The Pequod Review:
Sebastian Mallaby's More Money Than God is a well-researched history of the hedge fund industry, structured around several key investors (George Soros, Julian Robertson, John Paulson, Paul Tudor Jones, etc.) and economic inflection points (1997 Asian Financial Crisis, 2007-08 housing collapse, etc.). Because hedge funds have a wide range of strategies this is a difficult story to tell, but Mallaby has a strong understanding of economics and proves to be an intelligent guide. He also captures the methods of great investors, including the trial-and-error nature of their work and their focus on quickly exploiting opportunities before inefficiencies get competed away:
Standing six feet five inches tall, occasionally donning a jersey of the National Hockey League's Calgary Flames, and equipped with a graduate degree in math, [Brian] Hunter was imposing physically as well as intellectually. He was earnest, soft-spoken, and unfailingly clim, and from the moment he landed at Amaranth in 2004, his returns from trading natural gas stood out conspicuously. He had spotted an anomaly in winter gas prices. Unlike oil, which is shipped around in tankers, natural gas is delivered mainly in pipelines; supply routes cannot easily be changed to fill unexpected local shortages. As a result, gas prices are volatile: Time and again, a blast of cold weather would cause demand for household heating to spike, and in the face of rigid supply, prices would leap upward. Hunter's discovery was that options whose value would shoot up in a shortage were strangely cheap -- they represented bargain weather insurance. Hunter loaded up on these options, figuring he had found a classic asymmetrical trade: The most he could lose was the small cost of buying the options, but if a shock hit the market and the gas price spiked, he could earn many times more than that. Another way of cashing in on the same insight was to buy a pair of futures contracts: Hunter would go short a summer contract and long a winter contract, betting that the narrow spread between the two would widen if winter prices leaped upward. The strategy had worked in recent winters, and in November 2004 it came good again. The price of natural gas jumped to around 80 percent above its low point in the summer, and Amaranth cashed in handsomely.
Mallaby also covers the psychology of market participants more generally:
People form opinions at their own pace and in their own way; the notion that new information could be instantly processed was one of those ivory-tower assumptions that had little to do with reality. This gradual absorption of information by investors explained why markets moved in trends, as new developments were gradually digested. But market psychology was more subtle than that; there were times when investors' reactions accelerated. Human beings do not simply make forward-looking judgments about markets... they react to recent experiences. For example, losses might trigger an anxious bout of selling; gains might set off waves of euphoric buying.
These profiles represent a powerful counterargument to at least the stronger versions of the efficient market hypothesis. Recommended.