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More Money Than God - A book review

In January 1994, Alan Greenspan, the Federal Reserve Chairman, paid a visit to the White House. Pepped by low interest rates the US economy was recovering nicely and Greenspan thought the time was right to signal a change of policy; interest rates should go up. Clinton and Gore were horrified; wouldn’t the bond markets crash as investors anticipated further rate rises, they asked the Fed Chairman? On the contrary, Greenspan assured them, by raising short term rates, the market will see that we are serious about heading off inflation. Long term interest rates are pegged to long term expectations about inflation, so by raising short term rates, long dated bonds should rally.Greenspan raised rates by a quarter of a per cent in February. The stock market fell a little, which was what he had expected. Then something odd happened, instead of falling, long term rates rose by the same amount as short term rates. In retrospect, this was the signal that things would never be the same again. We had entered the era of massive leverage, the shadow banking system and Murphy’s Law, or the Law of Unintended Consequences, take your pick.The way that hedge fund managers, such as Stanley Druckenmiller, Michael Steinhardt and others saw it, the Fed’s decision to raise rates created uncertainty and that meant more risk. More risk meant that the prime brokers who provided the liquidity to the hedge funds would raise margin calls. If you are leveraged a 100 to 1, an extra $4m of margin means you have to sell $400m of bonds. Soon those margin calls mount up until, like that last grain of sand on the heap, there is a collapse.More Money than God is a history of the hedge fund industry and the picture it paints, in some detail, is of a world of astonishing complexity. Men like Steinhardt, Soros, Julian Robertson and Paul Tudor Jones are all, in turn, trapped by leverage. They might be able to see the end coming but often they are unable to extricate themselves because their positions are either too large, or they are confused by the complexity. Leverage can lead to a kind of quantum entanglement; the after shock of an event like Greenspan’s tiny rate rise showed up in unexpected asset classes on the other side of the world.What makes this book really hum, however, are the portraits of the world’s great traders, starting with Alfred Winslow Jones, a journalist with a PhD in Sociology and a liking for left wing politics. At the age of 48, Jones decided it was time to make real money, so he set up the world’s first hedge fund. Jones was never a great stock picker but he knew how to manage risk and people. Anticipating present day hedge funds, such as Marshall Wace, he paid brokers handsomely to provide him with model portfolios. This was how Jones ensured that he always got the broker’s first call, even when pension and mutual funds were much larger. Like all great hedge fund managers, Jones had devised a secret sauce. Over twenty or so years the returns he made rivaled those of Warren Buffett. The moral o f More Money than God is that you can never keep the sauce secret for ever. The market never sleeps and eventually your competitors catch up. Paul Tudor Jones had all his traders read George Soros’, The Alchemy of Finance. In the reprint that I have, Jones has written the introduction. While praising Soros as the greatest of all traders, he takes a quote from the film Paton. In preparing for battle with Rommel, Paton had read all the German’s writings on strategy. Peering out from his command post, Paton says: Rommel you magnificent bastard. I read your book.
Yet you need more than just a secret sauce. Great traders know that the Goodbye Trade, the one that will transform your reputation, the one that has little downside, doesn’t come around that often. When it does you must, as George Soros said, when he and Stan Druckenmiller were about to break the British pound: “Go for the Jugular.” Druckenmiller later said that Soros’s views on currencies were only a little better than average. Where Soros was different was in his ability to know when was really right. When that time arrived Soros made his bet on a cosmic scale. He put $15 bn on breaking the British Pound, back in the day when a billion counted for something. If he had been wrong it would have destroyed his fund and reputation.Soros can seem like an East European Intellectual dilettante but he also has the instinct of a Tyrannosaurus Rex eyeing a lame duck. The same can be said of each of the great traders. Most of them were larger than life characters with a sharp sense of humor. One of Steinhardt’s staff once exclaimed, “I want to kill myself,” “Can I watch?” Steinhardt asked. If you’re looking for a real page turner that might help you raise your game, then More Money Than God is it

Disclosure: no positions