Inside the House of Money
by Steven Drobny, published 2006
This book *almost* picks up where the Jack Schwager's hedge fund chronicles leave off in his second book: “The New Market Wizards.” I say “almost” simply because the book “Inside the House of Money” focuses solely on the strategy of “global macro,” while Schwager's “The Market Wizards” and “The New Market Wizards” were mainly about funds that were specialists in their industries – such as currency trading, options trading, the stock market, or a dedicated short bias in the stock market.
In a way, this focus is unavoidable, given the proliferation of hedge funds since 15 years ago (when “The New Market Wizards” was first published) – a phenomenon which has been largely responsible for mediocre returns for many specialist strategies or hedge funds that have recorded impressive returns in the past – such as convertible arbitrage, long/short equity, and managed futures. In today's world of highly “efficient markets,” the only way to consistently earn excess returns with less risk (“alpha”) is to adopt a flexible mandate and to branch out into different stock, currency, fixed income, and derivative markets (or even Ghanian stocks and inflation-linked housing bonds in Iceland). In other words, “global macro” as we know it today.
This book begins by giving the reader an introduction of the history of “global macro” and its characters - from John Maynard Keynes to Alfred Jones to Julian Robertson/George Soros, and so forth. Many of these hedge fund managers “grew up” in the late 1980s to early 1990s – and in turn discuss their experiences during the 1987 crash and the 1994 bond market crash and the subsequent Orange County default. By reading the interviews of these hedge fund managers, one gets a good sense of how much the “global macro industry” has changed over the last ten years – from a world dominated by five to six “mega” hedge funds based in New York to a bigger and more liquid market – but a market where the individual funds are smaller and far more numerous than ten years ago. In addition – whereas traders in New York or London dominated trading in emerging markets ten years ago – today, there is a significant local presence, and thus less correlation among the emerging markets (which makes sense since the economics of each emerging market country can be strikingly different).
This book is not for novice traders or investors. However, despite that, I feel that most people would benefit from reading “Inside the House of Money.” The nice thing is – many of the themes that these hedge fund managers discuss in this book will still be relevant over the next few years (such as the imbalances in the U.S. economy and the rise of the emerging/commodity markets). Get it while it's hot.