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Megan Tobias Neely, "Hedged Out: Inequality and Insecurity on Wall Street" (U California Press, 2022)
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Megan Tobias Neely
Hello everybody.
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Alfred Marcus
This is Marshall Poe.
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Megan Tobias Neely
I'm the editor of the New Books.
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Alfred Marcus
Network and if you're listening to the New Books Network, I imagine you like to read and I'm wondering if you have a goal to read more this year. How about a goal to read more of what you love and less of what you don't? The Proofread Podcast is here to help.
- [00:16]
Megan Tobias Neely
Hosted by Casey and Tyler, two English.
- [00:18]
Alfred Marcus
Professors and avid readers with busy lives, Proofread helps you decide what books are worth spending your precious time on and what books aren't. They feature 15 minute episodes that give you everything you need to know about a book to decide if you should read it or skip it. You'll get a brief synopsis, fun and witty commentary, no spoilers, and no sponsored reviews. It's just what Casey and Tyler think. Life's too short to read a bad book. So subscribe to the Proofread Podcast today. And by the way, there's a new season coming. Thanks very much.
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Megan Tobias Neely
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Alfred Marcus
Welcome to the New Books Network. Welcome to the New Books Network. I'm Alfred Marcus and this is on the Cusp, where we explore how strategy and ethics intersect in shaping organizations and social change. Today I'm speaking with sociologist Megan Tobias Neely, author of Hedged Inequality and Insecurity on Wall street, published by the University of California Press. This book is an ethnographic study of the hedge fund industry based on years of fieldwork and interviews that asks how a small group of mostly white upper class men at hedge funds have come to capture extraordinary rewards while risk and insecurity are pushed onto others. We'll talk about the culture of hedge funds and what her findings imply for strategy, regulation and ethics in finance. So Megan, could you start by telling us how you came to this project. How did a history graduate who found herself working at a hedge fund decide to turn that experience into a sociological study of Wall Street? The book is based on years of ethnographic research, interviews with dozens of industry professionals, and observation of firms and conferences. What was it like to study the phenomena given the access you had?
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Megan Tobias Neely
Yeah, thank you so much for your interest in this topic and for asking me about this. I, yeah, I took a very unusual path to working at a hedge fund. I was, like you said, I was a history major, I was interested in studying inequality, and I realized my senior year that a PhD, it made sense for me or might be a good path to take. But I wanted to get really hands on, detail oriented research experience first. So I applied to all these jobs that were research roles and one of them was at something that was called a financial boutique. And I had no idea what that meant. I had never studied finance really in any form as an undergrad, but I decided to apply. And so when I did the interview, I remember them asking, do you know what a hedge fund is? And I didn't want to do a job where I didn't know what I was doing. I wanted to be transparent about it. So I said, no, I don't, you know, but I'm willing to learn. And they said, well, that's great. We'll, you know, we'd rather have people who are trained as critical thinkers that we can, you know, we can teach you all about hedge funds. That's not what we're worried about. We want your, you know, critical thinking and research skills. And so that's how I ended up in the alternate, what's called the alternative investments division of BlackRock, which is the, one of the largest money managers of the world. And I did kind of background research, things like background checking and news media, civil litigation monitoring for their investments in hedge funds and private equity firms, venture capital. And I learned so much about the industry. It was, it was very eye opening. I would regularly go to Investopedia to figure out the things I didn't know and ask colleagues. And I ended up being the first hire right before the, or the last hire, I should say right before the 2008 financial crisis. And so during that time, you know, I worked with people who were generally like very supportive, interested, engaged, politically, you know, publicly engaged, socially engaged people who talked about the importance of us do, you know, taking care of investments that were for pension funds and university endowments. And then when the financial crisis hit, I realized how much hedge fund investments are wrapped up in Things like people's home mortgages and things that affect us all. And so I kind of, it piqued my interest on what, you know, how do people in this industry think about that, how they make sense of the world. And so when I went back to do my PhD in Sociology, this kind of is part of what led me to sociology. But I initially thought, oh, that I wouldn't necessarily study finance per se, but study inequality more broadly. But in coursework, and I say this for all the graduate students out there, I really let coursework, my graduate courses, lead me to what topics I wanted to study. And I just kept going back to what I experienced in the hedge fund world and what I found. So, and this was during the time of Occupy Wall street, and people were drawing attention to the inequality in this sector. And in 2013, the Wolf of Wall street movie came up. And I remember it was this big box office hit that, you know, depicted these greedy, horrible broker dealers who were high rollers and greedy fraudsters. And I remember thinking like, this kind of sensationalizes the problems with industry because what really on the ground, what happens is there's a lot of people who do work in it who want to do good for society, but it's rather the problem is about the structure of the industry, how it's organized, how it is kind of walled off from enough oversight, which many of them are aware of. And so that's what led me to want to study it, is to really examine that. And I should mention that at first, the other thing I like to really emphasize for people thinking about studying elites, at first I really played up my insider access. And what I found is that people were so much more wary of participating in my study because I represented a large institutional investor, you know, and you know, they, hedge funds are very wary of the news media, but even more so of the people who are going to invest in them. They don't really want to share, be candid, you know, share their secrets with them, so to speak, or just their candid thoughts. And so when I really just approached them as an outsider, as a sociologist interested in understanding the industry, then people were much more willing to participate. And I emphasize that because I, I think there's this notion that we have to have access to elites to study them, but it's not always true. You know, having that experience helped me to understand the jargon. I knew so much about the industry, which would have taken longer to learn, but it wasn't necessary for access to do that.
