THE INVISIBLE HANDS -- Contents -- Foreword to the 2011 Edition -- Foreword to the 2010 Edition -- Preface -- Preface to the 2011 Edition -- Preface to the 2010 Edition -- Part One REAL MONEY AND THE CRASH OF '08 -- Chapter 1 Rethinking Real Money -- I. Why Real Money? -- Size -- Impact on Society -- 2008 Losses -- Taxpayer -- II. The Evolution of Real Money -- In the Beginning, There Were Bonds -- Along Came Inflation -- The 60-40 Model and the Great Moderation -- The Dot-Com Crash -- We Are All Endowments Now -- The Crash of '08 -- Less Endowed -- Pensions Are Different -- III. RETHINKING REAL MONEY-MACRO PRINCIPLES -- Chapter 2 The Family Office Manager -- From mid-2008 to mid-2009, you took a year off and went to cash. Isgoing to cash the key differentiator between hedge funds and real money? -- How do you value cash? -- Looking back at Japan in 1990 or at the United States in 1929, the valueof cash looked pretty good 20 or 30 years after these events. Yet for thelast 20 to 30 years in the U.S., cash looks like a pretty bad investment. -- What is the appropriate cash level for an endowment or pension? -- We all know that correlations go to one in a disaster, yet it still catchespeople out. What can investors do to prepare for downside tail events? -- In doing this analysis, are you guilty of investing in the rear viewmirror? -- Being cognizant of what everyone else is doing seems to be a big partof your analysis. -- So real money managers should use a valuation approach to raise orlower equity and equity-like exposures and cash and cash-like exposures? -- What other flaws in the real money world were exposed in 2008? -- Should real money funds manage to a risk target rather than areturn target? -- Does asset allocation work in a world where extreme events happen moreoften than predicted?.

If size is the enemy of flexibility, what should large real money fundslike CalPERS, with 200 billion in assets, do? -- How should a real money fund manage its portfolios with respectto inflation? -- Is there anything else you learned from 2008? -- Part Two The Invisible Hands -- Chapter 3 The House -- How did you get into this business? -- How does the feedback of being right or wrong affect you? -- At what point in your career did you know you had skill? -- If you were asked to run one of the Swedish AP pension funds as part ofyour social welfare duty, how would you go about it? -- So the weaknesses in the real money world are structural. How wouldyou go about maximizing the strengths, such as the strong balance sheetand credit worthiness that you mentioned? -- Isn't levering up a portfolio with illiquid assets what caused so muchtrouble for investors in 2008, especially in the endowment and pensionworld? -- What are your thoughts on diversification, which didn't provide muchsafety in 2008? -- What else do most institutional investors get wrong? -- Should institutional investors use outside advisors to help plug theirknowledge gap? -- If you were allocating money to hedge funds, what characteristics wouldyou look for? -- Is alpha extraction a zero-sum game? -- What else did you learn in 2008? -- Often these risk-free arbitrage opportunities arise during the worstmoments of a crisis when liquidity is scarce. Should a real money fundmanager keep a certain amount of dry powder in reserve for such events? -- How would you protect yourself from high-impact, unforeseen events ina real money vehicle? -- Can you give me an example of how a real money fund could safelylever up? -- How would you manage risk in this hypothetical portfolio througha year like 2008? -- Can you give me an example of the value of liquidity and flexibility?.

