MORE MONEY THAN GOD HEDGE FUNDS AND THE MAKING OF A NEW ELITE Sebastian Mallaby A Council on Foreign Relations Book THE PENGUIN PRESS New York 2010 More Money Than God ALSO BY SEBASTIAN MALLABY The World’s Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations After Apartheid: The Future of South Africa MORE MONEY THAN GOD HEDGE FUNDS AND THE MAKING OF A NEW ELITE Sebastian Mallaby A Council on Foreign Relations Book THE PENGUIN PRESS New York 2010 the penguin pr ess Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A. 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The Council on Foreign Relations takes no institutional position on policy issues and has no affiliation with the U.S. government. All statements of fact and expressions of opinion contained in its publications are the sole responsibility of the author or authors. Photograph credits appear on page 483. Library of Congress Cataloging-in-Publication Data Mallaby, Sebastian. More money than god : hedge funds and the making of a new elite / Sebastian Mallaby. p. cm. Includes bibliographical references and index. ISBN: 1-101-45714-7 1. Hedge funds. 2. Investment advisors. I. Title. 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To my parents, Christopher and Pascale [...]... create a new secular Judaism But of course it was in finance that these egos made the most impact The story of hedge funds is the story of the frontiers of finance: of innovation and increasing leverage, of spectacular triumphs and humiliating falls, and of the debates spawned by these dramas For much of their history, hedge funds have skirmished with the academic view of markets Of course, academia is... involved in hedge funds are reluctant to talk about their success.” If hedge- fund managers had emerged as the It Boys of the new century—if they had supplanted the leveraged-buyout barons of the 1980s and the dot-com wizards of the 1990s—it was worth remembering that they were also the hot stars of an earlier era A hedgefund manager “can be away from the market and still know where its rhythm and his are meshing,”... the pattern of the stars on his wedding night sixteen years earlier The hedge- fund titans were the new Rockefellers, the new Carnegies, the new Vanderbilts They were the new American elite the latest act in the carnival of creativity and greed that powers the nation forward And what an elite this was Hedge funds are the vehicles for loners and contrarians, for individualists whose ambitions are too big... fail and favor ones that are small enough to go under The story of A W Jones and his successors shows that a partial alternative to banking supermarkets already exists To a surprising and unrecognized degree, the future of finance lies in the history of hedge funds 1 Big Daddy A t the dawn of America’s second gilded age, and on the eve of the twenty-first century’s first financial crash, the managers of. .. later.6 He was the son of an expatriate American who ran the Australian operations of General Electric; according to Jones family lore, they owned the fi rst car in Australia A formal photograph from the time shows the three-year-old Alfred wearing a white sailor cap with a white jacket; on one side of him sits his father in a stiff, winged collar, on the other side is his mother in an elaborate feathered... inefficient, there was money to be made, and the finance professors saw no reason why they should not be the ones to profit Cliff Asness was fairly typical of the new wave At the University of Chicago’s Graduate School of Business, his thesis adviser was Eugene Fama, one of the fathers of the efficient-market hypothesis But by 1988, when Asness arrived in Chicago, Fama was leading the revisionist charge: Along... Europe and Asia After the East Asian crisis, Malaysia’s prime minister, Mahathir Mohamad, lamented that “all these countries have spent 10 MORE MONEY THAN GOD 40 years trying to build up their economies and a moron like Soros comes along with a lot of money to speculate and ruins things.”10 And so, by the start of the twenty-first century, there were two competing views of hedge funds Sometimes the funds. .. had accumulated a fortune of $1.4 billion in today’s dollars, earning the nickname “Jupiter” because of his godlike power over Wall Street But in the bubbly first years of this century, the top hedge- fund managers amassed more money than God in a couple of years of trading They earned more vastly more than the captains of Wall Street’s mightiest investment banks and eclipsed even private-equity barons... investment banks such as 12 MORE MONEY THAN GOD Goldman Sachs and Morgan Stanley; insurers such as AIG; the moneymarket funds that received an emergency government guarantee at the height of the crisis By contrast, hedge funds made it through the mayhem without receiving any direct taxpayer assistance: There is no precedent that says that the government stands behind them Even when Long-Term Capital collapsed... inefficient-market view also imbued hedge funds with a social function This was the last thing they had sought: They had gotten into the alpha game with one purpose above all, and that was to make money But if alpha existed because markets were inefficient, it followed that savings were being allocated in an irrational manner The research of Fama and French, for example, showed that unglamorous “value” stocks . Photograph credits appear on page 483. Library of Congress Cataloging-in-Publication Data Mallaby, Sebastian. More money than god : hedge funds and the making of a new elite / Sebastian Mallaby. . SEBASTIAN MALLABY The World’s Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations After Apartheid: The Future of South Africa MORE MONEY THAN GOD HEDGE. were the new American elite the latest act in the carnival of creativity and greed that powers the nation forward. And what an elite this was. Hedge funds are the vehicles for loners and contrarians,