Karl Marx didn’t like speculators. “What distinguishes the present period of speculation in Europe is the universality of the rage,” he lamented in 1856. On cue, every leftist-type worth his jhola today reserves special hatred for the speculators of our era. There is much lament about the present “universality of the rage”: Speculation these days can even drive up food prices, as one commentator ranted recently in The Independent.
That must mean then that the speculators who most embody this “rage”, none other than hedge funds, are the very avatars of freewheeling capitalism. Sebastian Mallaby, proud capitalist, tries to find out where exactly hedge funds stand in the capitalist scheme of things in his More Money than God. In constructing their history, he comes to the conclusion that they may well be the future of capitalist finance.
A former writer at The Economist and The Washington Post, Mallaby tells his story with the keen eye of a journalist and the steady narrative of a novelist. We’re treated to both revealing factual material from hundreds of interviews as well as to the elegant metaphors that stitch together these different—and sometimes complex—facts.
More Money than God: Bloomsbury, 482 pages, Rs599.
The first such fact: What is a “hedge fund”? The term today is thrown around casually to suggest (and blame) some greedy financier-type. Though it’s actually hard to settle on a definition, this type of fund has tended to mean a particular way of investing. The first “hedged” fund, started by A.W. Jones in 1949 was so because Jones took the care to bet in favour of some stocks, while betting against others. He thus “hedged his bets”, protecting himself against the ups and downs of the marketplace.
This fundamental tenet has somewhat survived, even as hedge funds have evolved fantastically. Mallaby shows us the “block trading” days in the 1970s (waiting for someone to dump a large block of stocks, buying them as the dumping lowers the price, and then selling them when the price springs back up); the “trend surfing” days of the 1980s (watching data charts carefully to ride a bull market and getting out as it turned bearish to bet against it); and the “quant” days starting in the 1990s (computers detecting financial signals humans can’t).
And hedge funds evolved over the last 50 years in step with changes in the macroeconomic landscape. Back when exchange rates were fixed and capital couldn’t cross borders easily, Jones wouldn’t have dreamed of betting against national currencies. But George Soros, the most famous hedge fund titan till date, could bring both the UK pound and the Thai baht to their knees in the 1990s. Mallaby displays an impressive grasp of history here: As ideas and policymaking shifted, the strategies of funds have had to, too.
But some things have remained the same. “Repellent and attractive, objects of envy and yearning” simultaneously, hedge funds have remained the “wizards of modern capitalism’s favorite pastime, the unabashed pursuit of money”. Many maintain that this unabashed pursuit must be controlled, but Mallaby insists otherwise: Society should tolerate these speculators because, in their greed, they have ended up performing a social function (most of the time at least). Block trading provided liquidity to those looking to offload many shares; attacking the baht forced Thailand to abandon an inflexible currency framework, arguably for the better; and all the quantitative tricks have, on most days, tried to make prices reflect reality instead of sentiment.
Of course, the days when they aren’t so noble, hedge funds have been known to create mayhem. Yet before we pass judgement on those fund managers who almost crippled the financial system in the past, Mallaby’s narrative converges on to the present day, when some bankers did fully cripple the system.
This book (thankfully) isn’t part of the 2007-09 crisis literature, but it adds a great twist to it. To wit, if the big banks failed and threatened to take down the whole system, why doesn’t finance rely more on hedge funds? This crisis killed 1,500 funds, without imperiling the system or requiring government bailouts. Many of them even profited because they weren’t as stupid.
Mallaby is convinced that through all the evolutions and shifts, some things have kept hedge funds unique—and kept them performing a social function—unlike other financial firms. They continue to rely on individual geniuses, not lumbering bureaucracies. They continue to be driven by contrarian instincts: They don’t get sucked into the tide. And they continue to be taut and lean: Because the managers’ own savings are often at stake, risk is perhaps better managed and incentives better aligned. Still, after this last gut-wrenching crisis, can we really stomach these unregulated hedge funds?
Mallaby is remarkably fair in addressing this concern. Aware of the exhausting debate over financial regulation that preoccupies the world, he doesn’t pretend that his recommendations will stand the test of all time, or that they are free of costs. He offers sufficient nuance, which we should give its due. The only sharp opinion he clings to is that he likes his speculators. He wants their rage to be even more universal.