How do you make sure that you are around to keep playing in yourhedge fund? -- Do you spend more time thinking about how it could all go wrong orhow you are going to make money? -- To prepare for a macro scenario or an environment that is not good foryou, do you conduct stress tests on your portfolio? -- When modeling potential future scenarios, do you play around withhistorical and future correlations and volatilities? -- Did you alter your time horizon or any other aspects of your strategyor process during 2008? -- It sounds as if you structure your portfolio with a lot of small trades. -- Why does the market or banks allow you to be the casino-shouldn'tthe banks be the casinos? -- When you are looking for trade ideas for your fund, do you focus moreon the macro big picture or the micro story within certain financialinstruments? -- How did you recognize we were in a credit bubble? -- Can you give me an example of ridiculous credit pricing? -- The problem with buying those types of hedges is if the option becomesworth a lot, it is unlikely that the counterparty who sold it to you wouldstill be around to pay. We almost saw that with AIG. -- And I presume you recognized the credit bubble in 2004-2005? -- But the NASDAQ was already mispriced in 1997. It was definitelymispriced in 1998, then more so in 1999. -- Now that the credit bubble has burst and banks and financials haveimploded, what is next? -- So you have multiple scenarios that you are tracking: (A) the world isokay -- (B) the Great Depression -- and (C) bad inflation? -- As market conditions have improved since March 2009, the risks youdescribe seem less likely. Nevertheless, are you starting to purchaseprotection against these types of extreme scenarios as protection becomescheap again?.

The consensus view at the moment is that unprecedented fiscal stimulusand quantitative easing automatically leads to inflation. Do youbelieve that? -- How can you hedge against protectionism? -- Do fiat currencies inevitably lead to instability? -- What are your thoughts on the status of the dollar as the world'sreserve currency? -- Is this current bailout going to create the mother of all moral hazards?Are the actions of the Bernanke Fed a highly levered version of theGreenspan put? -- If we do have inflation, or even hyperinflation as some predict, what isthe best way for real money managers to hedge it? -- If you were to follow your passion and go deep sea fishing for the next10 years, and you had to put all of your wealth into one trade, whatwould it be? -- So you have an inflation hedge and an Armageddon hedge? -- Chapter 4 The Philosopher -- How did you get into the markets? -- At age 17 you knew that people were talking nonsense? -- What was your first job in the markets? -- When did you know you were a good trader? -- You must have been one of the few macro traders to make money in1994. -- What did you learn from working on a trading floor? -- What do you miss from the trading floor now that you run your ownhedge fund in an office with less people around? -- How do you define information, and what sources of information doyou use? -- Can you give me an example of how this process works in practice? -- Do you view your job as predicting sentiment? -- There have been large swings in sentiment during the past few years.How do you stay ahead of these swings when they are driven by onlysmall changes in fundamentals? -- How do you achieve that positive asymmetry in outcomes? -- How many hypotheses or positions do you typically run? -- Why do you think that happened in 2008?.

How do you measure liquidity and how do you prepare forpotential illiquidity? -- When people saw LIBOR spike in the summer of 2007, what shouldthey have done to mitigate their illiquidity risk? -- Why do investors engage in illiquid strategies when they could stick withliquid ones? -- How would you change the incentive structures? -- You said you run 10 to 15 themes and if you are wrong, you stop out.How do you set stops, and how do you manage risk at the portfolio level? -- When you put on a trade, do you worry about being wrong firstand foremost? -- When you play golf, do you visualize every shot? -- How do you generate trade ideas? -- What is your time horizon for your trades? -- What percentage of your trades make money? -- What was your worst miss ever? -- Where is the next bubble? -- Tell me about your worst trade, not your worst miss. What lessons didyou learn? -- What part of the cycle are we in now? -- What is it that makes macro more interesting in diverging andvolatile markets? -- If you went to play golf for the next 10 years and had to put all yourmoney in one trade, what would it be? -- I take it you do not believe that diversification is the only free lunchin finance? -- If asked, could you run a large unlevered pool of capital, such as apension or large endowment with no redemptions? -- Let's say you run a charitable foundation for an individual who aspiresto change the world. The individual wants long-term capitalpreservation, with returns of about 5 percent a year over inflation tocover annual donations. How would you do that? -- What is the right formula for a fund like CalPERS, then? Should theyhave different groups capturing risk premia and then tactically overlay? -- What are some other myths? -- What major changes would you implement for pension fund investing?.

If you worked for a pension fund that allocates to hedge funds, whatwould you look for in hedge funds?.