I am exactly halfway through Inside the House of Money, published late last year by Steven Drobny, John Wiley & Sons. It is an essential read for all wannabe traders and fund managers (hedged or not) out there. The book is a collection of interviews/conversations between the author and many hedge fund managers—some independent, some in charge of proprietary trading desks in big investment banks and some even in research.
For someone who has tried his hand at running a global macro fund for a year and a half and succeeded only in closing it down without burning investors’ principal amounts, the conversations have a strong element of déjà vu. The gory details of this episode will have to wait for the autobiography to be published, I hope, 30 to 40 years down the road.
The conversation between the author and Sushil Wadhwani, who was with Goldman Sachs and then served in the monetary policy committee of the Bank of England, contains many pointers on how asset prices have evolved in the last few years and how he views the role of asset prices in monetary policymaking. While he holds Alan Greenspan in very high regard, he does not hesitate to disagree with the chairman’s near-religious faith in the efficiency of markets. Such was, and is, his faith in the efficiency and power of financial markets to eliminate easy arbitrage that he refused to deal with asset price bubbles. That is why he quickly retracted from warning of irrational exuberance and became a cheerleader of the technology bubble.
Wadhwani feels asset prices have an important role to play in monetary policy. He does not stop there. He goes on to provide a concrete example. He says when house prices were entering into bubble territory in the UK in 2004-05, the Bank of England should have announced it was not going to set policy on the basis of its two-year forecast for inflation. Note here that Wadhwani is silent on whether the Bank of England should have offered any hint on what it was going to target instead. In other words, introducing uncertainty becomes an important element in tackling asset price bubbles.
Then, there is the interview with John Porter, chief treasurer for Barclays Capital. He has made truckloads of money for Barclays trading fixed income. He says that transparency has become such a fetish that “central bankers have fallen into the trap where they feel they have to be so communicative and so transparent that in the end it, probably does them more harm than good.”
Thus, two of the world’s most successful money managers seem to be endorsing, indirectly, the approach that the Reserve Bank of India (RBI) has taken to monetary policymaking. In other words, RBI doesn’t seem to be in need of any new “forward-looking” team, as some commentators suggest.
What motivates all these people to do what they are doing? In his April 2007 column (www.efficientfrontier.com/ef/0adhoc/excel.htm), William J. Bernstein quotes David Swensen who, according to him, was the wildly successful manager of the endowment fund of Yale University. His pay? A princely sum of $1.3 million in 2005. It might sound big to some Indian readers but to put it in perspective, the top 25 hedge fund managers took home collectively compensation of $14 billion in 2006, including returns on their own money invested in their hedge funds.
What was David Swensen’s achievement? He was the chief investment officer for Yale University’s endowment fund from 1985. During this period, the endowment’s funds grew from $1.3 billion to $14 billion in 2005. Through his investment performance, he contributed $7.8 billion. Since his arrival in 1985, Yale endowment earned a net return of 16.1% per annum over 20 years. While his networth—if he was working for hedge funds—could be around $800 million now, what motivates him is the fact that his performance made it possible for many poor students to attend Yale. Measuring winning and losing by dollars and cents appeared to be inadequate to him.
Indeed, sustained success in investing can only come from possessing the strong spiritual attributes that mark an evolved human being. That will surely be the subject of another column one day. Some readers might be interested to note that Swenson published a book titled, Unconventional Success: a Fundamental Approach to Personal Investment in 2005.
Porter echoes similar thoughts. He says he is simply passing through the investment world. While he enjoys trading, he does not believe traders add anything significant to society and says they perform a function no more useful than banks. Perhaps he is being too harsh on traders.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer (Singapore) Ltd. These are his personal views and do not represent those of his employer. Your comments are welcome at firstname.lastname@example.org