The rise of richer than God hedge funds

By Andrew Sheng, special to The China Post

In the old days, technical books were read for one’s education, but they were so boring that you would fall asleep. You read novels instead for their drama, romance and excitement.

In this fast moving world where daily events are more thrilling than fiction, books like “More Money than God” by Sebastian Mallaby make you want to turn the next page.

Written by a former journalist, who today works for the U.S. Council for Foreign Relations, the book has combined blood and guts story-telling of the hedge fund industry with careful analysis like Sherlock Holmes, tracing meticulously how the industry works.

The narrative is so thrilling that when the author described the scene where the hedge funds took down Thailand in 1997, my hair stood on end.

I was a ringside witness but I had not known who was doing what and how they did it. If you want to know how hedge funds sniff out opportunities by talking to honest and naive central bankers who admit that they made policy mistakes and then make more money than God, read this book.

It is both a clinical analysis of how hedge funds emerged from nowhere to become the market movers of today, as well as a morality story that raises more questions than it is able to answer.

It may not be illegal (at least under existing law) to do a trade that tips a nation into abject poverty because there were tragic policy mistakes, but is it morally right to take home billions by accelerating the process of “creative destruction?” The central insight of the hedge fund industry is brilliant — it is that the academic finance theory is all wrong and that we all are naive to believe that the theory is right. Modern finance theory begins with the assumption that the market is efficient and knows best. The efficient market hypothesis is based on the view that it is not easy to beat the market. However, the hedge fund industry makes most money from the inefficiencies of the market. If you are not convinced, how between May 1980 and August 1998, the Tiger Fund earned an average of 31.7 percent per year after fees, beating the 12.7 percent return on the S&P500 index. The offshoots of the Tiger Fund, created by people who left the Fund to set up on their own, generated returns of 11.9 percent per year between 2000 and 2009, compared with the average of 5.3 percent per year for the S&P index. Mallaby takes the story from the 1949 creation of the first hedged fund by Alfred Winslow Jones to the emergence of a sophisticated and complex US$2 trillion industry.

He weaves a wondrous tale of how tribal and interconnected the industry became as it emerged. Nobel Laureate Paul Samuelson, famous for arguing that randomly chosen stock selection would beat professionally managed mutual funds, was a founder investor of the Commodities Corporation, one of the first “quants” to use computer analysis to trade commodities. The Commodities Corporation was the nursery for three future hedge fund giants, Bruce Kovner (Caxton), Paul Tudor Jones Tudor Investments) and Louis Bacon of Moore Capital.

Louis Bacon had connections with two of the Big Three in the early 1990s, being related by marriage to Julian Robertson (Tiger Funds) and worked briefly with Michael Steinhardt. The last of the Big Three is George Soros (Quantum Fund), who became famous as the man who made US$1 billion speculating in sterling and has become a philosopher/philanthropist.

Many of these funds were involved during the speculative raids on Asian currencies during the 1997/98 Asian crisis and it is likely that many of them are having a food fest in Europe right now.