Book review: Hedged Out by Megan Tobias Neely

This book review was published in (2022) Economic Sociology: Perspectives and Conversations, 23(3): 52–53. https://econsoc.mpifg.de/46084/23-3

Megan Tobias Neely’s book Hedged Out: Inequality and Insecurity on Wall Street (2022) was brought to my attention while I was researching Melvin Capital, a New York-based hedge fund managed by Gabriel “Gabe” Plotkin. Melvin Capital made the headlines in January 2021 when it incurred substantial losses during the GameStop short squeeze (Aliaj, Mackenzie, and Fletcher 2021). At that point, Citadel’s Ken Griffin and Point72’s Steve Cohen invested US$2.75 billion in Melvin Capital to help Plotkin deal with his fund’s losses (Aliaj 2021).

Why did Griffin and Cohen inject emergency cash into Melvin Capital? The answer is simple: before launching Melvin, Plotkin worked at Citadel and then at SAC Capital Advisors, which is Cohen’s old hedge fund (Kolhatkar 2017). As the GameStop events unfolded, readers of the Financial Times were unsparing in their criticism of Plotkin, Cohen, and Griffin. According to a reader, “all these ******* should be closed down IMO. They are only here because of friends in the city and cheap finance – nothing clever about that” (Aliaj, 2021).

Hedged Out is a remarkable sociological study of the hedge fund sector in the United States. Neely offers useful analytical tools to capture how the Plotkin-Cohen-Griffin saga is emblematic of a larger problem: the US hedge fund industry is a hotbed of class, race, and gender inequality. It generates extreme wealth and privilege for a ‘power elite’ (Mills, 1956) of mostly white men. This highly unequal and non-meritocratic system supported Gabe Plotkin as a member of the hedge fund power elite, making sure that Melvin Capital was kept in business for more than a year. Melvin Capital eventually shut down in May 2022 (Aliaj and Fontanella-Khan 2022).

Drawing on extensive field research and her own experience working in the hedge fund industry, Neely explores how hedge fund insiders “hedge out” outsiders based on class, race, and gender. In so doing, they create an elite group of mainly white men who are in a dominant position in terms of authority, status, and wealth.

A hedge fund is an investment management organization that pools money from rich investors. It has a wider investment latitude compared to other institutional investors like mutual funds and pension funds. In other words, hedge funds can speculate more on financial markets and can borrow a lot of money to engage in such speculative activities. Recent annual data (Preqin 2022) show that there are about 12,000 hedge funds in the world, managing over US$4 trillion in assets. The US is the leading country in terms of assets managed by hedge funds.

Since Alfred Winslow Jones launched the first hedge fund (then called “hedged fund”) in 1949, US hedge fund managers such as Michael Steinhardt, George Soros, Julian Robertson, Paul Tudor Jones, Jim Simons, and a few others have become famous for being nonconformist individuals and for having personalities too big to fit into bureaucratic organizations like investment banks. These hedge fund tycoons captured people’s admiration and resentment. They are seen as independent thinkers pushing the frontiers of financial innovation and making capital markets more efficient, while profiting enormously in the process. At the same time, critics have shown how hedge funds make financial markets more volatile, precipitate currency crises, negatively influence democratic politics, make too much money, and avoid taxes (Mallaby 2010; Fichtner 2016; Zuckerman 2019).

In Hedged Out, Neely offers an original perspective on hedge funds that enriches existing critical accounts. Building on Raewyn Connell’s (1987) work in gender studies, Neely advances “hedgemonic masculinity” as a construct describing the dominant ideology in the US hedge fund industry. Hedgemonic masculinity legitimizes the power of elite white men in the hedge fund sector. Everyone else must conform with the rules and practices justifying the interests of elite white men as power holders and big earners.

Neely shows that a person who wants to work in the hedge fund industry needs to be a “good fit,” which means conforming with the ideology of hedgemonic masculinity. Within this ideological system, class, gender, and race intersect and influence people’s positions and careers.

An elite white man is likely to join the front office of a hedge fund. This is where investment research and trading are done – this is also where people earn “big bucks.” An elite white woman is likely to work in client services. This is a front-office area, but less prestigious than research and trading. A client-service role is known as the “mommy track” – that is, a family-friendly job suitable for mothers. In 2013, hedge fund titan Paul Tudor Jones famously stated that women are not good traders because they are focused on “the most beautiful experience […] a mode of connection between that mother and that baby” (Johnson 2013).

