Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets (a review)

What do an international news and business magazine, admitting mistakes, a tiger, and five investment gurus have in common? Surprisingly, all are mentioned frequently by hedge fund managers in Steven Drobny’s enlightening book.

Hedge funds have long been surrounded by a mystique that the fund managers are all too happy to maintain. In Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets, Drobny, who is a cofounder and partner of Drobny Global Advisors, an international macroeconomic research and advisory firm to many hedge funds, gets several of today’s leading hedge fund managers to open up and shed some light on the hedge fund business. He focuses specifically on the “global macro” hedge fund sector, which is much harder to define than other forms of investing because of its broad perspective. In the preface, Drobny points out that he originally planned merely to ask these hedge fund managers to define what “global macro” meant to them. Fortunately for Drobny and his readers, the conversations expanded into much richer discussions that address risk, portfolio construction, history, politics, central bankers, hiring practices, and the evolution of the business.

The book is reminiscent of John Train’s The Money Masters (HarperBusiness, 1980) and Bill Griffeth’s The Mutual Fund Masters (Irwin, 1994). In both of these books, the authors try to provide some insights into the thinking of some of the country’s best money managers. Like Griffeth, Drobny approaches this task through a series of interviews. An aspect that makes Drobny’s effort so interesting is the secrecy that envelops hedge funds. Unlike their mutual fund counterparts, hedge fund managers are not required to disclose their holdings or to define their investment objectives. An additional difference is that many mutual fund luminaries, such as Peter Lynch, John Neff, and Ralph Wanger, have written about their strategies. And other industry notables — Vanguard founder John Bogle, former U.S. SEC chairman Arthur Levitt, and Yale’s chief investment officer David Swensen — have written about the fund industry’s inner workings. Few hedge fund managers have been so forthcoming.

The book begins with a chapter by Joseph G. Nicholas, founder and chairman of HFR Group. Nicholas provides an introduction to the global macro hedge fund business. He defines the business as the use of macroeconomic principles to identify dislocation in asset prices anywhere in the world. Following the Nicholas introduction, Drobny provides a brief history of the hedge fund business. When people think of early hedge funds, they commonly think of George Soros, but Drobny traces its origins to famed economist John Maynard Keynes. Renowned for his work on macroeconomic policy, Keynes also spent much of his career speculating for his personal account and the King’s College Cambridge endowment.

During the fixed-currency regime that prevailed until 1971, hedge funds focused on equities and were patterned after the very first hedge fund, started by Alfred Winslow Jones in 1949. The A.W. Jones & Company approach minimized global macro influences on the effectiveness of stock picking by maintaining a hedged book of long and short positions.

The breakdown of the Bretton Woods fixed-exchange-rate system introduced an entirely new tradable asset, foreign exchange. Some of the best-known hedge fund managers, including George Soros, Jim Rogers, Michael Steinhardt, and Julian Robertson, emerged during this period.

Following the brief history of the hedge fund industry, Drobny delves into the minds of 14 leading hedge fund managers. Although the managers came to the hedge fund business via different routes and each defines global macro differently, they display a number of similarities. First, all of the interviewees recognize the importance of monitoring the global economy. Nearly all of the managers mention The Economist weekly as a leading source of information and investment ideas. Some, including Jim Rogers, have spent considerable time traveling the world to spot investment opportunities. Others, such as Scott Bessent of Bessent Capital, say that keeping their distance helps them to maintain objectivity.

Another common factor is the managers’ ability to manage risk. All investors seek investment positions that will make money, but the best investors recognize the importance of minimizing losses and know the importance of admitting mistakes. Some of the most interesting insights from the interviews come from Drobny’s query about each manager’s worst investment. The interviewees’ uniform candor yields some invaluable lessons.

As a final note of interest, many of this generation’s hedge fund managers have fallen from the same five trees. They trained with legends Julian Robertson of Tiger Fund fame, Stanley Druckenmiller, George Soros, Jim Rogers, or Paul Tudor Jones.

In summary, this interesting book takes us into the minds of some of the world’s best hedge fund managers. Drobny provides a good balance among information on the managers’ individual paths to the hedge fund business, their best and worst investments, and their views on topics ranging from history and politics to central banking. Many useful insights are not about the interviewees but about how they view other hedge fund managers. For example, Bessent opines that Rogers is a great analyst but a poor trader, that Soros is a great trader but a poor analyst, and that Druckenmiller’s strength is his uncanny ability to time the trade. These observations make clear that there are many ways to make money and that the most successful hedge fund managers are the ones who understand how to exploit their strengths. Inside the House of Money is a good read for anyone who is starting out in the hedge fund business or who is interested in learning more about the inner workings of the global macro hedge fund world.

—R.L.M.