In a lot of ways this book review does not belong in my series on the financial crisis of 2008 because well over 350 pages of the 500-page book have nothing to do with the financial crisis itself. But in one very important sense this book is extremely important to the aftermath of the crisis, and I hope to make that sense clear in this review. More Money than God should be required reading for anyone in my business, and I mean that with complete seriousness. It is an utterly fascinating look at the history of the hedge fund industry, and in telling the story of this ascension of this world-changing business, author Sebastian Mallaby treats his readers to an in-depth look at the individual stories of the biggest names in hedge fund history (George Soros, Stanley Drunkenmiller, Julian Robertson, Paul Tudor Jones, John Paulson, A.W. Jones, Jim Simons, Ken Griffin, and several others). But this is not history and biography for history and biography’s sake; Mallaby treats his readers to a thorough discussion of the Efficient Markets Hypothesis, and demonstrates more investment knowledge when it comes to subjects like alpha, arbitrage, and contrarianism than almost any Wall Street analyst I have read (which is essentially everyone of them ).
The reason for including this book in a review series that is focused on 2008′s debacle is because Congress and the media have picked a fight with the hedge fund industry, and Mallaby is the first author to enter the public fray to actually defend the billionaires. One may think that with a title like More Money than God that generic class envy would permeate the book. But alas, Mallaby is too intelligent for such drivel. And regardless of what one thinks about the lifestyles (not to mention the politics) of the rich and famous in Greenwich/Manhattan, the reality is that Congress and the media are shooting blanks when it comes to placing any of the blame of the 2008 crisis on hedge funds.
Mallaby ably points out that hedge funds did not receive any taxpayer bailout money after 2008. Some of them profited wildly (which I imagine their investors find to be a good thing). Some of them blew up (and as is the case in a risk/reward market system, suffered the due wrath involved in that). The vast majority delivered returns below 0%, but far better than the market itself (likely also pleasing the investors in the various funds). Mallaby’s point which must be understood is that hedge funds by definition are “small enough to fail”. They use far less leverage than the major banks did (and still do). The largest investors in hedge funds are almost always the very people running them. And most importantly, hedge funds seek out (and find) anomalies in the marketplace and make for a far more liquid and honest playing field. They have brought to the investment landscape a huge divergence of opinions, perspectives, strategies, and methodologies. Investors are so much better off for this … One can look at some of the more notorious hedge fund blow-ups in the last fifteen years, but none of them set off a chain reaction like the fall of Lehman did, and none of them received money from taxpayers to stabilize the system. This is a true “eat what you kill” world, and Mallaby demonstrates that hedge funds had no role whatsoever in making the financial crisis of 2008 worse; for many institutional and retail investors, they actually softened it a great deal.
One of the popular rallying cries against hedge funds is their lack of transparency. Various economic nitwits in Congress have screamed that hedge funds have a responsibility to disclose their positions to their investors. I (and Mallaby) would argue that hedge funds have no such responsibility, provided that they gave the one disclosure that matters to their investors: We will not be disclosing our positions to you. Mallaby uses this point of contention to give some of the greatest examples of the law of unintended consequences I have ever seen. The privacy hedge funds desire in their trading book is not contrary to their investor’s best interests (and if it were, the investors do not have to invest); it is positively correlated with their investor’s best interests. Congress just can not get out of its own way, and this disclosure issue is Exhibit A. It is when the market knows a hedge fund’s trading book that that fund is most susceptible to risk. The wisdom (or lack thereof) of telling your clients what you own is a matter best left to the fund and its own investors, and Mallaby uses careful logic and empirical evidence to make this case.
All readers of my financial crisis series should want the same thing I do: A future investing landscape that rewards good risk-taking and punishes bad risk-taking; a future landscape that is prepared to intelligently allocate capital in what will certainly be a challenging period. The aftermath to the crisis has been to mistakenly assume that government regulation will accomplish all of that. As Mallaby’s tremendous book shows, though, this is not the case at all. Best of breed investment managers prudently seeking out inefficiencies in a marketplace that is chalk-full of them is an ideal solution to the investing need of the hour. In the hedge fund industry, we have just that. No, these men are not all angels (as Mallaby grants), but of course neither are the regulators, politicians, or big banks either. What they are, though, is the best innovation a market system has come up with (to date) for providing superior risk-adjusted investment strategies to an institutional and retail investor population, without the backstop of the American taxpayer. Kudos to Mallaby for this phenomenal book. May this not be the last we hear from him …
P.S. – I may do my own research some day as to why exactly so many of these quintessential free market pioneers, the captains of the hedge fund industry who bathe in the risks and rewards of capitalism every day, are so often pre-disposed to such left wing lunacy. Granted, they are not all extremist radicals like George Soros, who in this book you will see the true summation of a sociopathic hypocrite. But of the dozens of hedge fund friends I have in the city, and of the major characters in this book whom I do not know, the vast majority are often ultra-left in their personal politics. This inexplicable factoid is probably explained by the same facts that explain the left-wing mania of Hollywood and Silicon Valley: Rich guilt. More inquiry into this is needed.