More Money Than God

More Money Than God Plot Summary

Introduction

In the summer of 1949, a journalist named Alfred Winslow Jones quietly launched an investment partnership that would forever change the landscape of finance. With just $100,000 in capital, Jones pioneered a revolutionary approach to investing that combined short-selling with leverage, creating what he called a "hedged fund." This seemingly modest innovation would eventually spawn a trillion-dollar industry that has profoundly shaped modern financial markets and created some of the greatest fortunes in history. The story of hedge funds is more than just a tale of wealth creation. It's a narrative about financial innovation, risk management, and the perpetual battle between markets and regulation. From the early days of A.W. Jones to the global macro giants who broke central banks, from the quant revolution to the financial crisis of 2008, hedge funds have consistently pushed the boundaries of what's possible in finance. Their evolution reflects broader economic trends, technological advances, and shifting power dynamics in the global economy. This book takes you inside this secretive world, revealing not just how hedge funds make money, but how they've transformed the very nature of financial markets.

Chapter 1: The Jones Model: Birth of the Hedge Fund Revolution (1949-1970)

The story begins in 1949 when Alfred Winslow Jones, a sociologist turned financial journalist, established what would become known as the first hedge fund. After writing an article about market forecasting for Fortune magazine, Jones became convinced he could develop a better investment approach. His innovation was deceptively simple: he would buy stocks he believed were undervalued while simultaneously selling short overvalued stocks. This "hedged" position would, in theory, protect against market downturns while still generating returns. Jones structured his fund as a limited partnership, charging no management fee but taking 20% of profits as performance compensation. This incentive structure, revolutionary at the time, aligned his interests with those of his investors. Operating outside the regulatory framework that governed mutual funds, Jones could employ leverage and short-selling techniques unavailable to traditional investment vehicles. By 1968, his fund had outperformed the best mutual fund of the previous decade by 87 percentage points, attracting widespread attention after a Fortune article titled "The Jones Nobody Keeps Up With" revealed his extraordinary performance. The success of Jones's model spawned imitators. By the late 1960s, approximately 140 hedge funds were operating in the United States, including those started by future legends like Michael Steinhardt, George Soros, and Julian Robertson. These early pioneers expanded on Jones's fundamental approach, developing new strategies and applying them to different market segments. Unlike Jones, who maintained a low profile, this new generation embraced a more aggressive style, both in their investing and their personalities. However, the pioneer years ended with a significant setback. The bear market of 1969-1970 devastated many early hedge funds, exposing flaws in their risk management. Many managers had abandoned Jones's hedging discipline in favor of concentrated long positions during the bull market, leaving them vulnerable when markets turned. This period of reckoning reduced the number of hedge funds by more than half and drove the industry into relative obscurity for nearly two decades. The pioneer years established the fundamental DNA of hedge funds: flexible investment mandates, performance-based compensation, and operation outside traditional regulatory frameworks. These characteristics would enable future generations of hedge fund managers to capitalize on market inefficiencies and dislocations in ways that conventional investment vehicles could not. Though the industry faced its first major test during the 1969-1970 bear market, the hedge fund model had proven its potential, setting the stage for its eventual resurgence and transformation.

Chapter 2: Trading Pioneers: Steinhardt and Commodities Corporation (1970-1980)

The 1970s marked a significant shift in the hedge fund landscape. As traditional equity-focused hedge funds struggled in the bear market, a new breed of traders emerged from an unlikely source: Commodities Corporation. Founded in 1969 by Helmut Weymar, a former Nabisco executive with a PhD from MIT, and economist Frank Vannerson, Commodities Corporation was established to apply quantitative methods to trading agricultural futures. With initial backing from Nabisco and several wealthy investors, the firm set up headquarters in Princeton, New Jersey, away from Wall Street's distractions. Commodities Corporation became the industry's most important talent incubator, producing an extraordinary generation of trading legends. Bruce Kovner, a former Harvard political science instructor, joined after a successful stint trading his own account. Louis Bacon, a young trader from North Carolina, honed his skills there before launching Moore Capital. Most notably, Paul Tudor Jones worked briefly at the firm before establishing Tudor Investment Corporation. These traders developed systematic approaches to markets during a decade of extraordinary volatility, as the collapse of the Bretton Woods system and the oil shocks created unprecedented trading opportunities. What distinguished these traders was their focus on risk management and psychological discipline. Unlike the equity-focused hedge funds of the 1960s, these traders developed rigorous systems for controlling losses. Paul Tudor Jones, for example, insisted on using stop-loss orders for every position, ensuring no single trade could significantly damage his portfolio. Bruce Kovner famously said, "The first rule of trading is don't get caught in a situation where you can lose a great deal of money for reasons you don't understand." This emphasis on capital preservation became a defining characteristic of successful hedge fund managers. The trading techniques developed during this period laid the groundwork for the "global macro" style that would dominate hedge funds in the following decade. These traders looked beyond traditional securities analysis to consider macroeconomic trends, monetary policy, and political developments. They traded across asset classes and global markets, using futures and other derivatives to express their views. Their approach was dynamic and tactical, focusing on identifying major market inflection points rather than small inefficiencies. By the mid-1980s, these trading legends had established their own hedge funds and were generating extraordinary returns. Paul Tudor Jones famously predicted and profited from the 1987 stock market crash, cementing his reputation. The success of these traders demonstrated that hedge funds could thrive in environments that challenged traditional investment approaches. Their ability to go short, use leverage, and move quickly between markets proved invaluable during periods of market stress, setting the stage for hedge funds' dramatic rise to prominence in the following decade.

