If you are a veteran investor and know the basic operation of the capital market and investment products, but have been puzzled by the popularity and success of hedge funds, this book is for you. This is not one of those fluff-filled books written by journalists who could only give readers anecdotal quotes of what this famous person said and then what the other well known person said. No, it gives you numbers and figures to explain how hedge funds work. For example, you hear often that hedge funds use a lot of leverage to make money, but how? where do they get their money from? The book tells you about prime brokerage accounts, and how a small return from mundane investment strategies are rolled into significant gains, even when hedging is taken into account. I used to wonder why people would adopt strategies that buy one stock (or bond or derivative) and sell another in the same industry at the same time, because the strategy would remove returns from broad industry and market movements and would thus be slim. It turns out that such hedge funds were just using borrowed money to multiply the tiny return. But then who would fund such opaque operations? Banks that are flooded with cash. It was a scenario that did not seem realistic until I read the numbers provided by the author.

Its coverage of the Bear Stearn hedge funds was also more in depth in terms of trading record. I have read books about the Bear Stearn story, such as “House of Cards”, but only in this book that I learned about the mistakes that the fund managers made in hedging their exposure. So the funds’ managers were initially not lying when they claimed that their funds were fully hedged, because the assumptions they made about the hedging instruments were historically correct, but broke down in the 2008 crisis.

Even the coverage on the Madoff’s scam, which I had read many articles about in Bloomberg and Wall Street journal, has some interesting angle. The role of feeder funds was more clearly described, and pertinent sections of their marketing materials were reprinted to show how Madoff and his supporters crafted the scam.

My only complaint about the book is the amount of content. It has 226 pages, but printed in large fonts. There must be more hedge fund stories to tell. Rating: 4 / 5