More Money Than God by Sebastian Mallaby
This is a review of More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby.
I was driving in my car listening to NPR when the author Mr Mallaby came on air to discuss his book. Mr Mallaby is an interesting and exciting speaker. He makes a dry subject like finance come to life with interesting anecdotes and insider stories, making you feel as if you’re watching the history of hedge funds unfold right before your eyes.
His book More Money Than God
details the history of the hedge fund industry from around the early part of the 20th century to the current recession of 2008. His basic premise is that small, boutique hedge funds that are not too big to fail are actually good for the economy as they provide liquidity to the market and generate the long sought after ‘alpha’, a measure of investor skill as opposed to ‘beta’ a measure of how well a stock performs just by the market rising. The early hedge funds generated alpha just by the fact that they sat in front of the SEC and got each company’s quarterly report by hand rather than waiting for them to be delivered by mail. This gave them a competitive advantage of a few hours to buy or sell a company’s stock before their competitors. As the market got more efficient and other people caught on to this innovation, new hedge funds came along and started trying fancier techniques like talking to clients of a company to see how well its doing, or estimating trends or even looking at stock ‘momentum’. With the event of the computer, hedge funds like Long Term Capital Management started doing things like finding correlated stocks that may trade in multiple exchanges where it may be too expensive in one exchange and too cheap in another and exploit these inefficiencies to their advantage. He finally describes the ultimate hedge fund of them all, Renaissance Technologies, that were founded by code breakers and statistical machine translation folks who use their advanced computer skills to analyze the stock market to generate ‘alpha’, in order to get uncorrelated returns from the market.
Mr Mallaby also shows the horrific consequences of hedge funds that got too big like LTCM that had overleveraged themselves and when it came time to liquidate, telegraphed their intent and became the victims of other traders who traded against their position. He also described how George Sorro’s Quantum Fund broke the currency pegs in the UK and during the Asian Financial crisis by borrowing more money than a large nations (like the UK’s) foreign reserve.
Although dry at times, it provides an interesting casual look into the world of hedge funds that is well research and an entertaining read. Recommended for people who are interested in finance that may not be in the field and are interested in knowing the backstory of what goes on.