More Money Than God
The New York Times bestseller“The bright light shed by More Money Than God is particularly welcome. Mr. Mallaby . . . brings a keen sense of financial theory to his subject and a vivid narrative style.” —Wall Street Journal“Splendid . . . the definitive history of the hedge fund history, a compelling narrative full of larger-than-life characters and dramatic tales of their financial triumphs and reversals.” —The Washington Post The first authoritative history of hedge funds-from their rebel beginnings to their role in defining the future of finance, from the author of The Power LawWealthy, powerful, and potentially dangerous, hedge fund moguls have become the It Boys of twenty-first-century capitalism. Beating the market was long thought to be impossible, but hedge funds cracked its mysteries and made fortunes in the process. Drawing on his unprecedented access to the industry, esteemed financial writer Sebastian Mallaby tells the inside story of the hedge funds, from their origins in the 1960s to their role in the financial crisis of 2007 to 2009—and explains why understanding the history of hedge funds is key to predicting the future of finance.
The Birth of Hedging
Alfred Winslow Jones revolutionized finance by combining leverage with short selling. In 1949, he launched the first hedge fund, aiming to neutralize market risk by pairing long positions in undervalued stocks with short positions in overvalued ones. This 'hedged' approach allowed him to charge a performance fee, a model that persists today. Jones proved that active management could generate superior returns regardless of market direction. His success transformed the investment landscape, shifting the focus from passive holding to aggressive, incentive-driven strategies. This section details how his sociological background influenced his contrarian investment philosophy, laying the groundwork for an entire industry that prioritizes absolute returns over benchmark tracking.
The Global Macro Pioneers
George Soros and Jim Rogers pioneered the 'Global Macro' style, looking beyond individual stocks to bet on entire economies. Their Quantum Fund treated the world as a chessboard, profiting from shifts in interest rates, currencies, and political instability. Soros introduced 'reflexivity,' the idea that investor perceptions actually change market fundamentals. This intellectual framework allowed them to spot bubbles and imbalances before the mainstream. By navigating the collapse of the Bretton Woods system and the oil shocks of the 1970s, they demonstrated that enormous wealth could be built by understanding the intersection of politics, economics, and human psychology, proving that hedge funds could act as global economic detectives.
Steinhardt and the Art of Block Trading
Michael Steinhardt brought a new intensity to the market, focusing on block trading and rapid execution. Unlike the patient investors of the past, Steinhardt was a 'predator' who thrived on liquidity and market friction. He leveraged massive positions to profit from short-term price movements, often intimidating counterparts with his sheer conviction. This era marked a shift toward institutional-scale hedge funds that could move markets through sheer volume. Steinhardt's ability to maintain high returns over decades solidified the hedge fund as a primary vehicle for capital growth, proving that aggressive, high-turnover strategies could consistently outperform traditional long-only benchmarks through superior market timing and psychological dominance.
The Systematic Trend Followers
As markets became more complex, traders like Paul Tudor Jones introduced technical analysis and systematic trend following. Jones famously predicted the 1987 Black Monday crash by studying historical patterns, particularly the 1929 charts. This section explores how he combined gut instinct with rigorous data, proving that market psychology often repeats itself. By focusing on risk management and price action rather than just fundamentals, these traders showed that hedge funds could thrive in periods of extreme volatility. Their success highlighted the importance of 'stopping out' of losing trades and riding winners, a discipline that redefined professional trading and introduced a more scientific approach to market speculation.
The Tiger and His Cubs
Julian Robertson's Tiger Management exemplified the 'bottom-up' fundamental approach, hiring elite analysts to scout for the world's best and worst companies. Robertson was a master of research, looking for the best twenty stocks to buy and the twenty best to short. His influence extended far beyond his own fund; his protégés, known as 'Tiger Cubs,' went on to found many of the industry's most successful firms. This section examines how Robertson's focus on intense competition and deep analytical rigor created a meritocratic culture that came to dominate Wall Street, even as his refusal to adapt to the tech bubble eventually led to his fund's high-profile closure.
The Man Who Broke the Pound
The 1992 ERM crisis cemented the hedge fund manager's image as a global power broker. George Soros and Stan Druckenmiller famously bet against the British pound, forcing the Bank of England to withdraw from the European Exchange Rate Mechanism. This 'Black Wednesday' trade netted Quantum over a billion dollars in a single day. Mallaby argues that rather than being villains, hedge funds acted as the 'immune system' of the financial world, exposing unsustainable government policies. This pivotal moment proved that private pools of capital could successfully challenge sovereign central banks, forever changing the relationship between high finance and national policy while highlighting the fragility of fixed exchange rates.
When Genius Failed at LTCM
Long-Term Capital Management represented the pinnacle of academic finance, led by Nobel laureates and legendary traders. They used complex mathematical models to exploit tiny price discrepancies with massive leverage. However, the 1998 Russian debt default triggered a 'black swan' event that their models deemed impossible. The fund's near-collapse threatened the entire global financial system, necessitating a massive Wall Street bailout. This section serves as a cautionary tale about the limits of quantitative modeling and the dangers of excessive leverage. It illustrates how even the brightest minds can be blinded by the assumption that the future will always resemble the statistical patterns of the past.
The Quant Revolution
Following the LTCM disaster, a new breed of 'quants' emerged, led by Jim Simons and Renaissance Technologies. Unlike LTCM, these funds avoided fundamental theories, instead using massive computing power to find hidden statistical patterns in market noise. Simons' Medallion Fund achieved the greatest track record in history by treating the market as a mathematical puzzle rather than a series of economic events. This section explores the transition from 'star' human managers to algorithmic trading. These black-box strategies revolutionized the industry, proving that cold, unemotional data processing could generate returns far beyond what human intuition or traditional fundamental analysis could ever achieve in modern, high-speed markets.
Navigating the Great Recession
The 2008 financial crisis was a moment of reckoning, but also of triumph for certain hedge funds. While banks collapsed, managers like John Paulson realized the housing market was a giant bubble fueled by subprime debt. By betting against mortgage-backed securities, they earned billions while the world economy burned. Mallaby highlights how hedge funds, unlike banks, were mostly able to survive without taxpayer bailouts because of their private structure and agility. This period demonstrated the industry's ability to profit from systemic failure and provide essential price discovery, reinforcing the idea that hedge funds are necessary to identify and burst dangerous asset bubbles before they explode.
The Future of Alpha
In the aftermath of the crisis, the hedge fund industry faced increased regulation and a shift toward institutionalization. Mallaby concludes that despite criticisms of high fees and inequality, hedge funds remain a vital component of a functional capitalist system. They provide liquidity, manage risk, and challenge corporate mismanagement through activism. The final section reflects on the evolution from small 'boutique' operations to global giants managing trillions. While the 'easy money' of the early days has vanished due to increased competition and market efficiency, the drive for 'alpha'—returns uncorrelated with the broader market—ensures that the smartest and most aggressive investors will continue to seek market inefficiencies.