More Money Than God: Hedge Funds and the Making of a New Elite

Moreover, the great beauty of Steinhardt’s method was that it was hard to copy

All new markets are inefficient at first, and the inefficiency means profits for early adapters.

Until the 1960s, the stock market was dominated by individual investors. Pension funds, insurance funds, and mutual funds—the institutional managers of savings—were not yet significant. In 1950, for example, only about ten million American workers were covered by a company pension, and because most of these plans were in their infancy, they had relatively few assets. By 1970, however, the number of workers with company pensions had more than tripled; pension-fund assets now stood at an eye-popping $130 billion and were growing at $14 billion annually.27 Meanwhile, individuals sold their direct stock holdings and entrusted the proceeds to a new breed of money men. By the late 1960s mutual funds managed more than $50 billion, up from $2 billion in 1950. Investing was no longer the province of amateurs, advised by gentleman-brokers. It had become a professional business.28

because home builders are vulnerable to rising interest rates and the monetary data screamed that rates were heading upward. But Steinhardt saw to it that Cilluffo was empowered to test his views: He adored this guy’s conviction, and he didn’t care if others were baffled by his reasoning. The short position on Kaufman earned Steinhardt, Fine, Berkowitz over $2 million. And so, wittingly or otherwise, Cilluffo’s colleagues were the beneficiaries of his innovation: the application of monetary analysis to stock markets

He tracked the large banks that formed the Federal Reserve System, and the moment they switched from reporting spare lending capacity to reporting that they had hit the limit of what could be supported by their capital reserves, Cilluffo’s radar bleeped: Banks had maxed out on their lending, so monetary growth was set to slow, so economic growth would head down and stocks would be in trouble. Cilluffo examined historical patterns and found that stocks began falling two months after the crossover point in the bank data. The relationship also worked in the opposite direction. If banks switched from reporting no lending capacity to reporting free reserves, the stock market would turn up imminently.

each had no problem sorting through the footnotes in company reports and shorting the life out of a firm that appeared to be concealing something

declared he had no faith in God but gave millions to Jewish causes

The markets had finally caught up with him.

The art of investment is not merely to maximize return but to maximize risk-adjusted return, and the amount of risk that an investor takes depends not just on the stocks he owns but on the correlations among them

the notion that stock prices were driven by predictable patterns in investor psychology. Money might be an abstraction, a series of numerical symbols, but it was also a medium through which greed and fear and jealousy expressed themselves; it was a barometer of crowd psychology.19Perhaps it was natural that a sociologist should find this hypothesis attractive.
Jones believed that investor emotions created trends in stock prices. A rise in the stock market generates investor optimism, which in turn generates a further rise in the market, which generates further optimism, and so on; and this feedback loop drives stock prices up, creating a trend that can be followed profitably. The trick is to bail out at the moment when the psychology turns around—when the feedback loop has driven prices to an unsustainable level, and greed turns to fear, and there is a reversal of the pendulum.