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“The bright light shed by More Money Than God is particularly welcome. Mr. Mallaby . . . brings a keen sense of financial theory to his subject and a vivid narrative style.” ―Wall Street Journal

“Splendid . . . the definitive history of the hedge fund history, a compelling narrative full of larger-than-life characters and dramatic tales of their financial triumphs and reversals . . . Mallaby weaves into his narrative just the right amount of economic theory and market history, and he has a wonderful knack for explaining complex trading strategies in simple and elegant prose.” ―The Washington Post

“[A] splendid account of the ups and downs of an industry in which few of the twenty-something hedge-fund wannabes know their history. They, and meddling politicians, should read this book before they are condemned to repeat it.” ―The Financial Times

“Mallaby's book is informative and entertaining.” ―Newsweek

“More Money Than God is an expert primer on America's most obscenely lucrative investment tool . . . [Mallaby is] incisive, informative, and as good a financial writer as he is a storyteller.” ―NPR's All Things Considered

“In More Money Than God, his smart history of the hedge fund business, Mallaby does more than explain how finance's richest moguls made their loot. He argues that the obsessive, charismatic oddballs of the hedge fund world are Wall Street's future-and possibly its salvation.” ―The New York Times Book Review

“Sebastian Mallaby's history of hedge funds is well written, smart, and balanced.” ―Greg Mankiw

“Sebastian Mallaby's in-depth research and clear writing style is engaging . . . With great insight into the lucrative world of hedge funds, More Money Than God is one of the best, most engrossing of the current financial books.” ―The Finance Professional's Post (A publication of the New York Society of Security Analysts)

“[A] superb book.” ―David Brooks, The New York Times

“Mallaby . . . effectively combines an insider's knowledge with a colorful storytelling ability . . . A lively, provocative examination of a little-understood financial realm.” ―Kirkus

“A superbly researched history of hedge-fund heroes stretching back to the 1950s, it is a fascinating tale of the contrarian and cerebral misfits who created successful, flexible businesses in an otherwise conventional financial world.” ―The Economist

“More Money Than God shines a fascinating light on what is still the most obscure route to becoming a billionaire―the mysterious world of hedge funds. Sebastian Mallaby's rollicking tour of industry legends―famous and otherwise―tells the improbable story of A.W. Jones, the vagabond journalist-sociologist and daring anti-Nazi activist who, after the war, would create the first 'hedged' investment fund. From there, we get rip-roaring profiles of investing titans from the full-throated gambler Michael Steinhardt to the bold TmigrT George Soros and the courtly stockpicker Julian Robertson to the ill-fated intellects of LTCM and the hedge fund stars of the present day. Even as Mallaby entertains he advances an unorthodox yet compelling brief: rich as they are, hedge funds are probably the best vehicles society has for assuming risk. Any who disagree will have to contend with the evidence of the recent Wall Street collapse. If one shudders at the prospect of concentrating risk inside giant banks whose chieftains wager other people's money and cavalierly call for taxpayer bailouts then, as Mallaby points out, hedge funds are a necessary antidote.” ―Roger Lowenstein, author of America's Bank

“Sebastian Mallaby takes us into the secretive world of hedge funds and the result is a wonderful story and an education in finance. The book is full of colorful characters playing high stakes' games. Throughout, with his customary intelligence, Mallaby helps us understand this important transformation of the financial industry.” ―Fareed Zakaria, author of The Post American World

“When Alfred Winslow Jones started the first hedge fund, he had no idea where it would lead. Sebastian Mallaby, who must be the keenest student of hedge funds anywhere, now does―and he shares it with you in this crackling good read.” ―Dr. Alan S. Blinder, Professor of Economics, Princeton University, and Former Vice Chairman, Federal Reserve

“A fascinating history. Mallaby combines vivid description of key personalities and episodes with thoughtful discussion of the sources of advantage for different investment styles in different periods of financial history. I enthusiastically recommend this book to colleagues and students in academia and asset management.” ―John Y. Campbell, Chairman of the Department of Economics, Harvard University, and Partner, Arrowstreet Capital

