More Money Than God: Hedge Funds and the Making of a New Elite (Council on Foreign Relations Books (Penguin Press))

This is the magnum opus on the hedge fund industry. As other hedge fund related books seek to either vilify the industry or brazenly praise the uncanny good fortunes industry insiders - this book does neither - which I found refreshing and a strategic positioning of this work from "the rest." 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.

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.

From reading about the crash from the perspective of a Mortgage Trader I segwayed to this book about the history of hedge funds. Great choice! This is an exceptional book and I would recommend this for all those with any interest in finance whatsoever! The book details the history of hedge funds and their groundbreaking fee structure from the first hedge fund by A.W. Jones in the late 1940s. Written generally chronologically it moves forward showing how people left firms to start their own and funds and also the different strategies employed by the firms. This is particularly compelling because while I work in the Finance field my knowledge of hedge fund investing strategies and the many options was not very deep. This book does a great job of pulling back the curtain and showing more detail. I will briefly mention some subjects and thoughts. George Soros and Stan Druckenmiller are covered at length. Their hedge fund strategies and specifically "breaking the bank" in more than one country highlights the importance and possible need for regulation of the hedge fund industry which is the underlying question to be answered throughout the book. Also Michael Steinhart whose great run in the 70/80s is explored as well as mention of whether he dealt with nonpublic information pertaining to block trading and Treasury auctions. Other interesting historical topics of interest were Julian Robertson of Tiger Investments, Citadel, and the Commodities Corp as well as their spin-offs. Of course no hedge fund book would be complete without mention of the LTCM meltdown. My personal favorite subject was of Paul Tudor Jones as I know so many of his friends since he grew up where I live and has had a run from the 80s to now. The book does a great job explaining his strengths coming from a commodities trading background. It really is fascinating to see the different nuances that so many of these successful investors take to achieve their goals. I could talk on and on about theories explored such as Efficient Market Theory as well as his opinion of potential regulation needed but instead, BUY THIS BOOK if you have any interest in Finance. It is well worth the read and worth the time. As a final comment I would like to add that I read the Kindle version. The one negative to Kindle to me is you start reading and you really don't know where it ends. I suspect there is an easy way to tell but I don't take the time to look. This is a very large, long book that took me quite a bit of time to read. No problem. I'm just struggling to get used to Kindle vs. holding the actual book in my hand and knowing where I am. You can see by percentage read that you are in for a haul but still, this book is worth the time.

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.

I really liked this book because it did such a nice job of telling the history of hedge funds in story form (it reminded me of Lewis, The Big Short, Liars Poker, etc). The author did *extensive* research and many interviews with the players, so the book has the ring of truth, for sure. I had to (and wanted to) read it through twice because there was so much good material. I particularly liked the attention the author paid to the reasons why hedge funds blew up, or were hurt badly -- typically, they got hurt bad when their trades were big, when they were leveraged too much, and when they couldn't get out of crowded trades when liquidity dried up and others started trading against the dying fund. It was also very interesting to read the author's take on whether it makes sense to regulate hedge funds more. If anything, I went into the book thinking like most laymen, that hedge funds were somewhat destabilizing and unsavory players in the market, but I came out of the book with more understanding of why hedge funds can play a positive role in the market, and why it doesn't make much sense to attempt to regulate them even more. An excellent, educational, and thought-provoking book, IMHO.

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.

Una historia de como nacieron los famosos fondos de cobertura, como operan, como están evolucionando y como quiebran. Sin ellos el mercado sería más aburrido y menos "eficiente"

As someone involved in the industry, I was disappointed with myself for not having read the book sooner. I now feel more grounded into understanding the very varied world of hedge funds. I do think that the author is somewhat too defensive of an industry that lately has had a hard time justifying its fat fees. Sadly, while there are varied strategies, there is now very little original thought left at any of your chicken fried funds. To that, you can add LPs' short time horizons and having professionals flocking into the industry hungry to make money rather than investing for the love of it, and you have an industry finding itself quagmired in mediocrity. Below are some of my conclusions and takeaways after reading MMTG. First, on the managers. Some have made money being more impressive than others -- Steinhardt, not impressive -- Renaissance (Medallion) and Julian Robertson definitely more impressive. 1) AW Jones -- first to have process and structure; somewhat less informed about the market itself; picking the best ideas by giving commissions to brokers who gave him best tips. 2) Michael Steinhardt -- block trading, network effects, manipulation, rumor trading, buying investment banks' favors (read bribing). 3) Paul Jones -- psychological trader, keen understanding of charts and emotions, little fundamental work. 4) Soros/Drukenmiller -- using technicals, macro understanding, and knowing how/when to bet your conviction. 5) Julian Robertson (Tiger) -- fundamental long short with exceptional culture. 6) Tom Steyer (Faralon) -- intense focus and dedication, all of managers' liquid savings invested in the firm. 7) Ken Griffin (Citadel) -- multi strat; excellent risk management and back office; buying large portfolios of other funds who failed to delever timely and had to be forced sellers. 8) John Paulson -- thorough due diligence of a fad that appears to be running out of steam. 9) Jim Simons -- even though Renaissance is quant, there is a lot of structure. Non-econ academics, formula driven, vast troves of data, closely guarded secrets, and back office support. Lots of edge there. On running a fund. Have a system, stick to it, review failures. On position sizing. Careful allocation and then "go for the jugular." Know how to bet your convictions. On risk management. Have to answer these questions: 1) how much capital; 2) at what leverage; 3) with what liquidity (duration of lock ups). High leverage kills if forced selling takes place. Liquidity is important. Secrecy is essential for stability.