[Bbanggubneun Tajagi] People Richer Than Gods

Sebastian Malabi, Hedge Fund Battle

There is no entity more criticized in the capital market than hedge funds. Hedge funds are accused of gathering the wealth of the rich and disrupting otherwise stable governments and markets. They are criticized for causing massive damage through all sorts of tricks and loopholes, disregarding national regulations. Progressive politicians constantly blame hedge funds for ruining the national economy and promise stringent regulations. Even individual investors see hedge funds, which frequently engage in short selling, as a thorn in their side.

However, Sebastian Mallaby, a senior fellow at the Council on Foreign Relations (CFR), pays no heed to such criticisms. In his book The Hedge Fund Mirage, he candidly introduces hedge fund managers who have recorded enormous incomes.

The wealth they have accumulated is truly astronomical. Financial firms and private equity leaders who once dominated Wall Street bow before hedge fund heroes. John Pierpont Morgan amassed a fortune of $1.4 billion and was called ‘Jupiter,’ but hedge fund managers have surpassed gods through just a few years of trading. Some relentlessly attacked flawed exchange rate systems, while others quickly tracked indices or seized opportunities in trading.

The book does not only cover hedge fund success stories. Even hedge fund masters make mistakes. Nobel laureates and Wall Street superstars have also engaged in herd trading and made wrong judgments. There were times when, despite rational analysis, market participants rejected their views, pushing them to the brink of bankruptcy. Yet, what allowed them to remain masters was their attitude of learning lessons and admitting mistakes. They survived the war-like financial markets by changing investment techniques, humbly accepting criticism from others, and adjusting their portfolios.

However, there is an unchanging common philosophy in the hedge fund industry: ‘finding errors.’ Hedge fund managers bet on market distortions. George Soros, often cited as the main culprit behind foreign exchange crises in several countries, is a representative figure. In fact, Soros did not destroy a sound system. He merely targeted politicians who defied the natural order of capital markets and anti-market policies. The reason the Bank of England collapsed under the short selling of the pound was not Soros’s greed but the anti-market policies of politicians aiming to create a ‘European single currency.’

Hedge funds also challenged financial theories that economists had solidly built over decades. In the 1960s, economists conducted research under the hypothesis that ‘markets are always efficient.’ Prices were considered random and unpredictable, and hedge fund billionaires were dismissed as lucky individuals. Only after hedge funds proved through profits over 20 years that ‘markets are inefficient’ did economists hurriedly start creating new graphs and theories.

Therefore, the protagonists of The Hedge Fund Mirage are not financial managers. The real hidden protagonists are states stubbornly clinging to foolish systems, politicians who only know how to incite the public but do not understand markets, scholars who insist on unrealistic theories, and investors who thoughtlessly put in money. The loopholes in the capital market that these groups have steadily created could only be filled because hedge funds existed. Of course, it required terrifying growing pains, but without the harsh medicine of hedge funds, the economy might have been on the brink of collapse.

Many people think hedge funds are shrouded in secrecy, pursue excessive risks, and cause major accidents. The book reveals the reality of hedge funds in detail. It shows how industry giants think rationally, worry about safety, and secure efficiency. It demonstrates that a healthy national economy and a robust capital market are possible only when hedge funds operate under appropriate regulation.

The Hedge Fund Mirage | Written by Sebastian Mallaby | Translated by Kim Gyu-jin and Kim Ji-uk | FN Media | 27,000 KRW