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Alfred Marcus
Can you explain to listeners what a hedge fund is tell them a little bit about the larger ones like Blackstone or Millennium Citadel, how they got started, who runs them, how they work. Also, I guess, what is your criticism of them and what is the impact on Main Streets today? That's a lot of questions, but go ahead. Why don't you start?
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Megan Tobias Neely
These are great questions. And that's the thing. Most of us have heard of hedge funds in the news media. Very few people know what they do. And I think they really invest in a whole wide range of strategies. But I think what's important for our listeners is that it's a private financial firm that pulls large sums of money from wealthy people and large institutions to invest in the stock market. And that's kind of key to how they're scrutinized by regulators as well as the kind of risks that they entail. Because they have to be an investor in a hedge fund, you have to have a minimum net worth of a million dollars, excluding your residency and or a minimum income of over $200,000. So less than 10% of Americans qualify. But most of us are exposed to hedge funds. So pension funds, university endowments, governments, Nonprofits comprise about 60% of their investments. And the thing that's important to know about them. So the, the big hedge funds you cited, like Millennium and Citadel, they were founded in the late 80s, early 90s, when at that time there was something like less than 600 hedge funds in the 1990s. And then they exploded since then. And back in those days, it was this very elite sector of Wall street where you really had to know people in order to invest in them. And they could. And to this day, many of them can exclude investors. They can just say no because they don't have capacity to take in more money. They don't. They, some of their strategies are better at certain sizes. So they're not actually motivated always to take anyone. And that's part of like that hardness to get in. And that those origins of the time, that it was associated with the really ultra rich networks, you know, makes it attractive.
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Alfred Marcus
It's like enjoying an exclusive club.
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Megan Tobias Neely
Absolutely. And that's something one of my interviewees from, who started an industry in that day, she said that was part of it is if you tell people you're invested in hedge funds, it's a way of saying how wealthy you are without saying how wealthy you are and that you're part of those networks.
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Alfred Marcus
Do they invest outside? I mean, some of them today are investing outside of Wall Street. They're, they're giving out Loans. It's. I mean, the. The boundary between private equity and hedge funds is beginning to blur. Is that correct or is it. Are they still exclusively stock market investing?
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Megan Tobias Neely
Yeah, no, they do a range. They do all kinds of private investments. They. Yeah, they invest in companies. There's what's called activist hedge funds. And this was something. When I first joined working at a hedge fund, having come from a more like social activism orientation in undergrad, I got really excited. I thought they were like socially minded hedge funds. But no, they're actually more like private equity. They're the type of hedge funds that go into companies, restructure them, you know, put a lot of pressure to make them leaner and meaner, so to speak. But yeah, hedge funds invest in a whole wide range of strategies. And that was one of the things I found interesting, is that they do everything from algorithmic trading, which is a lot of people who have PhDs in math and STEM fields, to doing things like leverage debt, to also what are called event driven strategies. And these are really interesting because they're in response to corporate and geopolitical events. So there's a lot of people who have backgrounds in political science, for example, who do these investments, and they draw on that knowledge of sort of what's happening geopolitically to think about where to shift money around.
