Philip Augar

I really enjoyed Philip Augar's The Death of Gentlemanly Capitalism: The Rise and Fall of London's Investment Banks, about the aftermath of the UK financial services "big bang" in 1986: In that book Augar is a credible witness, having held a senior post at J. Henry Schroder, and he writes in a lively and measured way.

But in the last eight years Augar has been "writing and consulting" and his absence from the industry in that time is a little telling. I was looking forward to Chasing Alpha, show more and was surprised to see him fluff his lines in the very first sentence of the preface, in giving an erroneous definition of "alpha" - significant as it is ostensibly (but as it transpires, not actually) the subject of the book.

Alpha, in the sense understood in the city, is not simply "supercharged profits" as Augar claims, though certainly positive alpha can create them, but a technical term gauging the variance of an instrument's (or more usually, a hedge fund's) performance over the market average, or "beta". An investment manager's alpha, therefore, is the added value it brings you that you would miss out on if you just invested in the benchmark. Hence the supercharged profits. Strictly speaking, the measure of alpha excludes the amplifying effects of leverage (borrowing to invest in the strategy, magnifying profits and losses of a dollar invested). Leverage increases the volatility of portfolio returns. Volatility is measured by vega, not alpha.

You may think I'm splitting hairs, but for two reasons I'm not: firstly, "alpha" is therefore only relevant to investment advisers (such as hedge fund managers) and is not a meaningful gauge for corporate chief executives nor, really, investment bankers (though granted, as with all buzzwords, it was - and still is - heavily overused in selling structured products).

Secondly, by definition, not everyone in the market can generate positive alpha - it is a measure of outperformance of the mean. Therefore, in the fund context, it was a far more credible label when hedge funds were a small segment of the market comprising the crème de la crème of the city's trading talent - the Soroses and GLGs of the world, who really could outperform the rest of the market. Nowadays, as Augar clearly recounts, the unregulated fund industry amounts to a massive shadow banking system which dwarfs the rest of the market, and all too often the supercharged profits were not generated by "alpha" but by leveraging something looking a lot more like beta. As long as the cost of funding the leverage was cheaper than the return of the benchmark, the strategy worked very well. But it amounted to a massive asymmetrical bet that this benign state of affairs wouldn't reverse. And, as we know know, it did, with a vengeance. The conflation of leverage (common) with alpha (extremely rare), leading the city to believe it had eradicated risk was a large part of the complacency which led to the rout.

Enough of portfolio theory. Having mis-described alpha, Augar then barely mentions it, making you wonder why he chose that title. For the credit crunch, as he patiently recounts, was not caused by chasing alpha. Even for the hedgies, chasing alpha wasn't the problem, deluding oneself that you were catching it was (what the 2 and 20 model called "alpha" was more like the premium on a deep out-of-the-money-put).

Augar seems to have in this way tabloidised his delivery - he's looser than he ought to be with the technical details (he misdescribes investments in SIV vehicles as "shares" - actually they're short-term debt investments, and that makes a world of difference) and his estimation both of the size of the alternative fund space and the extent to which it relied on leverage seemed pretty rudimentary. My own anecdotal experience suggests it was way bigger and way more highly geared than Augar suspects.

Away from the hedge funds the rest of his analysis settles down somewhat, and Augar's history is comprehensive enough, and it does read rather like a sequel to the Death of Gentlemanly Capitalism. However, in content, it doesn't cover colossally more than could have been extracted from careful reading the FT over the last couple of years. If you haven't done that, this book comes well recommended. If you have, you're not going to learn much here.

While it was an enjoyable enough read, I don't think Augar really gets to the nub of what caused the meltdown - he drops many names and spends too much time telling individual corporate stories with which he seems very familiar, but which don't really bear on the crisis. By contrast, his treatment of the phenomena that did (the originate and distribute model, for example) is cursory and his effort to tie it to the explosion in CDOs and the consequent effect on the mortgage market is salutary. That's the real story here and we are all implicated; not just the chasers of alpha.

Gillian Tett, who has been one of the best writers in the FT over the last couple of years, has recently published a book (Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe) which looks like it might get nearer to the real story; if you were going to read one book about the credit crunch you might be advised to look to that. show less

The authors have "changed personal details, amalgamated certain chanracters, conversations and events, and created new settings" to the poin I have my doubts on whether this book should be classified as non-fiction. Like a movie "based on a true story", I found myself approaching at entertainment, not science. There is such a reproduction of detailed dialogue in settings of invention that I think wea re detailing here with wanna-be playwrights, not career advisors.

Briefly touched on is this show more largely American corporate history that has led to middle managers that are producers too, the theme of this book. I would have liked more of that. The only thing I would refer to here again is Table 9.1 "Taking Command" with such tings as:

A Rookie Asks: What do they nned to know?
A Veteran Asks: What do they nned to understand?

I'll photocopy that, and ditch the book. On their "Rookie" type they at least twice list as a "Strength" bneing new to the complex arena of managing and producing. This is one of the things they should have amplified in detail instead of filling pages of imagined conversation and email exchanges. show less

A unique (ok, apart from Kynaston) work which tells us where we are and how we got there. It provides the historical framework which the majority of current practitioners in the City of London sorely lack. And a damn sight more accessible than Kynaston.

[2006] My manager loaned this to me after we discussed some of the challenges of my job, and clarifying my role in the group. I had a hard time seeing where I fit in with the authors' player-manager stereotypes. And none of their work or challenges felt quite like mine. So I didn't get as much out of it as I would've liked. But, if nothing else, apparently people recognize that being a player-manager is a very hard thing to do, and do well.