In the throes of the financial crisis of 2008, novelist Tom Wolfe was asked where the downturn left his Masters of the Universe—the iconic testosterone-driven magnates of Wall Street featured in "Bonfire of the Vanities." His answer: "In Greenwich, Conn., mainly. The hottest, brightest, most ambitious young men began abandoning investment banking in favor of hedge funds six years ago."
Secretive, obscenely lucrative and highly leveraged, hedge funds are surrounded by mystery and rumor. They’re run by small, reclusive and male-dominated staffs equally competitive and eccentric. They dump tidal waves of capital into an investment in the morning, only to pull out in the afternoon. Working for them is the quickest way to become a billionaire. Their collapse might be our next great financial crisis.
To learn more about hedge funds, Big Think spoke with Sebastian Mallaby, a senior fellow in International Economics at the Council on Foreign Relations and author of "More Money Than God: Hedge Funds and the Making of a New Elite." He told us that it's a misperception that hedge funds are riskier than other kinds of economic vehicles.
"I believe that their leverage of two or three times, on average, makes them less risky than lots of investment banks, which before the 2007-2008 crisis were leveraged more like twenty-five times, or more," said Mallaby. "Also, hedge fund managers tend to keep their own money in the fund. They have an incentive not to lose it, to worry about risk. And so they came through the crisis of 2007-2008 really quite well. Hedge funds were up in 2007 on average by ten percent. In 2008 they were down, but down only half as much as the S&P 500 Index. They weathered the storm better than the others because they have the right incentives to care about risk management.”
Mallaby also spoke about why there are so few women in the field, saying that he didn't quite know why the field has lagged behind other professions in gender integration, but that the tide may be turning.
“The hedge fund business is basically a knowledge-intensive business," said Mallaby. "It is also quite emotionally intensive because it is stressful to take all these risks. If you look at college enrollment in the U.S. you see that girls now outnumber boys. And so most knowledge industries going into the future should have a very high representation of women, and possibly even a preponderance of women.
"I was discussing this with Chrystia Freeland, Editor-at-Large at Thompson Reuters, who herself is an extremely successful professional woman, and she asked the question, ‘Is it that women have less of a risk appetite?' The implication of the question was: 'Is the willingness to take risk some kind of testosterone-linked human characteristic?' I’m not willing to go there."
What do you think? Are hedge funds an over-leveraged fiscal time bomb? Are women their future?
The full interview including Mallaby’s “Five Game-Changing Hedge Funds” will be published Friday, July 9th.