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Alfred Marcus
Is there a way of like, describing how the domain as a whole, like, which are the major ones that are investing, let's say more in private equity, more in geopolitical. The large names that we might know. Is there a way of like revealing that who is doing what? Or is it a mishmash?
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Megan Tobias Neely
Ultimately, it's kind of a mishmash. Although there are, you know, there are ones that, I mean, I would say like the most clearest differentiator are the quant funds that a lot of funds like Millennium and Citadel probably have. They have. I mean, they have like hundreds of funds, investment funds. So they have different funds that specialize in different areas. So you end up with a lot of. They. I mean, they build up these massive teams. They have thousands of employees who then specialize in each area. And that's something that's kind of also important to emphasize about their investments is these large hedge funds like those two, they can actually shape markets with how they do their investments because they could invest at such a scale that they can put downward pressure on a stock or like when George Soros shorted the British pound, Megan Short currencies and cause collapse of governments worldwide. So it's the scale of their Investments is part of what makes them so powerful and hard to regulate too well.
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Alfred Marcus
They'Ll do that intentionally. They'll gang up on companies either putting lots of money in or taking money out because of the bets they're taking. And I guess the way they're organized differs a lot because the way I understand it, Millennium and Citadel are very decentralized. They're letting all these different little funds run. And Ray Dalio recently criticized them. I heard a. I heard him criticize, saying because his Bridgewater was very centrally organized and he said my central organization is going to beat them in the long term and they're going to grind into the. I'm exaggerating. They're going to go away. Their history compared to the central culture that I've created. Is that a general phenomenon that you've seen that these different types of organizations.
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Megan Tobias Neely
I think that. So what I find kind of interesting is that with all three of those hedge funds, I think they actually stemmed from the same kind of organization, but it just has to do with how they scaled up. And this is something, when I teach organization and management courses, we talk about this in general with companies and hedge funds captured so well, because hedge funds and they're very similar. More recently, I've done research on private or venture capital and technology startups and they have. All three have very similar ethos about how to run their organizations and their culture, although they're different based on sort of like, you know, obviously the. What they do structures that a bit differently. But all are run with this idea that they want to have a shared ownership culture and have everyone have like this sense of investment in the company, in the firm and its. Its success. And so hedge funds. And what's interesting about Dalio's Bridgewater is that it stemmed from that and it embraces what's called a cultural of radical transparency, which you hear a lot in the industry. People love that, that sort of ideology of organization management. And the idea is that anybody who talks about anybody else is going to be candid about it. Like, you wouldn't say somebody, something about someone or their ideas behind closed doors if you wouldn't say it to them. And they actually have a rule that if you're going to discuss someone, you need to have them in the womb. And, you know, in news coverage of their. Their company, for example, they've talked about how they have transparency libraries where you file what you've said about people. So that's part. And I point this out because even though Daleo structured it in a more centralized way. He incorporated all these elements of what we would think of as like a decentralized organization in terms of the culture or the like having everybody weigh in kind of pract practice. But as it grew to scale it led to a very different outcome. So he wanted it structured in a way the way he's described it is that people would be candid and feel comfortable calling him out and other people within that hierarchy of command. So the idea is part of the radical transparency is to make sure everybody feels comfortable speaking up, that nobody sort of goes with the top down authority. Whereas companies or firms like Millennium and Citadel really developed into those areas of specializing specialization where the, you know, people who are the experts in those fields then lead them. So it's much like how Apple is organized, for example. It's more akin to that kind of structure where you it's decentralized because those who hold control over the product they're developing then then lead. But I think they, they stem from my research, you know, would suggest that they stem from the same organizing principles at the onset which were designed to get everyone involved, allow everyone to speak up and create a culture that fostered that experience. A membership that backs your business journey with American Express Business Platinum when you pay with membership rewards points for all or part of an eligible flight booked with a qualifying airline through Amex Travel you can get 35% of those points back up to 1 million points back per calendar calendar year. American Express Business Platinum there's nothing like it. Terms apply. Learn more@americanexpress.com Business Platinum.
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Alfred Marcus
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Megan Tobias Neely
You coming where to the North Pole of course.
