Who knew financial history could be so compelling and entertaining. I have almost no background in finance but this book taught me a lot, and kindled a desire to become a more serious student of finance. I didn’t even know what a hedge fund was before picking up this book, but by its end I was able to guess how the markets might respond to the most recent global disaster (Japan Earthquake/Flood of 2011), and intelligently follow along with CNBC commentators. The information in the book is great, and so are the human stories. George Sorros is the most famous, and there are many others whose careers are truly the stuff of legend. Apparently there’s something satisfying watching someone make tons of money and then lose it.
He could thus hedge his bets and even make money regardless of the market. To reduce his risk, Jones didn’t just buy stocks hoping they’d go up. He also bought stocks “short” — meaning he borrowed stocks he thought would lose value — sold them immediately, then bought them back when the price dropped. You’ll start receiving the latest news, benefits, events, and programs related to AARP’s mission to empower people to choose how they live as they age. A Social Purpose Corporation employs a hybrid approach to growth and profit, incorporating elements of traditional for-profit business and nonprofit organization. An SPC is able to pursue both social and financial goals in the for-profit context, even if those social goals may at times conflict with the corporation’s financial interest or shareholders’ financial interests. Finance professors have long argued that beating the market is impossible, and yet drawing on insights from physics, economics, and psychology, these titans have cracked the market’s mysteries and gone on to earn fortunes.
“Nobody steals Fred C. Dobbs’ gold!” snarled Bogart in the film version of Traven’s Treasure of the Sierra Madre, but the times have changed. Finance is a global high-tech operation, and the world is living on high-speed credit—theft is a cash flow problem that hurts only taxpayers, small investors, and out-of-work employees. He’s incisive, informative, and as good a financial writer as he is a storyteller. Yet I found his subjects morally bankrupt — and his book therefore hard to adore. Like a stock market fluctuation, my reaction is probably irrational. More Money Than God is an expert primer on America’s most obscenely lucrative investment tool. Hedge funds, as Mallaby explains, are like the Ferraris of finance.
The History Of Hedge Funds
Here I take Bezemer’s side and say that’s asking for trouble. Then came the crisis of 2007–2009, and every judgment about finance was thrown into question. Whereas the market disruptions of the 1990s could be viewed as a tolerable price to pay for the benefits of sophisticated and leveraged finance, the convulsion of 2007–2009 triggered the sharpest recession since the 1930s. In July 2007, a credit hedge fund called Sowood blew up, and the following month a dozen or so quantitative hedge funds tried to cut Retail foreign exchange trading their positions all at once, triggering wild swings in the equity market and billions of dollars of losses. The collapse of Lehman Brothers left some hedge funds with money trapped inside the bankrupt shell, and the turmoil that followed inflicted losses on most others. Hedge funds needed access to leverage, but nobody lent to anyone in the weeks after the Lehman shock. Hedge funds built their strategies on short selling, but governments imposed clumsy restrictions on shorting amid the post-Lehman panic.
On Wall Street, the crash of October 1929 was followed by a series of collapses in the early 1930s. He grappled ambitiously with the biggest questions of his age, but his conclusions tended to be moderate. One was a Ponzi scheme, one a tax fraud, and the last was sold to American Express for $380 million.
But in actuality they make computer-automated trades in millionths of a second, not knowing or caring what it is they are trading.The history shows hedge funds can be destructive to ordinary men and women. Soros’s attack on the English pound and Thai bhat are discussed in the book but it’s mitigated in Mallaby’s eyes because Soros wasn’t completely predatory in bringing about the collapse of all the East Asian economies.
They need to shrink institutions that are too big to fail and favor ones that are small enough to go under. W. Jones and his successors shows that a partial alternative to banking supermarkets already exists. To a surprising and unrecognized degree, the future of finance lies in the history of hedge funds. Mallaby, who is a bit of a hedge fund fan, points out that on average mutual funds don’t beat a dartboard portfolio or market index. Therefore, whatever you’re paying in mutual fund management fees is a bad value. Mallaby also points out that the employees of investment banks help themselves to roughly 50 percent of revenue every year. Morgan are giving up 50 percent of any returns to their capital, which makes the 20 percent fees of the most rapacious hedge fund seem low.
So are the stories of underdogs armed with nothing but a good idea working outside the system beating it at its own game. To an extent that he could not possibly have foreseen, Jones was anticipating the history of hedge funds. In the 1950s and 1960s, Jones himself was destined to impose a new efficiency upon markets. But the nature of that change was not at all what he expected. Jones believed that investor emotions created trends in stock prices.
