narrative many times in the remainder of the chapter, so that he starts to sound like Anton Chigurh's lawyer, if he had one. The concept that the authorities in countries like Thailand or the UK have other prevailing concerns besides appeasing the demands of shorts is simply too outlandish for Mallaby.

Later, the Quantum fund decides to take an opposite position in Indonesia (hedge funds ideally can switch positions so quickly they make money on both sides of a temporary spike in prices). This time, the expectations of the Quantum fund managers were dashed. Mallaby cheerfully takes this as evidence that Quantum fund cannot possibly be a superpredator (p.209), and later, when Soros personally loses hundreds of millions on a rogue investment in Russia, he again (p.219) insists that this "makes nonsense" of the idea of Soros as a superpredator.

Mallaby, in other words, has learned one lesson from the hedge funds and applied it to the ideological point he is pounding: if your man makes money, it's because he's the greatest mind since Jesse Livermore. If he loses it, it proves that he's just a soft touch. He repeats this sort of head-I-win, tails-I'm-too-good-for-this-world narrative with the Farralon Fund--and none of the inferences he makes about that particular story even make sense. He makes no secret of the fact that he thinks critics of the funds are disgusting--literally, aesthetically, disgusting--and mocks them on the rare occasion he brings them up.

At first I was mildly interested in his descriptions of how funds differed, but it became obvious he was too besotted with the man-musk, and too bored with the technical details, to actually provide anything but the most vague summaries. There's not really anything of financial interest that wouldn't have been readily available from reading a Fortune magazine profile online, and that's not saying very much at all.

Between 2003 - 2006, money in the top 100 hedge funds doubled to $1 trillion; by mid-2007 it was $2 trillion. Mallaby reviews the approaches taken by former hedge-fund managers, some a bit shady (inside information, dishonest mortgage marketing), but all with lots of leverage and shorting. A number crashed, most famously LTCM. His main point is that hedge funds have not required a bailout, and should be viewed as more benign than big banks. Nonetheless, it seems more than a bit sinful that in 2009 the top 25 hedge fund managers earned a total of $25.3 billion, more than ever. Especially the fact that they get special tax breaks. J.P. Morgan died in 1914 with the equivalent today of only $1.4 billion.

Mallory's second major point is that the efficient-market hypothesis does not hold water - something Buffett proved long ago. He neglects, however, to examine the implications of admiring this new casino capitalism in an age of globalism where millions of Americans have lost their jobs, and many others have lower pay, less security, and weaker benefits.

Note to Mr. Mallaby: John Paulson profited enormously from the credit bubble in large part because he got Goldman Sachs to agree to criminally conspire against Goldman Sachs customers whose investments were stuffed with garbage mortgage securities personally selected by Mr. Paulson for their high probability of failure, thus triggering his profit on the other side of the transaction in the form of credit default swaps.

Hedge Funds are a highly distilled version of the criminal elite on Wall Street. Elite not because of their brilliance but becaue of their outsized criminality.