O’Reilly director of market research Roger Magoulas wrote me this morning: “You may want to look at today’s New York Times Magazine Money issue, chock full of interesting articles about hedge funds and serial entrepreneurs.” He was right. Roger Lowenstein’s “See a bubble? opens the issue. Joseph Nocera’s article on the inner workings of hedge funds, “The Quantitative, Data-Based, Risk-Massaging Road to Riches” answers that question:
“There are plenty of people, even in the hedge-fund world, who are convinced that we have entered bubble territory. Their secrecy, their power, the incredible amount of money flowing into them, the sense that everybody on Wall Street is trying to start a hedge fund and of course the staggering riches: it all seems a little crazy and out of control. Hedge funds right now feel a little like mutual funds in the late 1960’s, or junk bonds in the 1980’s, or dot-coms in the late 1990’s. You just assume they are going to get their comeuppance eventually. Isn’t that what always happens?
But do you remember what happened after the mutual-fund boom burst? Or after the junk-bond craze? Or even after the dot-com insanity? It turned out, in every case, that underneath the craziness, something enduring was being created. The modern mutual-fund industry emerged in the wake of the early 1970’s mutual-fund crash. Junk bonds today are a critical part of the world’s financial scene. Amazon and eBay and lots of other real, profitable companies emerged from the dot-com mania, after all the pretenders were swept away in the rubble of the collapse.
This is also the premise of the book Technological Revolutions and Financial Capital, which makes the case that every major technological revolution has been accompanied by a financial bubble, and shows the complex relationship between advances in society and the ebb and flow of capital. (Well worth a read.)
There are other great articles in this week’s NYT Magazine as well.