Chapter 3: Global Macro Giants: Soros and the Sterling Crisis (1980-1998)

The 1980s and early 1990s witnessed the emergence of hedge funds as a dominant force in global financial markets. George Soros's Quantum Fund and Julian Robertson's Tiger Management grew to unprecedented size and influence, managing billions of dollars and generating spectacular returns. These "global macro" giants developed comprehensive views on economies and markets, then deployed massive capital to profit from major dislocations and policy mistakes. The defining moment of this era came in September 1992, when Soros and his lieutenant Stanley Druckenmiller wagered $10 billion against the British pound. The Bank of England had pegged the pound to the German mark through the European Exchange Rate Mechanism (ERM), but post-reunification Germany's high interest rates were incompatible with Britain's weak economy. Recognizing this fundamental contradiction, Soros built an enormous short position against sterling. When the Bank of England finally abandoned the peg after spending billions trying to defend it, the pound plummeted, and Quantum Fund made over $1 billion in a single day. Soros became known as "the man who broke the Bank of England." This spectacular trade revealed hedge funds' new power to challenge central banks and governments. The sterling crisis demonstrated that in deep, liquid markets, determined speculators with sufficient capital could overwhelm official intervention. Similar currency crises followed in Mexico (1994), Thailand (1997), and Russia (1998), with hedge funds often playing significant roles. These episodes sparked fierce debate about hedge funds' impact on financial stability, with defenders arguing they merely exposed unsustainable policies while critics condemned them as destabilizing speculators. Meanwhile, Julian Robertson built Tiger Management into another hedge fund powerhouse using a different approach. Robertson combined macro views with fundamental stock analysis, creating a global research operation that identified both long and short opportunities. His disciplined, value-oriented approach attracted talented analysts who became known as "Tiger Cubs," many of whom later established successful hedge funds of their own. At its peak in 1998, Tiger managed over $20 billion and had generated average annual returns of 31.7% since inception. The period ended dramatically with the 1998 Russian debt default and subsequent collapse of Long-Term Capital Management (LTCM), a hedge fund run by former Salomon Brothers star trader John Meriwether and staffed with PhDs and Nobel Prize winners. LTCM's failure, which required a Federal Reserve-orchestrated bailout to prevent broader market chaos, exposed the systemic risks created by excessive leverage and highlighted the limitations of quantitative models. This crisis temporarily dampened enthusiasm for hedge funds and prompted calls for greater regulation, foreshadowing challenges the industry would face in later years.

Chapter 4: Quant Revolution: From LTCM's Fall to Renaissance's Rise (1994-2007)

The quant revolution in hedge funds began quietly in 1988 when mathematician James Simons launched the Medallion Fund at Renaissance Technologies. Unlike traditional hedge fund managers who relied on fundamental analysis or macroeconomic views, Simons and his team of PhDs applied advanced mathematical models to detect subtle patterns in market data. Operating from a campus-like headquarters in East Setauket, Long Island, Renaissance's scientists treated markets as complex systems that could be decoded through statistical analysis, much like the cryptographic problems many had worked on previously. Renaissance's approach proved extraordinarily successful. Between 1989 and 2006, Medallion returned an astonishing 39% annually after fees, with remarkably low volatility and little correlation to broader markets. The fund became so profitable that it eventually closed to outside investors, managing only the money of Renaissance employees. Simons himself became a billionaire many times over, earning $1.5 billion in 2006 alone—comparable to the profits generated by major corporations with tens of thousands of employees. Renaissance's success inspired a wave of quantitative hedge funds. David Shaw, a computer scientist from Columbia University, founded D.E. Shaw in 1988 to apply computational methods to markets. Even traditional discretionary traders like Paul Tudor Jones began incorporating quantitative elements into their approach. By the early 2000s, "statistical arbitrage" strategies that exploited small pricing anomalies across thousands of securities had become a major force in markets. The quant revolution coincided with dramatic changes in market structure. Electronic trading replaced floor brokers, market data became more abundant, and trading volumes exploded. These developments created new opportunities for algorithmic strategies that could process vast amounts of information and execute trades with millisecond precision. Quantitative funds thrived in this environment, growing to manage hundreds of billions of dollars by the mid-2000s. However, the limitations of quantitative approaches became apparent during the "quant quake" of August 2007. Over several days, numerous quantitative equity funds suffered unprecedented losses as their models broke down simultaneously. The crisis revealed that many quant funds were pursuing similar strategies, creating hidden correlations that only became apparent under stress. As one fund was forced to liquidate positions, others holding similar portfolios suffered losses, triggering a cascade of selling that briefly threatened the viability of the entire sector. The quant revolution transformed hedge funds from intuition-driven boutiques to data-driven institutions. It demonstrated that systematic approaches could generate persistent returns, but also revealed new forms of risk. The most successful quant funds combined mathematical sophistication with rigorous risk management and an understanding of the models' limitations. By 2007, quantitative and systematic strategies had become a permanent feature of the hedge fund landscape, representing a fundamental evolution from the discretionary trading approaches that had dominated the industry's early decades.

