The myth-busts, hot takes, explainers, and tools worth keeping.
⚡Myth Buster· 1
⚡Myth Buster23:04
Why Hedge Funds May Be Safer Than Too-Big-to-Fail Banks
Mallaby challenges the image of hedge funds as finance’s uniquely dangerous wild west. Individual funds can fail, but their losses generally remain with investors, whereas highly leveraged banks may transmit losses across the system and ultimately expose taxpayers.
Hedge funds take risks and sometimes collapse
Fund failures can remain limited to private investors
Banks may rely on implicit government protection
Hedge funds were participants in 2008 but not the principal systemic cause
“hedge funds is small enough to fail, and they can fail without getting any taxpayer help.”
“hedge funds had nothing to do with the financial crisis of oh eight or nine.”
#hedge funds#banks#financial crisis#systemic risk
◆Hot Take· 2
◆Hot Take40:50
Britain’s Post-Referendum Calm Could Be a Delayed Reaction
Mallaby argues that consumers initially responded to Brexit uncertainty by borrowing and spending rather than retreating. He expects behavior to change when abstract political negotiations become concrete obstacles involving trade, work, travel, and customs checks.
Consumers did not react to the referendum as forecasters expected
Household debt ratios rose after the vote
Complex political risk can be ignored while its effects remain abstract
Spending may contract when practical restrictions become visible
“people just refused to be scared.”
“I think when the reality hits, then consumers will start to reign in their spending and then we'll see the cost of Brexit.”
#brexit#consumer behavior#uk economy#trade
◆Hot Take45:53
Why Mallaby Called the Eurozone a Disaster Waiting to Happen
Mallaby points to heavy sovereign debt, weak nominal growth, adverse demographics, and a common monetary policy partly suited to Germany. He sees no obvious path for some southern European economies, particularly Italy, to stabilize their debt dynamics.
Public borrowing continued adding to existing debt
A shared monetary policy affects member economies differently
Italy combines debt pressure with negative demographics
Weak nominal growth makes debt stabilization harder
“the euro Zone um is still a disaster waiting to happen.”
“they are locked into a monetary policy that is partly designed to suit Germany”
#eurozone#sovereign debt#italy#monetary policy
✶Explainer· 7
✶Explainer02:53
How a Central-Bank Skeptic Came to Embody the Federal Reserve
Alan Greenspan began as a committed libertarian who considered the Federal Reserve’s creation a historic mistake and favored the gold standard. As Fed chair, however, he actively managed interest rates and repeatedly supplied support during crises, making intervention central to his legacy.
Greenspan initially opposed the existence of a central bank
His gold-standard preference reflected distrust of government-controlled money
The 1987 crash established an interventionist pattern
Later interventions included Mexico, Asia, LTCM, and the post-Nasdaq period
“He didn't believe there should be a central bank, which which is which is ironic?”
“Really that set the tone for the rest of his his career.”
Why Stable Consumer Prices Can Hide Dangerous Asset Bubbles
A central bank can appear successful when consumer-price inflation remains low even as housing, commodities, credit, and other asset prices surge. Mallaby identifies this divergence as a continuing dilemma for monetary policy rather than a problem confined to the Greenspan era.
Consumer-price stability does not guarantee financial stability
Low rates can affect housing, commodities, gold, and oil
Asset inflation may develop outside the central bank’s primary target
A narrow inflation mandate can create false confidence
“you can be thinking, Okay, I'm doing a good job because inflation is low and stable, but you're not getting a good job because all…”
How the “Greenspan Put” Encouraged Wall Street Risk-Taking
Repeated Federal Reserve support taught traders to expect rescue when markets became unstable. Mallaby argues that this expectation weakened market discipline and encouraged excessive risk, particularly after the intervention surrounding Long-Term Capital Management.
Rescues can change expectations before the next crisis
Expected support creates moral hazard
Traders described the belief as “Uncle Allan will take care of us”
Large banks felt especially protected by their systemic importance
“Uncle Allan will take care of us.”
“That is not a good way for traders to be feeling, because then they're gonna take too much risk.”
How Forward Guidance Made Leveraged Trades Feel Safer
The Fed moved from barely announcing present decisions to signaling the likely path of future rates. Mallaby argues that this predictability reduced the perceived risk of sudden rate shocks, encouraging bond traders to use more leverage even while nominal borrowing costs rose.
Earlier Fed decisions were often deliberately untelegraphed
Unexpected hikes imposed discipline on leveraged traders
Forward guidance reduced fear of sudden rate shocks
Risk-adjusted return can improve even when the short-term rate rises
“you have to think about the risk adjusted return, not just the return.”
“And you've got to do that in markets a bit to to remind people that it's risky.”
Mallaby attributes weak aggregate hedge-fund performance partly to compressed yields, which reduce the reward for identifying mispriced risk. High management and performance fees then consume an unusually large share of the limited return left for investors.
Low risk spreads reduce compensation for risk-selection expertise
Low overall returns make fixed fees more burdensome
The traditional two-and-twenty structure takes a large share of gains
Fee compression toward lower rates was already emerging
“If all of these risks are priced very low, you're just not being compensated very much for that expertise anymore.”
“the two and two and twenty fee structure is taking a big nut, an insane bite right out of the return to the final investor.”
#hedge funds#fees#alpha#yields
✶Explainer28:15
What Allocators Value in the Hedge Fund Structure
Mallaby says hedge funds combine strong incentives with broad freedom of action. Manager capital provides downside exposure, performance fees reward successful research, and flexible use of long positions, shorts, and leverage allows managers to isolate selected risks.
Manager co-investment creates skin in the game
Performance fees motivate research and return generation
Long-short freedom permits targeted exposure
Leverage and hedging can combine desired risks while screening out others
“the manager has his own money in the fund, so he's incentivised not to blow it up.”
“you can go long and short, you can use leverage”
#incentives#skin in the game#portfolio management#hedge funds
✶Explainer37:54
What Japanese Keiretsu and Venture Capital Have in Common
Mallaby compares Japan’s relationship-based corporate finance with Silicon Valley venture capital. Both provide patient, direct capital rather than relying exclusively on anonymous secondary-market trading, but the model appears more effective with startups than entrenched conglomerates.
Keiretsu relied on cross-shareholdings and relationship banking
The model contrasted with arm’s-length securities markets
Venture capital also provides direct, long-term capital
Relationship finance may work better for small companies than giant conglomerates
“it's long termist. It is direct provision of capital to companies.”
“venture capital is finance, but without finance”
#venture capital#japan#keiretsu#capitalism
▲Takeaway· 1
▲Takeaway58:43
The Career Test for Aspiring Writers and Journalists
Mallaby advises aspiring journalists not to enter the profession unless they strongly want the work itself. Compensation can be limited and book writing lonely, but the career rewards people who enjoy discovery, conversation, understanding, and making sense of events.
Writing is often less lucrative than alternatives requiring similar skill
Long projects can involve extended solitary work
Strong intrinsic motivation is essential
Discovery and access to interesting people can make the career rewarding
“you have to really, really really want to do it”
“it's a wonderful way to spend your life because you're out there understanding things, going off, speaking to people, making discoveries.”