This is for the most part a collection of detailed interviews with leading global macro hedge fund managers. These funds have the widest mandate. All the world — every conceivable asset class, instrument and geography — is their domain. Their aim is to generate superior returns by making leveraged investments when, by using macroeconomic principles, they identify dislocation in asset prices. Macro funds go beyond specialised strategies and as the doyen among macro fund managers, George Soros, says, “I don’t play the game by a particular set of rules; I look for changes in the rules of the game.”
The popular image of macro fund managers is that of hugely powerful speculators who have humbled governments, as Soros did when in 1992 he forced the British government to take sterling out of the European Exchange Rate Management in ignominy. This has earned them the opprobrium of leaders from Richard Nixon to Mahathir Mohamad of Malaysia for waging all-out wars against their respective currencies. In fact, when macro managers spot an anomaly and pick on it, they limit its run, acting as both amplifier and damper of volatility, but not influencing the trend.
The author, head of Drobny Global Advisers which advises these funds on market strategy, notes in his history of this genre of investing that “today’s style of global macro investing was paved by John Maynard Keynes a century ago… Some say he was the first of the modern global macro money managers.” Keynes successfully invested his own money, those of insurance and investment trusts and the endowment of King’s College Cambridge as its First Bursar. Just as he incorporated lessons learnt from the crash of 1929 in his investment strategy, today’s macro managers have honed their skills on major market upheavals like the stock market crash of 1987, sterling crisis of 1992, bond market upheaval of 1994, the Asian crisis of 1997 and the collapse of the dotcom bubble of 2000.
To this list has to be added the housing bubble collapse of 2007, the credit crisis of 2008 and the current recession in developed economies. Till now macro funds have been highly successful in what they set out to do. During the 16 years 1990-2005, these have earned 15.62 per cent average annualised returns, 500 basis points higher than the S&P index. But macro managers are right now passing a watershed from which they need to emerge with the viability of their business model revalidated. While hedge funds have lost heavily last year, in the turmoil there is at least one classical macro manager, John Paulson, who betted against the housing bubble and reportedly made $2 billion.
To capture all this, another edition of this book should become due soon even as the ink on this second revised edition is scarcely dry. The first edition, the legwork for which was done around 2004, was published in 2006. This edition, incorporating new material, was put to bed in June last year. So much has happened since then that the book hangs somewhat in limbo.
Among those interviewed, the term maverick fits best Jim Rogers who is simply called the pioneer. He co-founded Quantum Fund with George Soros in 1969 and based his career on at-their-time wild, out-of-consensus investment ideas like Malaysian rubber and Botswana stocks. The explorer of undiscovered investment options is quite literally an explorer and adventurer who has circled the world on car and motorcycle. He is strong on commodities and has a dim view of the future of the US dollar. His outspokenness is incredible. Sample this. Why will the EU not admit Turkey, despite the great demographic advantage it will bring? “They are not going to do it (admit Turkey) because of the dirty little secret they don’t like to talk about. The Turks are ‘not like us’ Europeans. ‘They’ got that funny language and that funny religion and that funny skin.”
In utter contrast to this is the urbane and thoroughly British Sushil Wadhwani who is unique among this group for having done a stint as a central banker, as a member of the monetary policy committee of the Bank of England soon after it was made politically independent, in between managing private money. As over the last few decades central banks have got better at their job and reduced volatility, where are the policy kinks for macro managers to exploit? His answer, in circa 2004, was that modern central banking “is focused on consumer price inflation and not so much on asset price inflation….What you’ve got now is huge asset market distortions, and one of these days, the chickens will come home to roost, and when they do, there’ll be huge opportunity.” You cannot get more prescient than this and the book is strewn with such nuggets.
INSIDE THE HOUSE OF MONEY
TOP HEDGE FUND TRADERS ON PROFITING IN THE GLOBAL MARKETS
Steven Drobny
John Wiley & Sons
$16.95; 414 pages