Chapter 5: Crisis and Transformation: Hedge Funds in the Modern Era (2008-Present)

The 2008 financial crisis marked a watershed moment for hedge funds. As Lehman Brothers collapsed in September 2008, markets plunged into chaos, testing hedge funds' claims of providing absolute returns regardless of market conditions. The results were mixed. While some funds delivered on their promise of capital preservation—most notably John Paulson's Paulson & Co., which made approximately $15 billion betting against subprime mortgages—many others suffered catastrophic losses. By year's end, the average hedge fund had lost 19% according to Hedge Fund Research, still outperforming the S&P 500's 38% decline but falling far short of investor expectations. The crisis triggered a significant reshaping of the industry. Many smaller funds closed as investors withdrew capital, while larger, more established managers gained market share. Institutional investors—pension funds, endowments, and sovereign wealth funds—became the dominant capital source, replacing the wealthy individuals who had previously been the industry's primary backers. This shift accelerated a trend toward institutionalization that had begun earlier under the influence of investors like David Swensen, Yale University's pioneering endowment chief, who had championed hedge funds as a portfolio diversifier since the 1990s. Regulatory changes further transformed the landscape. The 2010 Dodd-Frank Act required most hedge fund managers to register with the SEC and disclose detailed information about their operations. Meanwhile, post-crisis banking regulations restricted proprietary trading at investment banks, pushing talented traders toward hedge funds and creating new opportunities as banks retreated from certain markets. This regulatory arbitrage became a significant source of hedge fund profits in the post-crisis era. Adaptation became the industry's watchword as managers adjusted to a new environment characterized by unprecedented central bank intervention, near-zero interest rates, and reduced market volatility. Many funds diversified beyond their original strategies, evolving into multi-strategy platforms that could allocate capital opportunistically. Others specialized in increasingly niche areas, from litigation finance to cryptocurrency trading. Technology continued to transform the industry, with machine learning and alternative data becoming essential tools for generating alpha. By 2020, the hedge fund industry had matured into a $3.6 trillion global business, far removed from its entrepreneurial roots. The largest firms managed tens of billions of dollars and employed hundreds of people across multiple continents. Compensation structures evolved, with the traditional "2 and 20" fee model giving way to more investor-friendly arrangements for all but the most successful managers. Performance became more differentiated, with a growing gap between top-tier funds and the mediocre majority. Despite predictions of the industry's demise, hedge funds demonstrated remarkable resilience, adapting to changing market conditions and continuing to attract capital from sophisticated investors seeking diversification and downside protection in an increasingly complex financial landscape.

Summary

The evolution of hedge funds from A.W. Jones's modest experiment to a multi-trillion-dollar industry reflects a fundamental tension in financial markets: the perpetual battle between efficiency and opportunity. Throughout their history, hedge funds have thrived by identifying and exploiting market inefficiencies, whether through Jones's original long-short approach, the global macro bets of Soros and Robertson, the statistical arbitrage of Renaissance Technologies, or the structured credit trades that defined the 2008 crisis. Yet their very success in exploiting these inefficiencies tends to eliminate them, forcing constant innovation and adaptation. This dynamic has driven hedge funds to develop increasingly sophisticated strategies and to expand into new markets and asset classes, perpetually searching for the next source of alpha. The hedge fund story offers several enduring lessons for investors and policymakers alike. First, financial innovation is a double-edged sword, creating both opportunities for profit and potential sources of systemic risk. The flexibility that allows hedge funds to generate extraordinary returns can also enable dangerous concentrations of leverage, as demonstrated by Long-Term Capital Management's collapse and the 2008 crisis. Second, markets are neither perfectly efficient nor completely irrational, but exist in a state of constant evolution where skilled participants can identify temporary mispricings. Finally, the institutional structure of investment vehicles matters profoundly. The alignment of interests created by hedge funds' performance-based compensation and managers' personal investment in their funds has proven to be a powerful incentive for risk management and innovation, even as it has sometimes encouraged excessive risk-taking. As financial markets continue to evolve, hedge funds will likely remain at the frontier of innovation, adapting to new challenges and continuing to shape the global financial landscape.

About Author

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Sebastian Mallaby

A Washington Post columnist since 1999. Worked for The Economist from 1986 - 1999.

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