- The standard practice for professional investors was to load up with stocks when the market was expected to go up and to hold a lot of cash when it was expected to topple.
- His many children’s books have been named among the 10 Best Books of the Year by the New York Times, Publishers Weekly, and the New Yorker, and among the 12 Best Books of the Decade by Amazon.com.
- When it comes to choosing between funding an inoculation program or buying Treasury Bills, the governments, for their own safety, have to choose T-bills.
- 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.
- With humor, anger and great tenderness, Richard Michelson’s poems explore the boundaries between the personal and the political, and the connections between history and memory.
- In 2006 Goldman Sachs awarded its chief executive, Lloyd C. Blankfein, an unprecedented $54 million, but the bottom guy on Alpha magazine’s list of the top twenty-five hedge-fund earners reportedly took home $240 million.
Banks know that if they face a liquidity crisis they have access to the central bank’s emergency lending, so they are willing to rely heavily on short-term loans; hedge funds have no such safety net, so they are increasingly reluctant to depend on short-term lending. For all these reasons, a proper definition of hedge funds should stress their independence.
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.
More Money Than God: Hedge Funds And The Making Of A New Elite (council On Foreign Relations Books (penguin Press)) Read_epub
But from the mid 1960s to the mid 1980s, the prevailing view was that the market is efficient, prices follow a random walk, and hedge funds succeed mainly by being lucky. If it were possible to know with any confidence that the price of a particular bond forex or equity is likely to move up, smart investors would have pounced and it would have moved up already. Pouncing investors ensure that all relevant information is already in prices, so the next move of a stock will be determined by something unexpected.
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.
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Others argued that if stock prices were rising but trading volume was falling, the bull market was running out of buyers and the tide would soon reverse. All shared the view that stock charts held the secret to financial success, because the patterns in the charts repeated themselves. W. Jones, Julian Robertson, and many Robertson protégés clearly did add value in this way, as we shall see presently. But frequently the edge consists of exploiting kinks in the efficient-market theory that its proponents conceded at the start, even though they failed to emphasize them. But in the 1970s and 1980s, a big pension fund that wanted to dump a large block of shares could not actually find a buyer unless it offered a discount.
Paul Tudor Jones posed for a magazine photograph next to a killer shark and happily declared that a 1929-style crash would be “total rock-and-roll” for him. Michael Steinhardt was capable of reducing more money than god underlings to sobs. Jones set out to see whether he could translate the chart watchers’ advice into investment profits. But it was the structure of his fund that was truly innovative.
Yet they managed risk better than banks, investment banks, insurers, and so on—and they did so without a safety net from taxpayers. Wealthy, powerful, and potentially dangerous, hedge fund moguls have become the It Boys of twenty-first century capitalism. Ken Griffin of Citadel started out trading convertible bonds from his dorm room at Harvard. Julian Robertson staffed his hedge fund with college athletes half his age, then he flew them to various retreats in the Rockies and raced them up the mountains.
Their innovation has transformed the world, spawning new markets in exotic financial instruments and rewriting the rules of capitalism. The result appears to defy a basic rule of investing, which is that you can only earn higher returns by assuming higher risk. The hedged investor earns a third more, even though he has assumed less market risk and less stock-selection risk. THE DISINTEGRATION OF EUROPE THAT JONES HAD WITNESSED, first in Germany and then in Spain, was an extreme version of the turmoil in his own country. The America of The Great Gatsby had given way to the America of John Steinbeck’s The Grapes of Wrath; the Jazz Age had given way to the Depression.
Where Does The Money Come From?
Still, given the advantages of the hedged format, the question was why other fund managers failed to emulate it. Pierpont Morgan had accumulated a fortune of $1.4 billion in today’s dollars, earning the nickname Jupiter because of his godlike power over Wall Street. But in the bubbly first years of this century, the top hedge-fund managers amassed forex 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. In 2006 Goldman Sachs awarded its chief executive, Lloyd C. Blankfein, an unprecedented $54 million, but the bottom guy on Alpha magazine’s list of the top twenty-five hedge-fund earners reportedly took home $240 million. That same year, the leading private-equity partnership, Blackstone Group, rewarded its boss, Stephen Schwarzman, with just under $400 million. But the top three hedge-fund moguls each were said to have earned more than $1 billion.³ The compensation formula devised by Jones conjured up hundreds of fast fortunes, not to mention hundreds of fast cars in the suburbs of Connecticut.