Introduction: The Alpha Game

The first hedge-fund manager, Alfred Winslow Jones, did not go to business school. He did not possess a PhD in quantitative finance. He did not spend his formative years at Morgan Stanley, Goldman Sachs, or any other incubator for masters of the universe. Instead, he took a job on a tramp steamer, studied at the Marxist Workers School in Berlin, and ran secret missions for a clandestine anti-Nazi group called the Leninist Organization. He married, divorced, and married again, honeymooning on the front lines of the civil war in Spain, traveling and drinking with Dorothy Parker and Ernest Hemingway. It was only at the advanced age of forty-eight that Jones raked together $100,000 to set up a “hedged fund,” generating extraordinary profits through the 1950s and 1960s. Almost by accident, Jones improvised an investment structure that has endured to this day. It will thrive for years to come, despite a cacophony of naysayers.

Half a century after Jones created his hedge fund, a young man named Clifford Asness followed in his footsteps. Asness did attend a business school. He did acquire a PhD in quantitative finance. He did work for Goldman Sachs, and he was a master of the universe. Whereas Jones had launched his venture in his mature, starched-collar years, Asness rushed into the business at the grand old age of thirty-one, beating all records for a new start-up by raising an eye-popping $1 billion. Whereas Jones had been discreet about his methods and the riches that they brought, Asness was refreshingly open, tearing up his schedule to do TV interviews and confessing to the New York Times that “it doesn’t suck” to be worth millions.By the eve of the subprime mortgage crash in 2007, Asness’s firm, AQR Capital Management, was running a remarkable $38 billion and Asness himself personified the new globe-changing finance. He was irreverent, impatient, and scarcely even bothered to pretend to be grown up. He had a collection of plastic superheroes in his office.

Asness freely recognized his debt to Jones’s improvisation. His hedge funds, like just about all hedge funds, embraced four features that Jones had combined to spectacular effect. To begin with, there was a performance fee: Jones kept one fifth of the fund’s investment profits for himself and his team, a formula that sharpened the incentives of his lieutenants. Next, Jones made a conscious effort to avoid regulatory red tape, preserving the flexibility to shape-shift from one investment method to the next as market opportunities mutated. But most important, from Asness’s perspective, were two ideas that had framed Jones’s investment portfolio. Jones had balanced purchases of promising shares with “short selling” of unpromising ones, meaning that he borrowed and sold them, betting that they would fall in value. By being “long” some stocks and “short” others, he insulated his fund at least partially from general market swings; and having hedged out market risk in this fashion, he felt safe in magnifying, or “leveraging,” his bets with borrowed money. As we will see in the next chapter, this combination of hedging and leverage had a magical effect on Jones’s portfolio of stocks. But its true genius was the one that Asness emphasized later: The same combination could be applied to bonds, futures, swaps, and options―and indeed to any mixture of these instruments. More by luck than by design, Jones had invented a platform for strategies more complex than he himself could dream of.

No definition of hedge funds is perfect, and not all the adventures recounted in this book involve hedging and leverage. When George Soros and Stan Druckenmiller broke the British pound, or when John Paulson shorted the mortgage bubble in the United States, there was no particular need to hedge―as we shall see later. When an intrepid commodities player negotiated the purchase of the Russian government’s entire stock of non-gold precious metals, leverage mattered less than the security around the armored train that was to bring the palladium from Siberia. But even when hedge funds are not using leverage and not actually hedging, the platform created by A. W. Jones has proved exceptionally congenial. The freedom to go long and short in any financial instrument in any country allows hedge funds to seize opportunities wherever they exist. The ability to leverage allows hedge funds to size each bet to maximum effect. Performance fees create a powerful incentive to coin money.

Ah yes, that money! At his death in 1913, J. Pierpont Morgan had accumulated a fortune of $1.4 billion in today’s dollars, earning the nickname “Jupiter” because of his godlike power over Wall Street. But in the bubbly first years of this century, the top hedge-fund managers amassed more money than God in a couple of years of trading. They earned more― vastly more―than the captains of Wall Street’s mightiest investment banks and eclipsed even private-equity barons. In 2006 Goldman Sachs awarded its chief executive, Lloyd C. Blankfein, an unprecedented $54 million, but the bottom guy on Alpha magazine’s list of the top twenty-five hedge-fund earners reportedly took home $240 million. That same year, the leading private-equity partnership, Blackstone Group, rewarded its boss, Stephen Schwarzman, with just under $400 million. But the top three hedge-fund moguls each were said to have earned more than $1 billion.3 The compensation formula devised by Jones conjured up hundreds of fast fortunes, not to mention hundreds of fast cars in the suburbs of Connecticut. Reporting from the epicenter of this gold rush, the Stamford Advocate observed that six local hedge-fund managers had pocketed a combined $2.15 billion in 2006. The total personal income of all the people in Connecticut came to $150 billion.

