The trouble with writing a book aimed at shedding light on hedge funds is, as Niall Ferguson, Laurence Tisch professor of history at Harvard University put it: “Everyone loves to talk about hedge funds – except the people who actually run them.”
With Inside the House of Money, Steven Drobny, co-founder of Drobny Global Advisors, a macroeconomic research advisory company that counts several of the world’s largest hedge funds among its clients, attempts to address this problem for one particular strategy – the so-called “global macro funds”. He has done a good job, and the book could be very useful for anyone who has entrusted money to funds in the sector.
Amid the growth and evolution of the hedge fund business, where global assets now top $1,000bn, Drobny believes global macro is the one strategy that has remained true to its original mandate of absolute return investing, not linking to any benchmark but seeking outsized returns from investments anywhere in the world, in any asset class and in any instrument.
However, as Drobny discovers, that mandate is open to some interpretation. His day job means he enjoys the trust and, in some cases, friendship of some of today’s top macro managers. He uses this access to present a series of fascinating interviews with more than a dozen managers representing a broad spectrum of investment thinking.
The interviews reveal diverse opinions over how to define “global macro”. Some have problems with their label. For example, Dwight Anderson, a commodity specialist manager at Ospraie Management in New York, tells Drobny: “We are global micro, not global macro. What we do is pure Microeconomics 101: supply and demand, identifying which companies are low cost, which have cash, and so on.”
Even Jim Rogers, co-founder with George Soros of the Quantum Fund in 1969, and perhaps the best known manager interviewed, agrees there is a problem of definition. Asked what he thinks of the term “global macro”, Rogers replies: “I don’t know what global macro means, or at least I’m not smart enough to know. I guess global means worldwide, and macro means macroeconomic. So I guess that is what it means, it means a view of the whole world. That sound right? Did I pass?”
The managers also share their views on subjects ranging from the global interest rate cycle, what they’d like to be remembered for, how they manage high-risk positions, where they get their trading ideas, and trades they are particularly proud of. What results is an insight into the ways in which some of the best performing global macro managers think about the world they invest in and how they have amassed their fortunes.
The book also features a brief history of global macro, tracing the path of today’s style of investing back to John Maynard Keynes almost 100 years ago. Drobny says that for an economist Keynes was a renaissance man, who had investment acumen as well as the ability to charm the Bloomsbury set.
According to Drobny, Keynes’ investment know-how was evident in the 13.2 per cent average annual returns of the Kings College, Cambridge University endowment, the College Chest, for which he had responsibility as First Bursar.
The book highlights the key points in the evolution of global macro hedge funds in more recent times, from the stock market crash of 1987, 1992’s Black Wednesday – when sterling was forced to leave the European Union’s exchange rate mechanism under a speculative attack led by Soros – and the financial crises in Asia in 1997 and Russia in 1998, which nearly led to the collapse of Long Term Capital Management, then one of the biggest macro funds.
Drobny gives a nod to the usual suspects, such as Soros, Michael Steinhardt, Julian Robertson and Paul Tudor Jones, who are widely acknowledged as the founders of modern global macro, before conducting his interviews with some of today’s star managers.
Although there are clear and often large differences in the strategies they follow, it is perhaps the basic similarities between individual managers that grabs Drobny’s attention: “Most hedge funds are run by diligent, smart, ethical people. The managers I met displayed humility, a respect and love for the markets, and were decidedly not ‘ra ra’ traders but far more thoughtful and intellectual.”
None of these words was likely to be attached to macro managers during the welter of negative publicity that followed LTCM. But Christian Siva Jothy, former head of proprietary trading at Goldman Sachs, who now runs a fund called SemperMacro, seems to fit the description. He tells Drobny that he got into financial markets by accident, simply because as a student he thought going to investment bank presentations was a good way to get a free drink.
When asked about the characteristics he rates most highly when hiring, Siva Jothy seems to bear out the observation that macro traders are not arrogant. “Passion and humility are the main qualities I look for but first and foremost – it sounds a bit cheesy – I ask myself: is this a good person? Is this someone I want to sit next to me that I trust and want to work with? Integrity is the single most important thing to me in hiring,” he says.