Andrew Allentuck

Monday, September 24, 2001

Hedge Funds: Courtesans of Capitalism
by Peter Temple
John Wiley & Sons, 2001, 271 pages
ISBN 0-471-89973-9

Financial writer Peter Temple has taken a complex, technical field of investing and given it sex appeal. His technique is to beguile by innuendo, e.g., "Courtesans draw their clients from the rich and famous....Just as the average courtesan needs accommodation sufficient to project an air of successful opulence to potential clients, so too do hedge fund managers need office space, clearing services, bank loans and a variety of more technical facilities to ply their trade."

The comparison is forced, but Mr. Temple's point, that managers of hedge funds that can borrow money and invest whatever they like in wild schemes, is absolutely right. Having set up his value system, he moves on to accurate portraits of hedge fund managers like Julian Robertson, a hedge fund manager who closed up shop and left the field with honour; John Meriwether, who nearly wrecked the world financial system; and Nick Leeson, whose goofs sank Baring Bros. and then sent him to jail. There are, of course, those who have survived and profited, notably George Soros of Quantum Fund. The record of the hedge funds is as grand as it is ghastly. Investors must tread with caution.

The cards are stacked against investors, Mr. Temple notes, because fees can take 20% of returns over certain benchmarks, thus rewarding managers who win on big risks. But there is no symmetry in the system, so a string of losses may only mean a job shift to another hedge fund where the race for performance begins again, Mr. Temple says.

Hedge fund have become fashionable, for they are making money in the present market when few other investments are profitable. The investor who wants to plunge into a hedge fund should read this book first. Forget the nonsense about ladies of easy virtue. There's a good index, a fine bibliography and a very good mind at the keyboard that produced this excellent book.