In the 1990s magazines drooled over the extravagance of dot-com millionaires, but now the spotlight was on hedge funds. Ken Griffi n, the creator of Citadel Investment Group, bought himself a $50 million Bombardier Express private jet and had it fitted with a crib for his two-year-old. Louis Bacon, the founder of Moore Capital, acquired an island in the Great Peconic Bay, put transmitters on the local mud turtles to monitor their mating habits, and hosted traditional English pheasant shoots. Steven Cohen, the boss of SAC Capital, equipped his estate with a basketball court, an indoor pool, a skating rink, a two-hole golf course, an organic vegetable plot, paintings by van Gogh and Pollock, a sculpture by Keith Haring, and a movie theater decorated with the pattern of the stars on his wedding night sixteen years earlier. The hedge-fund titans were the new Rockefellers, the new Carnegies, the new Vanderbilts. They were the new American elite―the latest act in the carnival of creativity and greed that powers the nation forward.

And what an elite this was. Hedge funds are the vehicles for loners and contrarians, for individualists whose ambitions are too big to fit into established fi nancial institutions. Cliff Asness is a case in point. He had been a rising star at Goldman Sachs, but he opted for the freedom and rewards of running his own shop; a man who collects plastic superheroes is not going to remain a salaried antihero for long, at least not if he can help it. Jim Simons of Renaissance Technologies, the mathematician who emerged in the 2000s as the highest earner in the industry, would not have lasted at a mainstream bank: He took orders from nobody, seldom wore socks, and got fired from the Pentagon’s code-cracking center after denouncing his bosses’ Vietnam policy. Ken Griffin of Citadel, the second highest earner in 2006, started out trading convertible bonds from his dorm room at Harvard; he was the boy genius made good, the financial version of the entreprenerds who forged tech companies such as Google. The earliest pioneers of the industry were cut from equally bright cloth. Julian Robertson staffed his hedge fund with colle

The first authoritative history of hedge funds-from their rebel beginnings to their role in defining the future of finance.

Based on author Sebastian Mallaby's unprecedented access to the industry, including three hundred hours of interviews, More Money Than God tells the inside story of hedge funds, from their origins in the 1960s and 1970s to their role in the financial crisis of 2007- 2009.

Wealthy, powerful, and potentially dangerous, hedge fund moguls have become the It Boys of twenty-first­century capitalism. Ken Griffin of Citadel started out trading convertible bonds from his dorm room at Harvard. Julian Robertson staffed his hedge fund with college athletes half his age, then he flew them to various retreats in the Rockies and raced them up the mountains. Paul Tudor Jones posed for a magazine photograph next to a killer shark and happily declared that a 1929- style crash would be "total rock-and-roll" for him. Michael Steinhardt was capable of reducing underlings to sobs. "All I want to do is kill myself," one said. "Can I watch?" Steinhardt responded.

Finance professors have long argued that beating the market is impossible, and yet drawing on insights from physics, economics, and psychology, these titans have cracked the market's mysteries and gone on to earn fortunes. Their innovation has transformed the world, spawning new markets in exotic financial instruments and rewriting the rules of capitalism.

More than just a history, More Money Than God is a window on tomorrow's financial system. Hedge funds have been left for dead after past financial panics: After the stock market rout of the early 1970s, after the bond market bloodbath of 1994, after the collapse of Long Term Capital Management in 1998, and yet again after the dot-com crash in 2000. Each time, hedge funds have proved to be survivors, and it would be wrong to bet against them now. Banks such as CitiGroup, brokers such as Bear Stearns and Lehman Brothers, home lenders such as Fannie Mae and Freddie Mac, insurers such as AIG, and money market funds run by giants such as Fidelity-all have failed or been bailed out. But the hedge fund industry has survived the test of 2008 far better than its rivals. The future of finance lies in the history of hedge funds.