Narrator: In 1948, a forty-eight-year-old man with a résumé unlike any other on Wall Street decided to try his hand at investing. He wasn't a banker or a broker; he was a former sociologist, a one-time student at a Marxist school in Berlin, and an operative who had engaged in clandestine anti-Nazi activities. His name was Alfred Winslow Jones, and with $100,000 pooled from friends and his own savings, he created a new kind of investment vehicle—a "hedged fund." By buying promising stocks while simultaneously short-selling unpromising ones, and using leverage to amplify his bets, Jones created a structure that was insulated from broad market swings. He had, almost by accident, invented the modern hedge fund, unleashing a force that would create a new financial elite and forever alter the global economy.

This story of innovation from the fringes is the starting point for Sebastian Mallaby's book, More Money Than God. It chronicles the evolution of hedge funds from a niche strategy into a multi-trillion-dollar industry, driven by a cast of iconoclastic geniuses, contrarian thinkers, and swashbuckling traders who challenged the very foundations of traditional finance.

Narrator: The hedge fund was not born in a boardroom but from the mind of an unconventional outsider. Alfred Winslow Jones’s innovation was to combine four key elements into a single structure. First, he charged a performance fee—20 percent of the profits—which incentivized skill and aligned his interests with his investors. Second, by operating as a private partnership, his fund escaped the heavy regulations imposed on mutual funds, giving him flexibility. Third was the core concept of hedging: holding both long and short positions to protect against market-wide downturns. Finally, he used leverage, or borrowed money, to magnify the impact of his stock-picking skills.

This model was revolutionary. In the 1950s and 60s, Jones’s fund delivered extraordinary profits, far outpacing the market. He even developed a system to measure and reward his individual stock pickers based on their performance, creating a Darwinian environment where only the best ideas survived. Jones proved that it was possible to generate "alpha," or returns based on skill, rather than just riding the market's "beta." He laid down a blueprint that would be copied, refined, and scaled by future generations, establishing a new, aggressive, and highly profitable way to play the financial game.

Narrator: The first wave of hedge funds, the "go-go" funds of the 1960s, largely mimicked Jones's structure but not his discipline. When the turbulent 1970s arrived, bringing inflation and market crashes, most were wiped out. But a new breed of manager not only survived but thrived. Michael Steinhardt was the archetype of this generation. While others were failing, his firm, Steinhardt, Fine, Berkowitz & Company, posted staggering returns.

Steinhardt’s success came from being a true contrarian. He anticipated the end of the post-war economic boom and shorted the overvalued "Nifty Fifty" growth stocks that everyone else loved. His firm pioneered the use of monetary data analysis, tracking Federal Reserve actions to predict market shifts long before it was common practice. Steinhardt also mastered the art of block trading, providing liquidity to large institutions and profiting from the inefficiencies in how they bought and sold huge volumes of stock. His methods were aggressive and sometimes ethically questionable, but they demonstrated a core principle: in a bear market, the spoils go to those who dare to bet against the herd.

Narrator: By the 1980s and 90s, the most powerful hedge fund managers were no longer just picking stocks; they were making massive bets on the movements of entire economies. These were the macro traders, and none were more influential than George Soros and Paul Tudor Jones. Soros, a philosopher-turned-investor, operated on a theory he called "reflexivity," which states that investors' perceptions don't just reflect reality but actively shape it, creating boom-bust cycles. He looked for unstable situations and bet on their collapse.

This strategy culminated in the legendary "breaking" of the Bank of England in 1992. Working with his brilliant portfolio manager, Stan Druckenmiller, Soros identified the British pound's position in the European Exchange Rate Mechanism as fundamentally unsustainable. As Germany raised interest rates, Britain was forced to follow suit to defend its currency, strangling its own economy. Soros and Druckenmiller saw the inevitable and placed a colossal $10 billion bet against the pound. The pressure was too much. On a day that became known as "Black Wednesday," the British government was forced to devalue its currency. The Quantum Fund walked away with over $1 billion in profit, proving that a private hedge fund could now wield enough power to challenge a sovereign nation's central bank.

Narrator: While macro traders relied on intuition and grand theories, another revolution was taking place in the quiet halls of academia and in farmhouses in Princeton, New Jersey. This was the rise of the quants—traders who used complex mathematical models and computer algorithms to find an edge. A firm called Commodities Corporation, backed by the famed economist Paul Samuelson, was an early pioneer. After a near-disastrous bet on corn blight, the firm learned to temper its fundamental models with disciplined risk management and trend-following strategies, hiring brilliant traders like Bruce Kovner and Michael Marcus who blended quantitative analysis with a feel for market psychology.

However, the quant revolution also revealed a dark side. In 1998, Long-Term Capital Management (LTCM), a fund staffed by Nobel laureates and legendary traders, collapsed spectacularly. LTCM believed its models had all but eliminated risk, allowing it to leverage its capital at a ratio of over 25-to-1. But when Russia defaulted on its debt, markets behaved in ways the models never predicted. The correlations that were supposed to diversify their portfolio all went in the wrong direction at once. The fund’s failure was so catastrophic that the Federal Reserve had to orchestrate a private bailout to prevent a systemic collapse, serving as a stark warning that even genius is no match for extreme leverage and unforeseen market panic.

Narrator: By the 2000s, hedge funds had created a new elite, with managers like Ken Griffin of Citadel and Steven Cohen of SAC Capital amassing fortunes that dwarfed those of traditional Wall Street CEOs. Their success attracted immense institutional capital from endowments and pension funds, making hedge funds central players in the financial system. But their growth also magnified their potential for disruption, a fact laid bare by the 2008 financial crisis.

While the crisis was primarily caused by fatal flaws in the traditional banking system—especially the "too big to fail" institutions—hedge funds were at the center of the action. Some, like John Paulson, made billions by correctly foreseeing the collapse of the subprime mortgage market and betting against it. Others, like Ken Griffin's highly leveraged Citadel, were brought to the brink of ruin as credit markets froze. The crisis demonstrated the dual role of hedge funds: they could act as canaries in the coal mine, identifying and profiting from market irrationality, but their use of leverage also contributed to the system's overall fragility.

Narrator: Ultimately, More Money Than God argues that the story of hedge funds is the story of financial evolution. These firms, born from an outsider's clever idea, have consistently been at the forefront of innovation, attracting brilliant and often difficult personalities who are too restless for the confines of traditional banking. Their history is filled with spectacular successes and catastrophic failures, highlighting both the creative and destructive power of lightly regulated capital.

The book's most critical takeaway is that while hedge funds are risky, the alternative—massive, state-supported banking "supermarkets"—is far scarier. Hedge funds are built to be agile; their managers have their own money on the line, and when they fail, they are generally allowed to do so. The challenge for the future of finance is not to eliminate the risk-taking embodied by hedge funds, but to contain the systemic danger posed by institutions that have become too big and interconnected to fail. The real question, then, is not whether hedge funds are dangerous, but whether we have the wisdom to foster a financial ecosystem where their innovative energy can thrive without holding the entire global economy hostage.