We’ve been warned. Academic theory, computer advances and human error have conspired to increase, not reduce, the risk in hedge funds. And when the market crashes, the industry will have only itself to blame. That’s the argument in A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, a new book by Richard Bookstaber published this month by John Wiley & Sons. Bookstaber, 56, is former head of risk management at Moore Capital Management, a $12.5 billion hedge fund based in New York and London. At Morgan Stanley in the 1980s and at Salomon Brothers in the ‘90s, Bookstaber witnessed firsthand the major market meltdowns of the past 20 years. He now believes that hedge funds must cut back on leverage and complex investment strategies to prevent a market collapse. Whether or not managers agree, they will appreciate his take on recent events in the hedge fund industry. An exclusive excerpt in this month’s Alpha, Institutional Investor’s sister publication, tells how hedge fund titans George Soros and Julian Robertson Jr. fell victim to the Internet bubble for very different reasons.
