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May 22, 2011

The Top 10 Books on Hedge Funds

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It’s that time of year again- the sun is out, the days are longer, and it’s a little easier to dash out of the office on Friday afternoon for a weekend getaway. While we are fans of the occasional Sunday Funday, the summer is a great opportunity to continue your self-learning and prepare for fall hiring spree by both banks and buy-side firms. Not only are these books a great way to immerse yourself in the world of finance and learn terminology, they also make for fantastic conversation between yourself and future colleagues. So for those of you who are truly putting the summer months to good use, we came up with the definitive list of the top 10 Books on Wall Street for some fantastic summer reading. We’ll start from the top down.


10. Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager

Diary of a Very Bad Year - Gessen

One of the best books for a non-finance person, Diary of Very Bad Year, by Keith Gessen, chronicles recent stories from the Street through a series of interviews with HFM- an anonymous hedge fund manager. Gessen and HFM narrate the stories behind the death of Bear Stearns, the collapse of Lehman Brothers, the weakening US Dollar, the Madoff Scandal, and the bailouts. Equally impressive and interesting is HFM’s thinking about these major events, which is practical and thoughtful, as well as Gessen’s ability to transform these complex financial crises into simple parables. Overall a great story-personable in its narrative, but also informative in its explanation of the financial events that occurred.


9. Money and Power: How Goldman Sachs Came to Rule the World

Money and Power - Cohan

From the ruthless competition, unique culture (check out Wall Sreet Insiders’ blog post on GS’ corporate culture), and questionable practices, Cohan provides one of the most comprehensive looks inside Wall Street’s most prestigious firm.  Cohan’s research is unmatched with substantial interviews with employees past and present as well thousands of pages of insider documents.


8. Confessions of a Street Addict

Confessions of a Street Addict - Cramer

If you haven’t heard of Jim Cramer, you’re not in finance. The brash and intense host of CNBC’s Mad Money indulges in his personal story from beginning his career as a journalist and Wall Street pundit, to becoming an internet entrepreneur and Hedge Fund manager, to his current role as a television commentator. Cramer describes his love of trading that began when he was a boy and went into overdrive when buying and selling stocks during law school in the pre-internet days. He also reveals a side that isn’t apparent from his TV personality and the tailspin and eventually recovery from workaholism and alienating his friends and family. We recommend this thrilling and brutally honest tale for some easy summer reading that isn’t all graphs, charts and models.

7. When Genius Failed

When Genius Failed - Lowenstein

An instant classic, Roger Lowenstein’s When Genius Failed is the story of the rise and fall of one of Wall Street’s most infamous money management institutions: Long-Term Capital Management. The book is fairly long, and offers a comprehensive analysis on major aspects of the fund including who the people (former Salomon Brothers VP’s John Meriwether, Myron Scholes and Robert Merton), the strategies, and their bail out on the fear that their collapse would cause a chain reaction throughout the markets. Returning of 40% (after fees) in its initial years, LTCM lost $4.6B in 4 months during the Russian financial crisis. The greed, hubris, but also advanced algorithmic trading strategies are quite fascinating as explained by Lowenstein, who’s intimate knowledge of the topic permeates throughout. Although the book can wane at times, we recommend it for its depth into financial modeling, and account of a story no one in recent generations will forget.

6. More Money Than God

More Money Than God - Mallaby

Sebastian Mallaby is a pure-bred capitalist who makes no apologies for the greed, risk, and motivations in the “old-school” world of high-finance. More Money Than God offers a particularly well-balanced explanation on why hedge funds should not be regulated, and how, in the long-term, they benefit the economy through correcting the market’s anomalies. Mallaby gives some engrossing accounts of how hedge funds have utilized derivatives, with examples like Soro’s shorting of the pound sterling and John Paulson’s shorting of the sub-prime mortgage market (see our #1 rec below). This book is an absolute MUST READ for anyone working at a hedge fund since it is well-researched and gives a great overview of the evolution of high-finance, the various trading techniques, and the psychology behind the actual traders and executives themselves.


5. Fooling Some of the People, All of the Time

Fooling Some of the People All of the Time - Einhorn

Another anomaly in this list from the typical trials-and-tribulations stories, David Einhorn illustrates the gripping struggle between his firm and Allied Capital—a firm he claims practiced some questionable accounting practices. Einhorn leads us through his deep analytical process in divulging the particulars of Allied Capitals “fooling” ways, and talks about how a poorly run business will do whatever it takes to keep the company, and its stock, afloat. Aside from this expose, Fooling Some of the People All of the Time discusses the career path of a traditional banker, from the inane repetitious tasks involving spreadsheets to the creativity, relationships, and fortitude needed to make it in the long run. A great blend of self-effacing writing with detailed financial examples, this book comes highly recommended.


4. The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes and Real Money

The Invisible Hands - Drobny

The Invisible Hand establishes itself as somewhat of an anomaly on this list as Steven Drobny explores the less well-known models and strategies of global macro hedge fund traders. His research cuts right to the jib and focuses on traders and managers who actually made money during the recent financial crisis. Through a series of meaty interviews, Drobny explains how “real” money managers have clients like pensions, endowments, and high-net worth individuals and take less risky, high-leveraged approaches that most have come to associate with hedge funds in the last decade. You’ll need a little bit more finance knowledge and vocabulary when reading The Invisible Hand, so don’t be afraid to do some research along the way.


3. Money Mavericks

Money Mavericks - Kroijer

Another read that gives a very intimate look at the hedge fund world, author Lars Kroijer shares a window into his own life and mind as a hedge fund manager. However, Lars’ tale is very much one of an entrepreneur as well as he illustrates the trials and tribulations of starting his fund, Holte Capital, during the hedge fund boom years. The absurdity and boastfulness of the industry in general will surprise some readers, and his recount of raising capital, finding partners, trading the market, and the general emotions that a hedge fund manager experiences is something most everyone can learn from. His down-to-earth and honest tone make Money Mavericks a very inviting and easy read that we highly recommend.


2. Hedgehogging

Hedge Hogging - Biggs

Barton Biggs is a hedge fund legend and it shows in his book with the strategic, humble and self-reflective tone that he delivers. Biggs tells his story of starting Traxis Partners after leaving Morgan Stanley as its Chief Global Strategist and delves into the hedge fund culture (uber-competitive, filled with ego) as well as the strategies that succeed in the long term. He explains some of the fundamentals of successful investing including buying low and selling high-“you’d be suprised with how many multi-billion dollar investors make investments at the wrong times,” “retooling” every 3-5 years, and remaining wary of the weakness that comes with success.  Hedgehogging not only allows the reader an exclusive opportunity to hear about what happens behind the scenes of the hedge fund world, but offers insightful and instructive anecdotes on being an investor. Overall a great read.


1. The Greatest Trade Ever

The Greatest Trade Ever - Zuckerman

The Greatest Trade Ever follows a handful of iconoclast traders who shorted sub-prime mortgages prior to financial crisis of 2008.  The majority of the book is dedicated to John Paulson who went from a fledgling hedge fund manager to King of Wall Street.  In 2007, Paulson paid himself a $4 billion bonus based on his sub-prime trading performance.  While this was the most that anyone has made in one year, he bested his own record in 2010 by pulling in a cool $5 billion.  At one point during his sub-prime bet, Paulson mortgaged his family’s house to double down on the trade.  His conviction is unflappable and borders on lunacy which is The Greatest Trade Ever is our favorite book to get you reved up for autumn.

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