More money than God summary

Essentially, the people who run hedge funds understand the market deeply: They know how to buy long and sell short to maximize profits, but often they have little capital. So they find investors to lend them large sums, which allows the hedge fund to invest on a massive scale. This is how they earn money.

And although they often invest other people’s money, hedge fund managers actually keep a portion of the profits they earn as a performance fee, which motivates them to trade successfully.

Diversificiation

Hedge fund portfolios are diversified, which means they aren’t actually very risky for investors. Traders assemble diverse portfolios by buying “long” and selling “short,” a strategy that protects against market swings.

For example, if the market index rises and stock values jump accordingly, your “long” stocks will bring you profits that compensate for small losses incurred on the “short” stocks.

And on the other hand, if the market goes down and stock prices fall, you’ll make profits on the “short” stocks to compensate for losses on the “long” stocks. So by having a mix of “long” and “short” stocks, your overall investment is insured no matter what happens to the market.

Steinhardt, Fine & Berkowitz

They were the first to do it on a massive scale — which meant that they earned more profits than anyone had before.

Their strategy was simple: bet big to win big. This approach was actually enabled by changes to the stock market which occurred in the early 1970s. For the first time, large chunks of stock were offered at steep discounts to anyone willing to buy them in bulk.

Steinhardt (the driving force behind the firm — some later said his success was the product of a “gambling gene”) was one of the few investors who had the guts to go big. He flourished in this new climate.

For example, once Steinhardt made a million dollars in just eight minutes, by buying up 700,000 shares of a bankrupt railroad company and reselling them immediately.

Commodities Corporation

It another giant in hedge fund history.

The firm’s traders arrived at a simple insight: Investors tend to buy when a stock goes up, causing the price to rise even higher. The reverse is also true: Investors are likely to sell when a stock’s price falls, which further drives down their value.

Commodities Corporation used this insight into investor psychology by buying up stocks when the prices first tipped upward, hoping that the move would encourage others to also buy.

They were essentially trying to create a snowball effect, and this strategy worked brilliantly: By the end of the 1970s, Commodities Corporation’s capital had soared from just $1 million to $30 million.

George Soros

Quantum, a firm started by George Soros in 1973 (though initially under a different name).

He totally upended the conventional wisdom for currency. Soros didn’t view currencies as stable properties, so he decided that rather than betting on stocks, he would trade currency itself.

In 1985, Soros made his first big currency trade, betting that the dollar was going to fall. He bought up many “short” US dollars as well as stable foreign currencies, so he could later buy the dollars back.

Although at first it seemed that his predictions were wrong, on 22 September 1985, treasury secretaries from the United States, West Germany, Japan and Britain decided to push the value of the dollar downward.

As a result, George Soros earned $230 million, gaining a fortune from a single political event. Later on, he would be able to influence such events himself.

Tiger

Tiger, founded by Julian Hart Robertson. 1980.

Today, most people understand that when you’re trading on the stock market, it helps to have insight into which stocks are likely to become more valuable.
But until Tiger appeared on the scene, no one tried to do hedging simply by picking the best stocks.

The Tiger fund excelled at stock picking: Robertson and his small team analyzed all the information that was relevant to the stock’s value, both in terms of the company’s prospects and also the currencies and commodities they could use to buy the stock.

Tiger fund searched the market for companies that were misvalued and traded them — either buying “long” or selling “short,” depending on whether they were overpriced or underpriced. This strategy won huge profits for the firm.

In 1985, Tiger identified underpriced shares belonging to Aviall, a company that distributed aviation parts. The fund bought shares for $12.50 and then later resold them for double the price — $25 a share.

Similarly, Tiger bought all of Empire Airlines’ shares for just $9 each and then sold them for $15 apiece. When the founder wrote to his investors that year, bragging about the firm’s success, he joked that they shouldn’t show the letter to their wives, unless of course they wanted to go shopping for diamonds.

Farallon

Farallon, founded by Tom Steyer in 1985.

Farallon’s main contribution to hedge fund practices was to make traders accountable for losses. Before the firm came along, traders were primarily motivated by performance fees, but these could have a negative effect on a hedge fund’s overall profits.

Hedge funds keep part of their profits as a way of motivating traders to achieve higher earnings.

But there’s a downside to this practice because making bigger profits sometimes entails taking bigger risks. And traders who don’t feel the sting of the losses (but do benefit from the gains) are more likely to make overly risky calls, on the chance that they win big.

The fund success had to do with strong sense of integrity: Steyer insisted that employees kept their savings invested in the fund, so they would “feel the pain” if they made a bad bet. This ensured that traders thought twice before taking a big risk.

Hedge funds influence on economies

When the Berlin Wall came down, it pulled the continent into a political maelstrom that subsequently wreaked havoc on Europe’s currencies. The British pound sterling was doing especially badly, lagging at the bottom of the exchange rate charts.

Europe’s distress was a treat for George Soros, who promptly took action to short-sell sterling. In an attempt to protect the currency and avoid devaluation, the Bank of England spent $27 billion. But their efforts failed, earning Soros $1 billion in profit.

But hedge funds aren’t just capable of economic devastation. In some cases, they can also save economies.
This was the case in Indonesia, after the country’s dictator resigned in the late 1990s. Around the same time, the nation’s largest bank, Bank Central Asia, started teetering on the verge of bankruptcy. Soon afterward, the 9/11 attacks occurred. Taken together, these events made the world’s largest Muslim country seem extremely unattractive to foreign investors.
But not necessarily for hedge funds. In 2002, Farallon bought control of Bank Central Asia. In less than five years, the firm not only managed to raise the share price of the bank by more than 500 percent, it also attracted other foreign investors to the country by setting an example, thus reversing the economic fortunes of a nation of over 240 million.

They are never “Too Big To Fail”

The one main benefit of hedge funds (dangerous as they can sometimes be) is that they can never become “too big to fail.”

Consider that during the 2007–2009 financial crisis, governments had to use taxpayer money to bail out investment banks in order to avoid even bigger economic losses. By contrast, over 5,000 hedge funds went bankrupt between 2000 and 2009, but not one of them received an injection of taxpayer money in order to prevent financial catastrophe.

That’s because banks lend to other banks. The whole system is interconnected, so if one bank collapses, many others could collapse as a result. Hedge funds, on the other hand, rarely lend money, since they’re far more focused on investing.

Based on: https://lifeclub.org/books/more-money-than-god-sebastian-mallaby-review-summary