Salomon's back office had constituted the firm's true edge. And you know, the classic original market-maker in hedge fund space is Steinhardt, who is a guy, he's pretty intense, he gets, you know, he's on the phone all the time, and he's got two cigarettes at once. And so you then begin to get an understanding where there's lots of dumb money running around, writing credit-default swaps and betting on all these instruments, and the smart money betting against it all. Then, another new method will come about, and the process will repeat each other. This overt practice gradually went away though was the progenitor of the high speed trading issue that broke with Michael Lewis' latest book, and was practiced by any trading entity that could do so- technically illegal, of course, so no one admits to it , but without the hedging, much of the profits came from the concept of asymmetric risk, a simple idea that is difficult to identify in reality. You have been there before.
And I think smaller funds, the boutique funds, that's exactly what we want because it's healthy for the system. And you know, it's just a kind of visceral reaction. Sebastian Mallaby, who must be the keenest student of hedge funds anywhere, now does-and he shares it with you in this crackling good read. Mallaby himself is a bit of an antelope, gracefully covering a lot of ground. The question is, how do you move risk into institutions that will manage it in the most sane and least dangerous way possible? I did learn quite a bit about the functions of a hedge fund and how a number of smart folks can seek out inefficiencies, irregularit At one time this book seemed interesting so I got it to listen. And Swensen said, it's a genetic defect.
If you stand up and say, I have two questions, Sebastian will start figuring out which one's the easier one, and then that's the one he'll take. I mean, he basically made a life choice that he's happy running an endowment for a university that he believed in, where he got his own Ph. So in my view, the 9,010 or whatever it is, you know, should be affirmatively not regulated, because why erect any barriers to their setting up? However, he's littered it with so much of his preclusion and selection errors, it paints a rusty picture over a darker canvas. I wonder if you could give this audience, before they read your book, some sense of the ingredients of success for the hedge fund managers and some of the characteristics you maybe find they have in common. So there are clearly things that go wrong. Extremely detailed research is reduced to a cascade of brilliance--a triumph of tight editing.
Any who disagree will have to contend with the evidence of the recent Wall Street collapse. So in the vein of your question, would it be useful to make the play in three acts? Julian Robertson staffed his hedge fund with college athletes half his age, then he flew them to various retreats in the Rockies and raced them up the mountains. Many of the titans have been brought low by people simply figuring out which trades they were making and making them as well. Mallaby's tales about the most prominent hedge fund superstars, their biggest killings and steepest falls constitute an amusing story. I'm going to ask you to wait.
And so when he said to me, you know, what on earth good for society is this, I mean, one of the answers is that two-thirds of the money in hedge funds now comes from institutions, whether it's endowments, nonprofits, pension funds and so forth. Jones all the day to the modern master of the universes. What I take away from this story of extraordinary characters is perhaps a more positive view of hedge funds, mainly due to the fact that they are treated in the eyes of regulators as freestanding structures which can be allowed to fail without causing broad ripples across the economy and getting bailed out with taxpayer money; un Fairly comprehensive history on hedge funds since their inception at the end of the 1940's until their rise to the commanding heights of the contemporary world economy. Hedge funds are bigger than the market. But he makes one serious omission. So you know, Julian Robertson walks out of this meeting, and he basically sells his German positions. The guys who understood what was happening, or the guys who were just completely betting without thinking about it? And, for good measure, the Efficient Market Hypothesis and its proponents come in for some well-deserved criticism.
You know, there was a lot of scapegoating then of hedge funds, too. It was almost too antiseptically clean. And the chief executive says, oh, no, no, this is the lunch we give to all our employees. And then supplemented that with some translation specialists. And he's as wide as a truck, and his partners have put a scale by his desk. If there was an option to give a book 6 stars I would have given it. And I think these are really the least -- inaudible -- options.
That means that there won't be discontinuity in prices. This bias starts irritating at some point and it becomes hard to follow the author, because the author has given ridiculous logic to prove his point. And you see all the credit-default swaps. Tell us how you made that decision to commit to this big project, hold hundreds of interviews, go through boatloads or maybe I should say yacht loads -- laughter -- of material. So they are algorithm-specific to try to comb through data and find patterns. And there's something about Merrill Lynch, et cetera, et cetera.
They get called in to do it. They go visit Thailand in February, they interview somebody at the central bank, who says something incredibly stupid, is the story I tell in my book, where they sort of admit to the Soros guys that, yeah, this peg, it's becoming a bit difficult. You know, I'm not there at all. Drawing on his unprecedented access to the industry, esteemed financial writer Sebastian Mallaby tells the inside story of the hedge funds, from their origins in the 1960s to their role in the financial crisis of 2007 to 2009. One-Breath Author Bio Mallaby is a senior fellow at the Council on Foreign Relations.
So I didn't know really a lot about it. This book is a good way to learn about how these mysterious companies called Hedge fund started and how they are different from the other Asset management company's. And the other thing was, it felt as if there was a sort of intellectual arbitrage to be done, where most people, I think, who knew a lot about finance could see the virtue of hedge funds and that, you know, these were small-enough-to-fail institutions that could go down without damaging the system, that they were often contrarian, which was healthy for reducing the size of governments, and that they were probably on balance a good thing. As he shows in more than a dozen interlocking stories, the history of hedge funds is a history of the men who were able to spot market opportunities others missed, and who were prepared to gamble a fortune on their convictions. You raise a question about, you know, the sophisticated investor question, and it's a tough one. I think you know the way we do it, so we'd really appreciate it if you'd stand, state your name and your affiliation. And this is coming from someone who took three years to finish reading it.