An excellent history of hedge funds that combines narrative with more technical analysis. It combine the detailed luck and idiosyncratics of history with clear examples explaining concepts such as crowding, balance sheet effect, leverage, shorting, currency trades and survivorship bias. It's to be expected from someone who wrote for the Economist. The book is denser than I thought, but it was thoroughly enjoyable.

The book's protagonists are hedge funds and their founders. Sometimes for a book this length, the descriptions of their idiosyncrasies drags on, and their features tend to blend anyways but the book is generally excellent.

There's a few themes that the author returns to, which are explored in depth. The main theme is the tension between efficient markets theory and the success of hedge funds. The author makes several interesting observations. Some of the hedge funds' success can be attributed to exploiting well known problems with efficient markets hypothesis, such as currency bets against stubborn central banks/governments, Steinhardt's block trading, and institutional needs that are not driven by economic rationale. Other successes are more difficult to explain within the theory, and the author seems to believe that there exist trends that can be exploited. This part of the author's hypothesis seems more vulnerable to attack. For one, the strategies of quantitative firms like the Renaissance fund are highly secretive (the author has the good grace to admit so), so it's difficult to evaluate trend surfing claims. Other themes are the difficulty of hedge funds keeping their edge (typically their competitive advantage is learned by others or changes in the market moot them), or how many times hedge funds had pre-empted academia. In particular AW Jones's measurement of volatility of stocks to hedge, (years before CAPM) and his use of shorting and longing to hedge (years before portfolio theory) seems to demonstrate Taleb's complaints against academia to be based on some truth. Another background theme is the question of whether hedge funds act as correctional forces to the market, bringing prices in line with their fundamental value (allocating capital correctly) or just make the gyrations of the market more extreme. The author brings up the societal good that hedge funds have done by providing liquidity, bringing exchange rates to the proper rate, increasing the endowments of universities, and leading the charge of investments into emerging markets.

The book really does an excellent job (as far as I can tell) explaining Soros's breaking of the pound and the collapse of LTCM in detail (both giving and detracting credit where deserved). I was impressed by the detail of the book. In particular that it referred to Mandelbrot's power law observations and the fact that the 20% performance fee comes from AW Jones's contention that it was the fee of phoenician merchants. I wish the book spent more time on Paulson's bet, and the book does not even mention Bridgewater, but the breadth of the book was still impressive.

The book has an interesting conclusion, even though it seems a bit disjointed from the rest of the book. The author contrasts hedge funds with investment banks and commercial banks during the crisis. He argues that hedge funds, with their paranoid culture, and performance fee incentives generally fared better than banks. Additionally, hedge funds rarely became too big to fail, when they did they did not disrupt the broader market generally. He recommends that the government not regulate hedge funds unless they become too large. It's a long read generally, but enlightening and does not disrespect the intelligence of the reader. ( )

Fantastic, highly recommended. Basically three books in one: history of major economic/financial events over the last fifty years, an analysis of hedge funds and the financial economics, and the motivation for a policy recommendation.

Mallaby has lots of nuance, appreciates the pro and con of every argument, but basically the main arguments of his book are: (1) hedge funds can get above market returns by exploiting information or anomalies that others do not; (2) in the process they improve the allocation of capital and, on balance, stabilize markets by, for example, minimizing bubbles by selling short; and (3) when they fail, hedge funds rarely pose a systemic risk to the economy or financial system, when they go bust it is generally another hedge fund that rushes in to take them over (see points 1 and 2 above).

Mallaby manages to convey all of this in a suspenseful page turner that uses well chosen anecdotes and stories to keep you engaged from beginning to end. ( )

“Why is it, particularly in the financial industry, we see such limitless greed? You have to look at the nature of money. Money is not like a commodity, commodities need inputs, money doesn’t need any inputs, so from the supply-side there is no constraint whatsoever, you can produce it in limitless quantities, technically speaking. Now from the demand side, the demand for money is equally limitless. So you have limitless demand and supply, in principle constrained only by regulation. So people operating in such a system if you de-regulate it, you automatically get limitless behavior.” – Dirk Bezemer

In the useful part of the book, Sebastian Mallaby takes us through a brief history of hedge funds. Hedge funds are defined by their 20% performance fees, their ability to go long and short, and their obscene use of leverage. Mallaby focuses on the heads of the most successful funds and describes some of the great financial booms and busts as seen from their eyes.