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Alfred Marcus
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Megan Tobias Neely
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Alfred Marcus
Is there any evidence that one form is more successful than the other today? I think all because there's so many more hedge funds today, their overall returns actually are going down if you look at it as a whole. But is there any structural form seem to be to perform better than some other structural form?
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Megan Tobias Neely
You know, I haven't like studied that in the hedge fund industry per se, but what I would say is like from my research and interviews, what people talk about is how as the industry ballooned, it lost kind of it grew out of where its origins were and its original focus. So what they, they often when they cite, hear those the research on the returns declining, they say, well that's because, you know, there's these newcomers and they don't know what they're doing and they kind of chew it off that way. But I think, you know, one thing when I teach organization and management that I really emphasize is it depends on what our metrics of success are. Because yeah, so I think like the, a structure that allows for more input in an effective way. And there are many decentralized structures that do this, but do it with sort of special or particular considerations for like for example, getting people to employees to weigh in on decision making and contribute to the path of the organization. There's a lot of research on how that's really effective, in part because you have less turnover than you. You know, if you make people part of the organization and, and have foster the sense of investment and make sure that they're actually heard when they speak up, it can be really effective. But what I found with hedge funds is that on the whole this sort of discourse about flatness and decentralization is actually a mask for the system that they where there's all kinds of checks and balances and middle managers who are removed in a way that actually bolsters the power of executives. So it's kind of under the guise of flatness or inclusion and open participation. But in reality, when it came down to it, most of these companies, what I would hear is that when problems arose, it would lead to the hedge fund manager because it's there for their identity, you know, their money and their networks wrapped up in it.
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Alfred Marcus
You're the accountable parties in the end. I mean, what they, they, they justify their enormous pay by the ability to manage risk and uncertainty. So do you find merit in this argument?
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Megan Tobias Neely
Well, you know, I Think what they. So the way they kind of think of it is like, well, if you want to play it safe and, you know, work for the corporation or in their terminology, this would be, you know, many of them started in the, in the like, entry level junior investment divisions of investment banks. So their mentality would be like, oh, if you want to play it safe and rise the ranks of Goldman Sachs, then you're going to be less, relatively speaking, less rewarded. But if you're going to be entrepreneurial and branch out and take risks, then you should get rewarded for those risks when you're successful. So that's the mentality they think.
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Alfred Marcus
They really think Goldman Sachs is relatively less rewarding.
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Megan Tobias Neely
Yeah, they actually, what was interesting is they, you know, I interviewed a number of hedge fund managers who founded their firms after spinning off from large investment banks and they described the, you know, bureaucracy of them as being stifling. And they actually would describe it in ways that were like it was demasculating. So you could tell they associated bureaucracy as sort of a feminization, feminizing association. And I think it has to do with these entrepreneurial ideologies that kind of go back to what Mitchell Abalafia found decades ago with traders on the trading floor in Wall Street. Similarly, hedge fund managers think of themselves as, you know, and they are, they're, most of them are entrepreneurs. At least those who are founders have been entrepreneurs. And so they, you know, they see the sort of what they would describe as how the politics of the large investment banks and the bureaucracy were strifling and stunting to innovation. And so they needed to branch out, you know, to gain their creativity and sense of control.
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Alfred Marcus
There also a lot of risk in these careers. And you talk about that risk and how they manage it. And they have to manage their, their portfolios against uncertainty, but their careers too against uncertainty. And it really affects their lives. Would you like to comment a little bit on that in the.
