In his book titled “More Money than God”, Sebastian Mallaby gives a brief background of the creation of hedge funds, and then compares and contrasts some of the biggest and most famous funds. He introduces his book by telling the story of Alfred Winslow Jones, an Australian investor who is credited with creating the first hedge fund, and is often referred to as the father of the modern hedge fund. Throughout the book, Mallaby explains that the creation of the investment strategy by Jones resulted in a new era of financial billionaires, some making an almost unfathomable amount of money, annually.
The first Hedge fund manager that I chose is “Big Daddy”. While this is the first manager in the book, I assure you that’s not why I chose him. Once I opened the book, the name “Big Daddy” instantly grabbed my attention, and I needed to read more. The man behind the nickname is none other than Alfred Jones, the man who created hedge funds. This unique nickname was coined by a 1968 New York Magazine article that referred to him as the “Big Daddy” of the industry. Jones’ investment style was considered incredibly risky at the time. He would short and long specific stocks, in order to maximize his profits.
Ever since the crash of 1929, shorting and longing had a negative connotation to it, since investors didn’t feel comfortable investing other people’s money with these sort of investments. For Jones however, he thrived in this investment style. Mallaby states, “By selling a portion of his fund short as a routine precaution, even when the charts were not signaling a fall, Jones could insure his portfolio against market risk.” An absolutely brilliant investing strategy by a man who didn’t even attend business school, Jones ensured that his portfolio minimized risk. When asked why he implemented this strategy, he said “You could buy more good stocks without taking as much risk as someone who merely bought”. Throughout his investing career, Jones kept his investment strategies to himself. While this may seem like a selfish move, I think that this was a smart choice. This kept his competitors in the dark about his next investment moves, in addition to keeping his ideas safe.
Mallaby argues that this was due to his past involvements with questionable political groups while he was living in Europe, however I believe that he just wanted to protect his money as well as his strategies. Jones’ approach was remarkable for several reasons. As someone with very little background in finance, he was able to create one of the most successful forms of investing, out of previous investing strategies that others deemed, “too racy”. In addition, Jones and his coworkers were able to calculate volatility of stocks in a time where this was considered “a laborious business”. The fact that he was able to correctly calculate the volatility of 2,000+ firms is incredibly impressive. Finally, Jones was able to predict the movements of the market years, and in some cases decades, before his successors. Thanks to Alfred Jones and his creation of the hedge fund, the world of investing is much more diversified and interesting to follow.
Another section that sparked my interest is the section titled “Top Cat”, the fifth chapter of the book. Mallaby introduced this chapter with an argument between two incredibly renowned individuals in the world of finance; Warren Buffett and Michael Jensen. Jensen argued that investments are nothing more than flipping a coin; a game of chance. While Buffett took the opposing side, saying that “stockpiling success is not randomly distributed.” The argument itself was very insightful, with Buffett eventually proving triumphant over Jensen, and even adding some insult to injury by explaining Jensen’s argument better than he did. Buffett’s overall argument, as explained by Mallaby, was that if fund managers are viewed as a series of performance numbers, then it is easier to dismiss their success as a “product of chance”. However, if you were to dissect the specific investment style of each manager, you would find out that the success is in fact, not random. Julian Robertson created the Tiger hedge fund in 1980, inspired by “Big Daddy”, Alfred Jones.
Throughout the fund’s 20+ year tenure, Robertson modeled his investment strategy after Jones. He strategically decided to short and long stocks, trying to minimize the risk involved for his investors. According to Mallaby, Robertson often dismissed commentary about the market’s direction; “Gibberish”, he called it. Robertson promised his investors that he would make their investments profitable. As his Tiger Fund increased, he started branching out into emerging markets. Unlike Jones, he started to diversify his investments, picking up foreign currencies, commodities and bonds. In addition, he started making call and put options, an investing strategy that is considered fairly risky. However, according to Robertson, he emphasized that these forms of investments were used for “conservative ends”.
While Robertson is one of the most successful fund managers of all time, what really separates him from the other managers listed in the book is his ethics outside of the office. Mallaby writes, “The Tigers would fly out west and be taken to a hilltop. They would split up into teams, each equipped with logs the size of telephone poles, some rope and two paddles… they would heave the equipment down to a nearby lake, lash the logs together and race to a nearby buoy.” These unorthodox and jarring team building activities differentiates Robertson from his peers, as well as his variation of Jones’ investment strategies.
The final fund manager that peaked my interest is James Simons, mentioned in chapter 13 of More Money than God. Out of all of the fund managers mentioned, Simons made the most money. Mallaby states, “He was not the world’s most famous billionaire, but he was probably the cleverest. What really stuck out to me about Simons is the fact that he wasn’t a savvy investor, he was an incredibly talented mathematician and code breaker. His success came from his ability to combine these two skills to predict the future of the market. Simons’ early investments were commodities, in which he applied the laws of supply and demand to maximize his profits. He launched his Medallion fund in 1988, focusing on short time trades.
Unfortunaley, the Medallion fund lost a large percentage of his investment in his first year, about 25%. His partners encouraged him to keep his investment; one of his smartest decisions ever. In 1990, they reopened the fund with a new based on short term signals, ending 1990 up 56%. Simons focused on hiring mathematicians to his team, rather than genius investors. This strategy, while unconventional in its methods, turned out to be incredibly successful. Mallaby writes, “Simons added computer scientists, physicists and astronomers to his roster, though he never hire economists.” He did this because he wanted people who weren’t already connected to the market; he wanted an outside perspective.
Economists and investors are “connected to the flesh and blood of a real economy” as Mallaby puts it. In addition, Simons’ strategy was able to persevere through financial crashes. According to Mallaby, after the crash of 2008, the Medallion fund was up 80% (after fees) an absolutely unpresented number for the time. The most jaw-dropping statistic that Mallaby mentions is that in 2006, Simons made $1.5 billion. This was more than Costco’s 115,000 and Starbucks 118,000, combined. Although he had one of the most interesting and unique approaches to hiring people to be members of his team, James Simons was able to break down the market using math, science and physics; resulting in the creation of billions of dollars for his fund.
Although they all had fairly different investment strategies, Alfred Jones, Julian Robertson and James Simons were all able to make an absolutely absurd amount of money through their own strategies with hedge funds. Whether it was Jones’ ability to predict which stocks to short, Robertson’s use of options or Simons unique mathematical approach to the stock market, these three were able to change the face of investing for centuries to come.
