Go 'Inside the House of Money'

Editor's note: This was written by Steven Drobny.

Sometimes when I walk out onto the street and look around, I get so bearish that I think about buying a bloody castle in Scotland and moving up there with a couple of loaded shotguns and a truckload of canned foods.

When you look at the whole world and see what it's built on, it's not sustainable. It is totally, clearly not sustainable. The biggest thing that scares me is that we are about four meals away from total anarchy. I don't know how much food you have in your house, but if there is a run on the food supply with nothing available in supermarkets or restaurants, we are in deep trouble. Anarchy on the streets. I think about that often!

-- Inside the House of Money, Revised and Updated (page 362)

This excerpt from the revised and updated edition of Inside the House of Money might have seemed a humorous exaggeration when the book was first released in 2006. Global economies were booming, and markets from real estate to emerging markets to commodities were roaring. Wall Street titans and hedge fund managers were the masters of the universe, raking in seven- to 10-figure salaries for making bets in world markets.

Fast forward to today and the world seems ominously close to the one predicted above by an anonymous London-based currency specialist, one of 13 interviews with global macro hedge fund managers that make up Inside the House of Money. Even midway through 2008, inflation remained the main preoccupation as commodity markets continued to rally and oil was pushing $150 per barrel. But as the subprime crisis became a full-blown international credit, debt and solvency crisis, banks began to teeter on unsustainable levels of leverage and a host of scandals compounded an already pervasive lack of confidence.

As risk assets of all kinds were sold en masse, the receding tide exposed many hedge funds for what they were: leveraged market beta plays. Although it now seems clear that hedge funds broadly were far less leveraged than the banks, which are now dragging down the real economy, hedge fund performance suffered, with even some celebrated household names losing 50% to 90% of their (investors') assets.

Almost without exception, funds that performed well in the recent environment were funds that understood the global macro picture. Whether a manager called him- or herself equity long/short, fixed income, commodity or other, understanding the broader macro backdrop became paramount.