Sebastian Mallaby spent 3 years and conducted over 250 interviews to complete this book. Among them are George Soros, Stan Druckenmiller, Paul Tudor Jones, Bruce Kovner, Julian Robertson and Michael Steinhardt. I am lucky enough to know many of the managers he’s interviewed and although I’m a voracious reader, Mallaby has dug deep into the history of many stories that have been told before, yet has shed new, and informative light.
This is a long interview (53 minute podcast), but it’s not every day that you can speak with someone of the order of Sebastian Mallaby. He’s been a bureau chief for The Economist and he’s been a columnist of the Washington Post for the past 11 years.
Mallaby is the Director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow for International Economics at the Council for Foreign Relations. He’s just written an amazing book on the history of hedge funds called More Money Than God: Hedge Funds and the Making of a New Elite.
I highly recommend this book. It’s long no doubt at 400 pages, but that includes the 60 pages of notes in the back of the book that are worth it alone.
During our discussion, Mallaby spoke with great candor both about the people he encountered, interviewed, and the events he’s delineated in his book: he didn’t play it safe and that’s made for a wonderful dialog. Below are a few excerpts from our discussion.
MM: Do you think that the block trading success for someone like Michael Steinhardt is permissible and ethical before and after SEC Rule 19c-3 had gone into effect since his risk taking had benefits society?
SM: That’s a great and a tough question. On the one hand his success owes a lot to being in this charmed circle of managers who began in the 1970s that could meet the needs of the big institutions who could absorb large blocks of stock outside the specialists. They needed someone on the buy-side to take on inventory.
[If Goldman Sachs has a 1 million share order of IBM for sale, and they call Steinhardt, he’s in the driver’s seat b/c he knows there is a big seller in the crowd. In order to incent Steinhardt, Goldman Sachs would give him a sizable discount of perhaps $1 share to take the stock from Goldman’s client onto his books.]
But Steinhardt would also walk away with more information that was not available to others on the floor. Was it a liquidity-driven sale for a pension that needed the liquidity or was it an information-driven sale by a hedge fund. Goldman, Oppenheimer, and Salomon Brothers were the big block traders of the time.
The liquidity provided by the big buy-side block traders (such as Steinhardt) was a benefit to the market. The crash of 1987 was a sharp reminder of what could happen when their buying power was relegated to the sidelines. So despite Steinhardt getting information that could be construed as “highly personalized” ultimately, it was good for the market b/c of the role that he played. There is a social benefit too. We want entrepreneurs to take risk. To persuade people to buy equities you have to have the provision of liquidity at a moments notice. Who’s going to provide that? It makes a fundamental difference to the price if there’s liquidity.
MM: Were Soros and Rogers lucky having taken on the massive leverage they did in running the Double Eagle Fund for ten years and exacting over 4,200 % RoR over that time period?
SM: I think they were good. (you’ll have to listen to the podcast to hear the rest of the answer).
MM: Do you think the hedge fund structure leads one to shoot for the moon (since they effectively have a free Call option) and they’ll either make 9 figures or go bust?
SM: I think that the Mutual fund model is one that encourages the company to gather assets only. The manager is not being directly compensated for performance. There is more emphasis on the marketing, rather than performance.
[MM: IMO, it’s easier to gather an additional 10% in net NEW assets, than to grow assets by 10% organically via performance. I think John Bogle is FOS. Enough is right John.]
Q: Do you think it is incumbent for a manager to short a currency and accelerate the inevitable…in other words…the way Stan And George set the UK free of the ERM b/c the champagne Socialists would not make the courageous decision politically?
A: Yes, I think so. They suffered massive humiliation. The Exchange rate was too high. Once the Sterling was kicked out, we (Mallaby is from the UK) went to higher employment and by one year later they had jobs thanks to George and Stan. I do think that trading can force myopic governments to do the right thing and force the right shifts needed. Just like some traders don’t want to recognize their losers and get out. When Politicians brought the GBP into the ERM, they had a “pride” in that decision and they stuck with their loser well beyond the point where they should have gotten out of it, and it wasn’t until they were forced to get out of it that they recognized it.
MM: What can the retail investor learn from your book?
SM: Traders are obsessive and compulsive about the markets. Retail investors don’t share that level of 24/7 focus.