Clever, engaging analysis offers backstage pass to billion-dollar world of hedge funds


AIDAN KANEreviews More Money than God: Hedge Funds and the Making of a New EliteBy Sebastian Mallaby, Bloomsbury, 463pp £25

THEY ARE locusts, hyenas, vultures, or sharks, depending on which dark niche in the ecosystem of capitalism your nightmares lurk. Or they are barbarian hordes, sweeping down to scythe through the peace of pious central bankers to whom the villagers run for protection; they are Visigoths with spreadsheets. They are the hedge funds, and resistance is futile.

But, really, who and what are hedge funds? Are they, like the Visigoths, “much misunderstood”? Or do they fully deserve fear and anger, and the attention of regulators, as we sort through their economic wreckage? Stephen Mallaby offers a guide and some answers in an engaging yet thorough and calm account of the origins, evolution and role of hedge funds in the international economy.

Mallaby is a fellow at the Council on Foreign Relations, a Washington Post columnist and former senior journalist at the Economist.

For Mallaby, a defining feature of hedge funds proper is their independence, which drives their management of risk, return and leverage, and the alignment of their own incentives with the interests of their investors. When they fail, he argues, hedge funds impose little collateral damage on markets, and they have received zero direct government bailouts.

All of this is in contrast with the record of their traditional rivals, investment and commercial banks. Hedge funds did not cause this crisis, at best they steer markets away from bubbles and busts, and by finding distortions in markets, they trade them away.

These and other contestable claims are driven by the core story, told in the book, of the evolution of an industry. This is no statistical blizzard or display of high theory, but it is a class act, a grounded companion to such exercises, and a bridge to that literature.

The story begins in the 1950s with the founder of hedge funds – sociologist and anti-fascist AW Jones. He pioneers the original combination of leverage and hedging (via short selling), and over time a variety of alternative investment strategies emerge. Analytical traders ferret out tiny exploitable discrepancies in prices, or make one-way bets against naive governments. They will buy and sell your granny – if the market has mispriced her.

Others are acutely psychological, surfing market waves of enthusiasm and gloom, making fortunes from the irrationalities which finance textbooks prove do not exist.

George Soros appears as a man with market instincts so visceral they make his back hurt, and then as aspiring philosopher and philanthropist. The LTCM fund springs to life from the lab of Nobel Prize-winning economists, and by 1997 it has solved the problem of managing risk. Except it hasn’t, and so it blows itself up.

Meet also the man who made $7 billion for Yale University’s endowment fund, and know for a moment how world-class universities can be supported. Roll up, roll up, and marvel at the fund which bet against sub-prime mortgages, pocketed $15 billion, and marvel at how easy this looks.

And tremble at the secretive renaissance fund which silently and steadily makes billions by employing the very best mathematicians and computer scientists to spot patterns in market prices that do not make sense. If they did make sense, the logic goes, someone else would have seen them.

Mallaby steps back from this all-too-intense world of skill, energy and money, to explain the mechanisms at work, and the context. His case may not win the day, but the debate, and the outcome, could be much the better for this admirable book.

Dr Aidan Kane is a lecturer in economics at NUI Galway