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Megan Tobias Neely
Absolutely, yeah. I mean, and that's one of the things that's really important to emphasize is that, you know, that average hedge fund only lasts five years, so there's considerable turnover and they are very much, you know, higher at will. They restructure layoff as needed when there's downturns. So people face a lot of insecurity in their careers by following this path. But they, you know, they don't play it up or complain about it because they know they're compensated accordingly. So what I'd hear from them is that like, well, you know, this is, you just have to plan for these times of unemployment. And it's, it's interesting because this is something that Karen Ho, an anthropologist, studied Wall street investment banks and how this same kind of ethos around downsizing and the importance, this belief that downsizing makes, you know, companies and Wall street banks more efficient is what allowed them to justify it. And I think, you know, my, the people in the hedge funds I interviewed had kind of a similar mentality. But what I, what I noticed was particularly interesting is they found it free. So they actually thought that the insecurity was something that gave them more control over their careers in the direction it held. So they, you know, they, it goes back to that mentality of not wanting to be tethered to a large bureaucratic organization. And I, you know, I, what I noticed is that they, they. There was a shift in terms of their orientation from what we think of in terms of workers in professional employment of the 20th century who were, you know, devoted to a company that would, you know, work there a long time, and that they, you know, very focused on the work itself and, and working towards incremental raises and promotions. And these workers don't do that at all. And I think this is true throughout a lot of professional work right now. It's true definitely of the people I've interviewed in tech as well. But what they see is like, you, you know, they embrace this sort of what I call like a portfolio ideal worker. And I'm referencing Charles Handy's work on. He, a popular business writer back in the 1980s who really championed the notion that we were moving towards an economy in which people would have portfolio careers and they could chart their own work. And he thought it was, it would be this liberating force where people would have control and autonomy over their work. And I think it's interesting because I hear a lot of this in, in the media. There's kind of people are embracing this, this and calling for portfolio careers, even though they don't realize the origins back in the 80s of him calling for it. But what I, what I noticed in my interviews is they would describe how the importance of networks, for example, over their companies to, you know, relationship with people at their company. And often those networks take you went through the company, but also expanded beyond it because that's how you find a job in a downturn. And they also really emphasized needing to have passion to kind of motivate you through the. These transitions. And that if you have passion for the work, it's what, you know, it's the sign that that you're really committed to it. And I noticed that. I think that was kind of a cover for not wanting to be seen as only motivated by the money. And many of them would say, like, of course, you know, it's the money, we get paid well, but really. And then they'd say, but really it's the passion, you know, you have to really love investing in public markets or be fascinated by it. And, and then, and the third thing that came up a lot was that they would emphasize how important it was to build your professional brand, because if you need to make career changes, you need to be known and have a reputation in the industry and beyond, more so than just at your company. But what I noticed is actually that people who tended to be more marginalized in the, in the industry and at central networks talked about this more. And what I realized is that the people who were included in the, the tight inner network, so those who were from elite backgrounds and were more likely to be white men, they took it for granted. They were just part of those networks. And so they didn't actually have to think about that side of it, that reputation building and branding. But they were doing it too. But for them, it came. It seemed natural. It just came. It was organic.
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Alfred Marcus
I mean, most of these people do end up getting rehired and they resurfaced. And I keep noticing people from Lehman, you know, they still alive in other places, even though they, they experience that. And you would think it would delegitimate them in some way, but it doesn't at all. It's like part of your professional career that you went through something like that. If you. Do you buy this idea that, that they do it out of what is the motivation? It's a balance between like, greed and just, you know, it' Is it a game? Sort of. And it's like investing is a game and it's nice to be able to play the game really well and there's some kind of fun associated with it. Or is it just pressure and anxiety? I guess there are a lot of different types out there, but what's your impression about that? The overall motivation and the.
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Megan Tobias Neely
And how.
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Alfred Marcus
They, and how they justify themselves?
- [27:13]
Megan Tobias Neely
I guess when this was something and this gets back to that notion of the passion for it, which kind of puzzled me at first. Like, I wasn't quite sure how to interpret it, because when I would ask them about their career aspirations. So I always ask a question about where, you know, where do you envision yourself in five years or longer, what you want to be doing or what's the, what is the top of your career? What is the, you know, biggest goal for you? And many of them would say they want financial freedom. And they didn't say it, mean it in the way, when I'd asked them to define it, they didn't mean it in the way we think of, you know, in the broader sense for, you know, people who are salaried and working more usual jobs. They meant it in the way of, like, having no financial concerns for the rest of their life. And they particularly described it as they want to be able to retire but to keep working because they love the work. And. Which seems so kind of counterintuitive. But I think it gets back to that pressure to kind of not only be seen as motivated by the money, but for some love of what they do. And that that sense of, of passion was kind of deeply part of their identity. And they'd often describe how they've worked and were motivated by a particular number. And they called it like the number. And it was a number that they would need to earn in order to retire. And they said as they'd advanced in their careers, that number would increase. So first it might be 5 million or 10 million, and then it'd be, you know, it'd go up, it would snowball upwards. And what I realized is it's largely this status differentiation. So when you are among the upper echelons of society, your boundary for what achievement is and status keeps pushing upwards. And so that, that, and it gets easy to kind of get pushed into that based on the, you know, the industry dynamics in the sense of status and recognition tethered to that. But I, that, I realize that's a big part of it is they're, they're justifying and they work really long hours. You know, they're, they're working around the clock. They're tethered to their work at all times, like many of us. But they, in the, in the way our economy is currently structured, unfortunately. But they, you know, I think to justify those long hours and that the commitment required of those kind of jobs, that's part of how they, they would do it. And they, and this goes back to the kind of the neoliberal ideology underpinning the industry, the belief system that numbers and metrics are the biggest indicator of our worth. And that's something that, you know, I think is very much, you know, when I was doing this research was during Trump's first time as president, term as president, and his campaign leading up to it. And I kept Thinking about these parallels, about how people, you know, average people in the US Associate billionaires like Trump as being somehow holding of merit. And you know that they're hardworking and smart or brilliant because of the money, that the money is a sign that they're successful. Even when you dig, you know, go into the details, it doesn't hold up. But the fact that they can achieve that much wealth, you know, I think it goes back, it gets to a very kind of fundamental belief system we hold on to it do in this country and that they do are invested in as well.
