Cash of the titans

August 31, 2010  

Sebastian Mallaby writes uncritically about today's masters of the universe.

By Leah Spiro

More Money than God: Hedge funds and the making of a new elite
By Sebastian Mallaby
Penguin Press

In "More Money than God," a chronicle of hedge fund superstars including Julian Robertson, George Soros and Paul Tudor Jones, Sebastian Mallaby writes that these hedge fund titans established themselves in the 20th century as "the new Rockefellers, the new Carnegies, the new Vanderbilts. They were the new American elite."

Mallaby, a Washington Post columnist and former Economist staff member, is clearly enamored of these masters of the financial universe. He has written a well-crafted and useful history of the now 60-odd-year-old hedge fund industry, telling the story through a series of smaller profiles of its biggest practitioners. Though hedge funds took a beating in 2008, Mallaby's upbeat thesis is that they will dominate the world of finance thanks to their superior incentives, risk management and nimbleness—as long as they are private. "Today, hedge funds are the new merchant banks—the Goldmans and Morgans of half a century ago," writes Mallaby.

The inventor of the hedge fund model was an unlikely and obscure financial pioneer, A.W. Jones, a journalist who launched the first hedge fund in 1949. Jones stumbled on a magic formula for making money, with four essential ingredients: a 20% chunk of profits that goes to the hedge fund manager, the ability to go short, the use of leverage and a minimum of regulation. Jones's motto: "Speculative means for conservative ends."

This 496-page tribute goes on to explain, in accessible, layman's prose, each manager's claim to investment fame, from Michael Steinhardt's high-intensity block trading prowess to Long-Term Capital's cerebral international bond and tax arbitrage. The book sheds light on an important question: Who are these guys, and how did they make so much money?

Despite Mallaby's considerable talents as a writer, he struggles to overcome a few hurdles. The first: It is nearly impossible to weave together the stories of a bunch of iconoclasts into a single narrative about an industry. Next is access. Past books about hedge fund managers have been based on lengthy, in-depth interviews with a few of the same subjects, yet "More Money than God" reads as if Mallaby had limited access to his mostly living subjects. To Mallaby's credit, a few of these financial titans, including Paul Tudor Jones and Stanley Druckenmiller, sat for rare interviews. The book includes a fresh retelling of how Soros ganged up on the British pound and some new Julian Robertson anecdotes. But elsewhere Mallaby has to construct these characters with material from secondary sources.

Most troublesome, a book that puts hedge fund managers on pedestals feels out of step with 2010. After the 2008 crisis, even the industry's most successful managers have sought to tone down the flash in a nod to the new era of fiscal austerity. And Mallaby avoids references to his subjects' personal lives or anything controversial. For example, he glosses over the brouhaha over Jim Simons' fund for institutional investors that lagged the returns of the Medallion fund, designed for employees only.

"More Money than God" is a full-throated defense of an industry that didn't cover itself in glory after the losses, lockups and frauds of 2008. And Mallaby, who is strongly antiregulation, sidesteps the issue of systemic risk, writing that when hedge funds blow up, "they cost taxpayers nothing." But the lesson of his own chapter on the meltdown of Long-Term Capital Management is that LTCM—a hedge fund—came dangerously close to wreaking havoc on the world financial system and would have left the taxpayers picking up the tab a mere 10 years prior to 2008. Mallaby ends upbeat: "Hedge funds' mystique survived the crisis. They were repellent and attractive, objects of envy and yearning." But will that mystique survive the brave new world of regulation?

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