A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

CHAPTER 9

THE BRAVE NEW WORLD OF HEDGE FUNDS

When I moved to Moore Capital, it was one of a handful of multibillion-dollar hedge funds. It owed its success and preeminent position in the investment world to the trading talents of its founder, Louis Bacon, who started the firm in 1989 after a short stint at Lehman Brothers. He had benefited from the tutelage of Julian Robertson, another luminary, whose Tiger Management fund amassed $20 billion of assets at its peak. Others in their ranks included Paul Tudor Jones, the founder of Tudor Investments, who, like Bacon and Robertson, has Southern roots, and George Soros, a Hungarian Jewish émigré. The list of high-powered, multibillion-dollar hedge funds expanded in the 1990s with a new generation that relied on computer power and analytical models, such as Long-Term Capital Management, D.E. Shaw, and Jim Simon’s Renaissance Technologies, and has continued to balloon to this day.

It would seem that any discussion of hedge funds should include a taxonomy describing all the types of strategies and instruments, putting everything into a neat set of boxes. I believe that doing so is not particularly informative, for reasons that I will spell out in Chapter 11. But as background, it is worthwhile to take a look at basic types of hedge funds and the strategies they pursue to understand what sorts of things they do, how they try to make money, and how they sometimes run into trouble.

FUN WITH DATA

You need an edge. That’s the basic rule for ...