- Foreign policy analyses written by CFR fellows and published by the trade presses, academic presses, or the Council on Foreign Relations Press.
In the aftermath of the global financial crisis, policymakers in the United States and around the world have focused on the problem of "too big to fail" institutions, debating remedies ranging from higher capital requirements to proposals to break up large banks. In his book, More Money Than God: Hedge Funds and the Making of a New Elite, CFR Senior Fellow Sebastian Mallaby argues that governments should instead encourage small-enough-to-fail hedge funds. Between 2000 and 2009, a total of about five thousand hedge funds went bust, but because they were too small to threaten the financial system, not a single one required a taxpayer bailout.
The author, director of CFR's Maurice R. Greenberg Center for Geoeconomic Studies, writes that, despite the failure of these five thousand funds, the hedge fund sector as a whole survived the 2007–2008 mortgage bubble extraordinarily well compared with the banking industry. Mallaby outlines four reasons for this stark contrast:
- Regulation. The capital requirements on banks that accept deposits are intended to shore up the solvency of such institutions but, in some instances, allow banks to run their books in ways that the requirements suggest are safe, even when they are not. Conversely, hedge funds are far more likely to make their own risk decisions and thus frequently fared better.
- Incentives. "When [bank] traders take enormous risks, they earn fortunes if the bets pay off. But if the bets go wrong, they don't endure symmetrical punishment—the performance fees and bonuses dry up, but they do not go negative. . . . Hedge funds [on the other hand] tend to have 'high-water marks': If they lose money one year, they take reduced or even no performance fees until they earn back their losses."
- Distraction of multiple profit centers. "The banks' proprietary trading desks coexisted alongside departments that advised on mergers, underwrote securities, and managed clients' funds; sometimes the scramble for fees from these advisory businesses blurred the banks' investment choices."
- Culture. "Hedge funds live and die by their investment returns, so they focus on them obsessively. They are generally run by a charismatic founder, not by a committee of executives: If they see a threat to their portfolio, they can flip their positions aggressively."
Drawing on unprecedented access to the industry, including three hundred hours of interviews and binders of internal documents, Mallaby charts the history of hedge funds, telling the stories of the industry's pioneers, from the undercover anti-Nazi activist A.W. Jones, to the philosopher-financier George Soros, to the cryptographer and mathematician James Simons. He concludes that to a surprising and unrecognized degree, "the future of finance lies in the history of hedge funds."
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Reviews and Endorsements
Mallaby's smart history of the hedge fund business explains how finance's richest moguls made their fortunes and argues that the oddballs of the hedge fund world are Wall Street's future, and possibly its salvation.
New York Times, Paperback Row
David Brooks, New York Times
An enormously satisfying book: a gripping chronicle of the cutting edge of the financial markets and a fascinating perspective on what was going on in these shadowy institutions as the crash hit.
[A] smart history of the hedge fund business . . . should be required reading this summer.
Mallaby manages to dramatise even heavily raked-over incidents, such as Paul Jones's anticipation of the 1987 stock market crash, or George Soros's successful assault on the Bank of England in 1992. He gets into the minds of the traders . . . and adds extensive historical and academic context without interrupting the highly readable narrative.
A superbly researched history of hedge-fund heroes stretching back to the 1950s, [More Money Than God] is a fascinating tale of the contrarian and cerebral misfits who created successful, flexible businesses in an otherwise conventional financial world.
[Mallaby is] incisive, informative, and as good a financial writer as he is a storyteller.
Mallaby's book is informative and entertaining. Its accounts of multibillion-dollar transactions and extravagant lifestyles may even entice you to switch careers.
. . . excellent book . . .
One of the definitive histories and descriptions of hedge funds.
A great story . . . meticulously sourced . . . full of wonderful stories about this brave new world.
Splendid . . . the definitive history of the hedge fund history.
Persuasive . . . an enticing and believable vision.
Clever, engaging analysis . . . [an] admirable book.
Compelling . . . [Mallaby] brings a keen sense of financial theory to his subject and a vivid narrative style . . . [More Money Than God] is still the fullest account we have so far of a too-little-understood business that changed the shape of finance and no doubt will continue to do so.
Wall Street Journal, Best Titles of 2010
Packed with excellent information and great anecdotes . . . its clarity is an example to other financial authors.
A lively, provocative examination of a little-understood financial realm.
More Money than God shines a fascinating light on what is still the most obscure route to becoming a billionaire--the mysterious world of hedge funds. Sebastian Mallaby's rollicking tour of industry legends--famous and otherwise--tells the improbable story of A. W. Jones, the vagabond journalist-sociologist and daring anti-Nazi activist who, after the war, would create the first hedged investment fund. From there, we get rip-roaring profiles of investing titans from the full-throated gambler Michael Steinhardt to the bold émigré George Soros and the courtly stockpicker Julian Robertson to the ill-fated intellects of LTCM and the hedge fund stars of the present day. Even as Mallaby entertains he advances an unorthodox yet compelling brief: rich as they are, hedge funds are probably the best vehicles society has for assuming risk. Any who disagree will have to contend with the evidence of the recent Wall Street collapse. If one shudders at the prospect of concentrating risk inside giant banks whose chieftains wager other people's money and cavalierly call for taxpayer bailouts then, as Mallaby points out, hedge funds are a necessary antidote.
Roger Lowenstein, author of The End of Wall Street
Sebastian Mallaby takes us into the secretive world of hedge funds and the result is a wonderful story and an education in finance. The book is full of colorful characters playing high stakes' games. Throughout, with his customary intelligence, Mallaby helps us understand this important transformation of the financial industry.
Fareed Zakaria, author of The Post-American World
When Alfred Winslow Jones started the first hedge fund, he had no idea where it would lead. Sebastian Mallaby, who must be the keenest student of hedge funds anywhere, now does--and he shares it with you in this crackling good read.
Dr. Alan S. Blinder, Gordon S. Rentschler memorial professor of economics and author of The Quiet Revolution: Central Banking Goes Modern
A fascinating history. Mallaby combines vivid description of key personalities and episodes with thoughtful discussion of the sources of advantage for different investment styles in different periods of financial history. I enthusiastically recommend this book to colleagues and students in academia and asset management.
John Y. Campbell, chairman of the Department of Economics, Harvard University, and partner, Arrowstreet Capital
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