- [30:19]
Alfred Marcus
It's not luck, but it's I beat the market, I'm really smart and I'm smarter than other people and the money's just a byproduct of that. And even when you have the money, there's always somebody that's richer than you. So you're never completely satisfied with where you are. In some ways, it's a status game as much as a money game. Ultimately, you want to be valued by your peers as being the smartest, usually guy in the room. Right. That's just another thing that comes up in your work a lot, that this is mostly male and it's mostly an industry of people who are not minorities. Do you want to say something about that as well? And even a little bit more, I'd like to hear a little bit more about how they justify. Are they neoliberal in their orientation and do they think this plays a very important. Allocating capital is a central feature of our society and the people who do it should be well paid for what they do because it's so important.
- [31:31]
Megan Tobias Neely
I'm raising a lot of points. I was going to say this takes me in two, but different related directions, but I think first, establishing sort of what's happening in the industry in terms of whiteness and masculinity. What. You know, one of the things that I found that I kind of bought that early on in my research that piqued my interest in this as a case was how well the industry sort of aligns with the gender and racial dynamics of the top 1% of earners. So what, what you'll find is that in the industry, I mean, it's, it's so predominantly run by white men. You know, there's, there's been multiple industry professional association reports done on how they found it was first done like a decade or 15 years ago, and then it was replicated about five years ago. And they found the same thing, that there are more hedge fund managers named David than there are women and the same. And the research that's been done on race and ethnicity finds that it is exceedingly slanted towards white, you know, white workers and especially white men. And what I argue. So the way. One of the things I've noticed that when people kind of read, you know, the description of my book is they assume it's sort. It's like a. A study of examining, you know, diversity in industry and what prevents diversity, but really it's a study that's not quite right. It's actually a study of how when you have a group that's based on homophily, so being similar to one another, how that's part of how they can wall themselves off from oversight and accountability and demand these high incomes. So the title of the book, Hedge out, refers to this sort of protective boundary that comes from when you have elite privilege that's rooted in whiteness and masculinity that allows you to really carefully decide who to let in, who to keep out, how to support, mentor people and create a system wrapped around that. And I think that's like a key to understanding the high incomes and how they're reinforced by less accountability, oversight, and their ability to charge us high fees. So this is. And this is something that I noticed, like, within the industry. So one of, you know, and one of the things, the questions that sort of drove this work is like, you know, we know there's been so much research on what prevents women, for example, and men of color from reaching up to the upper echelons of society. You know, we know we've studied this well. We know about labor market segregation and occupational segregation. You know, and I think that, you know, I. And from the onset, I thought, you know, we still need more work on understanding why people of color and white women are underrepresented among top earners and among leadership roles in societies. But what I wanted to understand are what are these deep kind of mechanisms of inequality that prevent all but white men from equal access to an industry that holds so much wealth. So, you know, we knew, you know, these forces that exclude people are well documented. But that's really different from understanding how and why an elite group of men can garner such high compensation at hedge funds. And I think, you know, what I found is that these systems of inequality, so thinking about gender, race and social class as systems of inequality, that sort of propel us into certain or that help to structure and reinforce what we do in the world. You know, how we are educated, what paths careers we choose, we pursue, and are open even Available to us that we can get into that. Those work together with systems of compensation, things like salary bonuses in and beyond hedge funds. And I found that there's kind of when you do, you know, one of the things that hedge funds insiders would say to me is that they would, you know, say, well, the low numbers of women and racial minority men on Wall street are, you know, a pipeline problem. And so they'd often say like, well, it's just an issue of like, people don't have the training or they don't have the interest. That was often, you know, it was, they would go back to this notion of passion. Well, people just don't care about investments. You know, they would say, oh, one example that came up a lot for me was like, oh, well, women, you know, they're invested, interested