A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber
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Book Summary Information
Author: Richard BookstaberEdition: Hardcover
Audio: English (Unknown); English (Original Language); English (Published)
Published: 2007-04-06
ISBN: 0471227277
Number of pages: 276
Publisher: Wiley
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Book Reviews of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
Book Review: 4 Stars for the Stories
Summary: 4 Stars
As the title of my review suggests, this book has great stories from a great insider. I am only in my 30s but already have 12 career years on the sell side of Wall Street. If I were captain of a Wall Street team, I would choose Bookstaber first. After reading this book my insight of the inner annals of opportunistic proprietary, arbitrage and hedge fund trading is drastically realized. Nevertheless, I found the pre-tense hype of the book leading to an unrealized end. Let's talk about the book:
Before reading the book, I thought the modern day global coupling of highly leveraged derivative strategies would be identified with respective consequences. It took me to almost the last chapter to realize this wasn't going to happen. The book was ripe with timeless stories of innovation & disaster. Bookstabers stories and recollections were an important piece of a puzzle put together by countless other books and reports. Richard's career is fascinating and he belongs in the Hall of Fame of Wall Street maybe for reasons other than why Soros or Buffet would be there. I could almost hear Richard's voice in his first person authorship and appreciated his consistent tone. I only wish the book followed the stories with modern day references, respective leveraged strategies and how Richard thinks they can blow up. I guess you can say he laid out foundations which we could apply to modern day wind-up bombs but this isn't enough.
The stories stop midway through the book where the biggest beef can be found. "The interplay of complexity and tight coupling that comes from combining liquidity with its derivative and leverage offspring is a formula for disaster." Alright! Let's start talking about carry trades, relative value in a razor thin risk premium environment and a synthetically low yield curve due to foreign reserve buying! It doesn't happen. The book goes mostly academic, albeit for lehmans, by laying out several caricatures, analogies and non-financial historical events which all masterfully lead to his arguments of what is bad and why it can go wrong. Bookstaber truly does a great job doing this at the expense of providing modern day meat.
Accepting the book for what it is, and putting it on the "great read" bookshelf, my closing thoughts were somewhat open ended. Having bought into Bookstaber's arguments and premise, I wanted to know what his personal long term investments are. Bookstaber's Wall Street career was purely focused on generating returns from everything that is not Fundamental and Long Term. His career was to capitalize on the inefficiencies and phenomena of our trading institutions, with either his firm's or other peoples capital, while the average Joe was using the same market to buy General Electric based on the American Dream. Bookstaber did not execute (or oversee) trillions of dollars over his career with the same long term objectives and beliefs his retail counterparts were piping to their clients. Bookstaber calls the players involved in this high-stakes corporate game "Liquidity Providers" rather than what they are, "Greedy." How can you claim that a proprietary trader is providing liquidity when these same individuals caused the '87 crash? How can you say a Liquidity Provider can be the cause of billions of dollars of losses because their game caused a downward spiral in our markets? I was a little disturbed when Bookstaber quoted Karl Marx in context of his innovation argument (which his argument aside of the Marx reference was right on the mark). I think Karl Marx's quote is better applied to why greater populations will lead more people to buy more tooth brushes; Hence why the stock market over the course of Dow charted history has gone up. Before I drift to far away on my soap box, I want to know more about the first person Author. If he believes a Liquidity Provider is good for capatilism, then what does he think is a good long term investment strategy for his family. I think this is only fair if we are going to judge his argument that high stakes speculative trading, hence liquidity providers, are a good thing.
Bookstaber is the best steward of Hedge Funds I have ever seen and unfortunately the book in the closing chapters became the coke bottle in the Tom Cruise movie. I found great value and belief in Richard's outlook for hedge funds as well his structure of how to categorize them. I just don't believe in the reality of his argument that a hedge fund manager will do better then his equal investment fund manager because of their greater flexibility to engage in unlimited risk transactions (i/e short). This argument mirrors the faulty assumption that greater risk equals greater return. In reality, risk is defined as losing money. I guess Murphy's law of, "What can happen will," is my premise here. I don't think Bookstaber is prepared to defend that a greater return will always prevail as a result of having greater risk flexibility versus the potential of greater loss resulting from greater risk taking. After all Wall Street loves to mask the geometric relationship of losses (To get back to par, you need a 100% return to cover a 50% loss). The restrictions of a common mutual fund manager might be the saving grace for an unsuspecting investor.
I am friends with a couple authors and know their addiction to "Amazon Rankings" and book reviews. If in fact Richard reads this review, I am humbled and only wish I could invite him to dinner. I will forever be a Richard Bookstaber fan and buyer of every book he publishes. I am sure his sons know how lucky they are.
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