There was only one reason to read this book and that was to obtain more information on the Medallion methodology. The author does provide information that hitherto was not public. For this I am grateful, but I would have liked, even more, a really deep interview with the various individuals involved in the development of Medallion.
For example, Berlekamp presents himself, on his website, as the creator of Medallion and the solver of its trading problems. He kicks himself for selling his share of this cash-generating marvel to the ruthless Medallion Pool Operator Owner for only six times the amount he had invested. I guess his intense need to play Dots and Boxes just overwhelmed his common sense.
Starting in the 1990's, hedge funds became large enough to move markets of all kinds. They could even overpower governments. This allowed the Tiger Fund in 1998 to approach "Russian friends...to buy the entire stock of nongold precious metals held by the central bank and finance ministry...take the palladium, the rhodium, and the silver. All of it." leaving the logistics problem of getting it into a Swiss bank with Tiger's name on it.
Money can be made in this lucrative venture and Sebastian Mallaby, will give you an education you won't find in any college. If you want to make a million, don't talk to an economic professor, go talk with a millionaire. If you want to make money with hedge funds, buy this book and do what Sebastian Mallaby tells you to do.
- it is often dangerous to trade on statistical evidence unless it can be intuitively explained". "Visceral" is the word meaning deep inward feelings rather than just an intellectual focus.
- "The whole point of leverage, the very definition of the term, is that investors feel ripples of the economy in a magnified way."
- We all rationalize success. One position by the Chanos Fund only worked out because the April 1989 Tiananmen Square demonstration broke out. This earned the comment "The way Ah see it, is that it took a revolution of a bihl-lion people for your darn short to work out."
- "Event driven" investing at Farallon Fund specialized in predicting events that cause existing prices to be wrong e.g. takeover announcements, demergers, avoiding bankruptcy, meeting banking covenants, major economic events, hybrid security maturity dates etc.
- `Pattern investing' used by the Medallion fund looking for patterns in the market. This applies research on French/English translation where the computer finds the grammatical rules not the programmer (using the Canadian Hansard which is conveniently in both languages).
- A Tiger Fund manager "should manage the portfolio aggressively, removing good companies to make way for better ones; should avoid risking more than 5 percent of capital on more than one bet; and should keep swinging through bad times until luck returned".
- Remember that "...the market can stay irrational longer than you can stay solvent".
- "If one of these stocks fell ... it was probably being pushed by an institutional block trader that needed to raise cash...the price would soon revert, creating an opportunity to profit." In other words, why is the seller selling?
- "the biggest danger for buyers of illiquid assets is that in a crisis these assets will collapse the hardest."
- "...the larger an investment fund, the harder it was for a fund manager to generate returns" meaning the small investor has more opportunity.
- And remember, "LTCM calculated that this loss should have occurred less than once in the lifetime of the universe. But it happened anyway." The market does not follow a normal distribution; often it is not random; but then is it often predictable?
Mallaby grapples with the variety of thought behind the success of the hedge funds giving us a workmanlike insight. This attempt to describe how the hedge funds actually operate - as far as he is able (and he tells us when he cannot) - makes this a valuable book indeed.