In the less useful PR part of the book, Mallaby gets an opportunity to indulge in his worship of money, incessantly reminding us of a fund’s size and rate of return. And more troublingly he engages in an apologia for the hedge funds and their operators.
First you have to understand that Mallaby is about establishment as you can get---son of the UK ambassador to France, Eton, Oxford, Washington Post editorial board, Council of Foreign Relations. His goal as dutiful public relations flak to his class is to convince us (basically the 99%) that hedge funds are on balance good (or at least no worse than any other institutional investment vehicle) and would do an even better job if…wait for it…they were less regulated.

For example, he defends a particularly noxious fund manager---used insider knowledge to make trades, controlled shadow “third markets”, cornered a Treasury auction and then applied a short squeeze on investors---with the vapid defense that such sociopathic behavior was good for the economy. That is, we should accept the crimes (never proven!) because on balance the fund manager helped the economy. Astonishing.

Another way Mallaby defends hedge fund managers is to tell us that hedge funds actually do something for the real economy---provide liquidity or risk insurance, or allocate capital to those who can best use it, or something. 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. Today, great reserves of dollars must be held by foreign governments to stave off speculative attacks from hedge funds. 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. And in so doing reinforce the US-dominated global financial system. This bigger picture seems lost on Mallaby.

Written in the wake of the global financial crisis, Mallaby offers hedge funds as an alternative to banks to manage risk. Although he puts in a plug for progressive taxation, the main message of the book is that hedge funds have it all handled, get out of their way. Here I take Bezemer’s side and say that’s asking for trouble. ( )

More Money Than God is one of the best books I've read so far this year. 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. So are the stories of underdogs armed with nothing but a good idea working outside the system beating it at its own game. The other financial book I read recently, The Big Short, is similar for the drama, but this book is better for the information and broader context, though a little more difficult, I would recommend it highly to anyone as you can read it just for the plot, or in more detail about how finance operates through successes and mistakes.

--Review by Stephen Balbach, via CoolReading (c) 2011 cc-by-nd ( )

This book is a history of hedge funds. Its quality is as good as one could hope, and an order of magnitude better than the last hedge fund book I read, The Quants by Scott Patterson. The details and extensive references are superb. I especially enjoyed the accounts of Commodities Trading Corp, LTCM, and Renaissance Technologies. It has one big fault. It makes no mention of Ed Thorp - probably because, as my brother Stefan said, he boringly made money consistently and never blew up. Incidentally, The Quants discusses Ed Thorp extensively, which is the best thing about that book.

This book should be read by every investor because the size, leverage, and behavior of hedge funds have a significant influence on the financial markets. I do not agree with the author's assertion in the last chapter of the book that hedge funds are not a destabilizing influence in the financial markets. They can be destabilizing. The concluding chapter of the book concerns the authors views of hedge funds in finance, which was the most boring chapter, and can safely be skipped.

My favorite quotes from this book:

I thought random walk was bullshit. The whole idea that an individual can't make serious money with a competitive edge over the rest of the market is wacko. (F. Helmut Weymar, pg 64)

Commodities Corporation was not about salesmanship and relationships and looking like a market insider; it was about beating the market with computer models, math, and superior information. (pg 65)

So long as hot dogs were selling, the world could not be ending. (Muriel Siebert, pg 98)

Great investors tend to have a screw loose, pursuing the game not for profit, but for sport. (David Swensen, Pioneering Portfolio Management, pg 252)

...there was a Henry Moore sculpture outside and a lawn where beautiful people ate organic sandwiches. (pg 275)

Simons...never hired economists. He wanted people who would approach the markets as a mathematical puzzle... (pg 289)