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Hedge Fund Investors Further Praise for Inside the House of Money from Hedge Fund Investors “Drobny has done a great job of capturing the inner workings of macro trading by interviewing some of the most interesting people in the fi eld today. This book is a treat and a must-read if you want to understand how the market’s best manage their portfolios.” —Mark Taborsky, Vice President, External Management Harvard Management Company “Inside the House of Money provides a unique insight into the hedge fund business. For those who think hedge funds are mysterious, here they will fi nd them transparent. Readers will be fascinated to see that there are so many ways to make money from an idea.” —Bernard Sabrier, Chairman, Unigestion “With its behind-the-scenes perspective and macro focus, this book is an entertaining, educational read, and also fi lls a substantial gap in hedge fund literature.” —Jim Berens, Cofounder and Managing Director, Pacifi c Alternative Asset Management Company (PAAMCO) “An exciting, fast-paced insider’s look at the elite, often mysterious world of high fi nance. This book is the real deal. An absolute must-read for every endowment, foundation, or pension fund offi cer considering investing with hedge funds.” —Michael Barry, Chief Investment Offi cer, University of Maryland Endowment INSIDE THE HOUSE OF MONEY Top Hedge Fund Traders on Profi ting in the Global Markets Revised and Updated STEVEN DROBNY Foreword by Niall Ferguson Cover Design: Michael J. Freeland Cover Photograph: © Getty Images Copyright © 2006, 2009, 2014 by Steven Drobny. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best eff orts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http:// booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. ISBN 978-1-118-84328-4 (paper); ISBN 978-1-118-86572-9 (ebk); ISBN 978-1-118-86557-6 (ebk) Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 The social objective of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. —John Maynard Keynes Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes. —George Soros The things you own end up owning you. —Tyler Durden CONTENTS Foreword by Niall Ferguson ix Preface xi Preface to the 2009 Edition xv Preface to the 2006 Edition xvii 1. Introduction to Global Macro Hedge Funds: Joseph G. Nicholas (HFR Group) 1 2. The History of Global Macro Hedge Funds 5 3. The Future of Global Macro Hedge Funds 31 4. The Family Offi ce Manager: Jim Leitner (Falcon Management) 35 5. The Prop Trader: Christian Siva-Jothy (SemperMacro) 85 6. The Treasurer: Dr. John Porter (Barclays Capital) 117 7. The Central Banker: Dr. Sushil Wadhwani (Wadhwani Asset Management) 145 8. The Dot-Commer: Peter Thiel (Clarium Capital) 165 9. The Floor Trader: Yra Harris (Praxis Trading) 183 10. The Pioneer: Jim Rogers 201 11. The Commodity Specialist: Dwight Anderson (Ospraie Management) 225 vii viii CONTENTS 12. The Stock Operator: Scott Bessent (Bessent Capital) 253 13. The Emerging Market Specialist: Marko Dimitrijevic´ (Everest Capital) 273 14. The Fixed Income Specialists: David Gorton and Rob Standing (London Diversifi ed Fund Management) 293 15. The Currency Specialist: Anonymous 309 Conclusion 325 Appendix: A Note to Investors about Global Macro 327 Acknowledgments 329 Bibliography 331 Index 335 FOREWORD fi rst met Steven Drobny in Barcelona in 2004. He had invited me to give I a keynote address at a global macro hedge fund conference he was organizing. At that time, I had only the haziest notion of what a global macro hedge fund was, but I accepted—not realizing that the keynote at such an event was essen- tially a form of entertainment. No doubt I gave some spiel about the impending demise of the American empire or the unsustainable nature of the U.S. current account defi cit or the impending liquidity crisis that would be triggered by some geopolitical crisis or other. The other conference participants—nearly all managers of macro hedge funds—listened more or less politely, but made little secret of their skepticism when it came to questions afterward. Given that the next four years were going to witness one of the greatest fi nancial upswings of all time, they had good reason to be dubious. The real business of the conference was not my after-dinner speech, of course, but the peer-to-peer sessions conducted the next day. As I listened with growing fascination, a succession of hedge fund managers stood up and explained with great precision how inordinately large sums of money could be made out of complex transactions, the like of which I had never heard. What was a “swap”? A “steepener”? And what on earth was the “Swissie” everyone kept talking about? Having spent almost the entirety of my professional career in universities—apart from a one-year fellowship at the Bank of England—I had for many years complacently assumed that academics were the smart- est people on the planet. Not well paid, to be sure, but otherwise rewarded by the pleasures and pains of scholarship. Yet I had always worried about the gap between the grand theories I and my colleagues discussed in the groves of academe and the rough-and-tumble world of practice. For years I had called myself an economic historian, with pretensions to understanding the world of fi nance. After a day at the conference I realized that I understood next to nothing. ix x FOREWORD What most impressed me about the global macro managers was the way they proceeded from theoretical insights derived from conventional eco- nomics, to empirical research, to the conception of a particular transaction, to the execution of the transaction—to the result itself. Here was a disci- pline generally lacking in many fi elds of social science and the humanities. Within a year at the outside, and more commonly a month, it would be clear if the trade had worked. Money would have been made or lost. So impressed was I by what I saw in Barcelona that I made a mental note to attend more such events and, if possible, to get a little closer to the busi- ness of hedge fund management. I could think of few better ways to learn about the relationship between economic theory and fi nancial practice. Steven Drobny’s book makes an invaluable contribution by document- ing what has been a quite extraordinary fi nancial revolution. The rise of hedge funds stands out as one of the decisive structural changes witnessed in fi nancial markets over the past 15 or 20 years. Future historians will thank Drobny—not least because hedge fund managers like the ones featured in these pages are rarely the kind of people who write their own memoirs. Although written in 2004–2006, long before the great subprime crisis begat the credit crunch and (perhaps) the recession of 2008–2009, Inside the House of Money repays rereading today. Many of the managers interviewed here anticipated the coming crisis, sensing that the explosion of leverage in the United States and the widening of the U.S. current account defi cit were unsustainable trends. If anyone had an incentive to anticipate the great struc- tural shifts of our time—not least the relative decline of the United States and the rise of East Asia and South Asia—it was the macro hedge funds.
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