Mallaby, Sebastian, “MORE MONEY THAN GOD. Hedge Funds and the Making of a New Elite.” Illustrated. 482 pp. A Council on Foreign Relations Book/The Penguin Press, 2010. Downloadable from the Dallas Library
Financiers, and especially financial speculators, are among the darkest and most hated figures of today’s capitalism. This is a good book even for the great majority of Americans for whom “hedge fund manager” and “Satan” are perceived as close. It could be argued that Mitt Romney lost the presidency in 2012 mostly because he was associated with hedge funds.
The first question we may ask is, “Does anybody like them?” The answer is yes. Other obscenely rich people like them.
Journalist Sebastian Mallaby likes them, too. He provides a really good historical review of “hedged funds” from the 1940s to the great recession. There are lots of insights into the best-known figures of financial history and insights into how they operate(d). They piled up billions of dollars at one time or another, but several of them also went broke. Instead of being disgusting parasites, though, Mallaby sees hedge fund managers as beneficial.
One reason that they are so good for society is that they are not greatly regulated. They answer to no elected oversight group. That’s what makes them agile and strong, and it’s what makes them good at providing money liquidity in extreme situations. Regulation, Mallaby says, would be destructive to the world financial system.
Hedge fund managers are not the major players in high finance. That would be investment bankers. Mallaby shows that they’re the ones who caused the Great Recession, not hedge fund managers.
What Are They?
As I understand it, hedge fund speculators are characterized by the way they hedge their bets. In general, they buy and sell similar things at the same time. They may go “long” on a stock, a bond, a currency, an option, a derivative, etc while at the same time selling “short” on something similar. Their success depends on picking something profitable to buy and something risky to sell. Once they decide on their “long” and “short” positions, then they borrow a lot of money to do both. The borrowed money is called “leverage.”
If a hedge fund manager is really good at choosing, they make a little or a lot on each transaction. Either way, it quickly adds up. In case after case explained in this book, hedge fund managers started with a few million dollars and soon started managing billions. As the word of their success got around, thousands of new hedge funds were created, some by inspired entrepreneurs and some within the larger banks and financial institutions.
How Do They Do It?
Unfortunately, this book doesn’t tell us how to make a billion dollars overnight. It only tells us how others did it in the past. Some of them started out as stock or bond traders. Some of them were economists who could analyze long and short-term trends. More recently, some of them were simply mathematicians who could safely ignore markets and economics while simply looking for mathematical changes that, using advanced computer technology, could pay off a little or a lot.
What Does It Mean?
The book goes from one successful gambler to the next. Some of them made their biggest piles of money during market downturns; consequently, the historical context is not immediately evident. But for me, the historical context is the most important part because understanding what happened is the basis for figuring out what may happen next.
The entire period covered by the hedge fund phenomenon was one of United States domination of world finance. The entire period was one in which increasingly the most astounding wealth went to people who didn’t manufacture anything and provided no service that anyone could immediately request or even understand.
We live in a world of financialization. The magnates of industry no longer control the governments of the world; their bankers do.