Tuesday, October 26, 2010

Review: More Money Than God

If I had to summarize More Money Than God in two words it would be "survivorship bias." Mallaby spends the first two thirds of the book describing the rise of hedge funds and their successes. This is interesting historically. While I had heard George Soros called "the man who broke the bank of England", I had no idea how it happened and what the story behind it was. Well, here it is in all its glory.

The last half of the book covers the recent financial crisis and the hedge fund responses to it. Mallaby might have spent a bit too much time wining and dining with hedge fund managers, since here he rises to their defense against regulation. His defense:
  • Most hedge fund managers have their own skin in the game, investing much of their assets into the funds
  • Many hedge funds have high water marks, where the partners don't get paid if the fund underperforms the benchmarks
  • Most hedge funds are not too big to fail, and the hedge fund industry has managed to salvage most failures at investor's expense, not based on taxpayer bailouts
If you took most of the book at face value, you'd be rushing out to invest in hedge funds. The numbers returned are phenomenal. The problem is selection: how do you know a priory which funds are going to do really well? Mallaby is of no help here since he only covers the successful ones and don't provide data on the ones that fail. I remember David Swenson talking about Hedge Funds in his book Unconventional Success, and he basically thinks that they are not a good choice for individual investor because the individual investor has no negotiating leverage over the fund, while the Yale Endowment Portfolio, for instance, could (and did) negotiate favorable terms on an equal basis with them. All in all, if you're curious about Hedge funds, how they work, why they make their managers so much money, and how their trading strategies work, the book comes highly recommended. For myself I read the book and shake my head at how much human ingenuity goes into shuffling bits around on disk to no real productive effort. The folks who invented statistical machine translation (the basis for Google translate), for instance, abandoned their work in research to join a hedge fund. Maybe they would have revolutionalized another field if only research paid better than being a hedge fund lacky. Just ignore the last half of the book where Mallaby defends Hedge funds and repeats every line ever spoken by a hedge fund manager without critically thinking about it.
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