A first-generation immigrant black woman with an MBA from a state school is likely to work in the back office, which includes supporting administrative and legal tasks. Back-office positions are more diverse in terms of gender, race, and class, but are paid less and have fewer promotion opportunities.

In other words, upper-class, usually white, men enjoy a fast track to top positions. Others must proceed through a more crowded and less prestigious track. Although some make it to the top coming out of the second track, generally the hedge fund industry favors elite white men.

The most interesting part of Hedged Out is the analysis of aspiring hedge fund managers and their paths to entrepreneurship (see chapter 6). To launch a new firm, would-be hedge fund founders must embody hedgemonic masculinity, have personal connections to wealthy investors, and be able to access a patronage system where established hedge fund managers provide training, seed funding, and mentorship. Tiger Management’s Julian Robertson is the most notable example of such patronage system. Robertson “seeded” over a hundred affiliated firms, which are managed by protégés colloquially known as the “Tiger Cubs” (Mallaby 2010).

Gabe Plotkin benefited from being in Cohen’s and Griffin’s good graces. His hedge fund Melvin Capital was bailed out during the 2021 GameStop short squeeze, but that was not enough to weather a market downturn a year later. In May 2022, Plotkin announced the liquidation of Melvin Capital’s assets and acknowledged his need to “step away from managing external capital” (Aliaj and Fontanella-Khan 2022).

We will have to wait and see what Plotkin’s next move will be in an industry built on hedgemonic masculinity. Has Plotkin been hedged out of investment management and his patronage system for good? How will he cope with professional failure? Hedged Out’s concluding chapter about fragile masculinity in the hedge fund sector is particularly relevant in this regard. As Neely (2022: 233) puts it, “[w]hen a hedge fund manager fails, it seems like a failure of their very identity.”   

I highly recommend Hedged Out. It is an insightful book about the US hedge fund industry as a microcosm of financialized America (Lin & Neely 2020).  

References

Aliaj, O, and Fontanella-Khan, J. 2022. May 18. “Gabe Plotkin’s Melvin Capital to Wind Down Funds.” Financial Times. https://www.ft.com/content/74ee1f19-1cdc-4cb8-941e-7d035cf86faf

Aliaj, O., M. Mackenzie, and L. Fletcher. 2021. February 6. “Melvin Capital, GameStop and the Road to Disaster.” Financial Times. https://www.ft.com/content/3f6b47f9-70c7-4839-8bb4-6a62f1bd39e0

Aliaj, O. 2021. January 25. “Steve Cohen Provides Funds for Hedge Fund Protégé Gabe Plotkin.” Financial Times. https://www.ft.com/content/1791269f-fe8c-47e3-b933-62125ee83242

Connell, R. W. 1987. Gender and Power. Sydney: Allen and Unwin.

Fichtner, J. 2016. “The Anatomy of the Cayman Islands Offshore Financial Center: Anglo-America, Japan, and the Role of Hedge Funds.” Review of International Political Economy 23 (6): 1034–63.

Johnson, J. 2013. May 23. “Paul Tudor Jones: In Macro Trading, Babies Are a ‘Killer’ to a Woman’s Focus.” The Washington Post. https://www.washingtonpost.com/local/education/paul-tudor-jones-in-macro-trading-babies-are-a-killer-to-a-womans-focus/2013/05/23/1c0c6d4e-c3a6-11e2-9fe2-6ee52d0eb7c1_story.html

Kolhatkar, S. 2017. January 8. “When the Feds Went After the Hedge-Fund Legend Steven A. Cohen.” The New Yorker. https://www.newyorker.com/magazine/2017/01/16/when-the-feds-went-after-the-hedge-fund-legend-steven-a-cohen

Lin, K., and M.T. Neely. 2020. Divested: Inequality in Financialized America. Oxford: Oxford University Press.

Mallaby, S. 2010. More Money than God: Hedge Funds and the Making of a New Elite. New York: Penguin.

Mills, C. W. 1956. The Power Elite. Oxford: Oxford University Press.

Neely, M. T. 2022. Hedged Out: Inequality and Insecurity on Wall Street. Oakland: University of California Press.

Preqin. 2022. “Global Hedge Fund Report.” https://www.preqin.com/insights/global-reports/2022-preqin-global-hedge-fund-report

Zuckerman, G. 2019. The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution. New York: Penguin.