in fashion and taking care of people. They're not interested in hedge funds or investments. And I thought it was really interesting because I interviewed several women investors who were trained in like specialty areas. So for example, one was her background was in oil and gas. She had, that's what she did. Her oil and gas investments were the focus of her undergraduate degree. And yet she was hired on an 80 person investment team as the only woman and she was assigned to retail investments. So this is backing company. Yeah. And she described how she was hired to replace a woman who was pushed, funneled out of the investment team when she got married into client services. And the justification was that they thought, and this was before the woman had children, she wasn't pregnant, she had expressed no interest even in having children. But it was assumed that when you got married you would want to have children and that client services where you, you know, work with investors and meet with them would be a better job for having kids. But what I thought was interesting is the women who I interviewed in client services described some of the most grueling jobs there were because they have to travel, they have to meet with investors. So they're actually not good for parents. But it was just believed that and that's part of what kept women out of roles that would lead to top leadership and management. And then what I heard from men, especially men in executive roles, as they said, actually being, you know, this CEO, the head of the company is the best to be a parent because you, you know, they would always laugh and say, well, you work, you know, 100, over 100 hours a week, but you choose those hours. You can still be there at the soccer game or you can do what, you know, they would, they would kind of laugh about how much they work. But they said you could still at least control when you worked and how you worked. And so I thought that was a really interesting kind of contradiction there, this belief that being a dad was, you know, was great with an executive role and that being a mom was better for client services. Close your eyes. Exhale. Feel your body relax and let go of whatever you're carrying today. 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- [38:53]
Alfred Marcus
Is another aspect. I think there was a recent article either in the Wall Street Journal and the Times. It was a front page article. I don't know if you saw it, but it was an article about how in elite institutions now, like at Harvard already, when people kids are freshmen, they're already being recruited by the hedge funds to work for them and in fact it takes away from their ability to do their studies because they'll bring them into New York or other financial centers. So a lot of this is self enclosed. I mean the entryway is through an elite institution oftentimes and it's sort of assumed that if you go to Princeton or some other Iing that you're inherently capable of doing this kind of work. Which is that true merit to that?
- [39:46]
Megan Tobias Neely
Well, there, I mean, there are two things that, I mean, you know, I think that people with all kinds of trainings are capable of doing many different forms of work. And one of the things I want to emphasize too, is that very few business schools have classes on hedge fund investment. This is largely. That's true. Yeah. It's. This is largely an industry that's taught on the job. And so, you know, from a sort of general perspective, you know, they're looking for people who can learn on the job, like I was told when I was interviewed. But I think the key to this, the focus on people from those elite institute candidates from those elite institutions is that they want access to elite networks and they want people that look good on paper for investors. And I think this is part. This is. And what was told to me was that this has become even more intense as the industry has become more institutionalized, because institutional investors like BlackRock, for example, Fidelity, and you know, as well as university endowments, they're looking for, you know, they look at the bios of people working at the companies, and that's an easy metric to assume competency for them. But it also, you know, like I said, it captures those lead networks. And I, you know, this gets me to another example of people who were sort of funneled in work into particular avenues in the industry that that were interact with gender and race was one woman I interviewed who'd gone educated from elite background. And in our interview later, I was able to figure out that she was the daughter of a CEO of one of the biggest investment banks in the 80s. And she's also an example of someone she started off in investments, and clearly she had that training, that support. You know, we learn all kinds of things from our parents. This is well done, well studied. Starting in, you know, dinner table conversations, what we observe our parents doing, we learn how to navigate these industries. So you would think she would be the example of somebody best equipped, right, to rise to the ranks of these companies. And she was very successful. But she was funneled, even though she started off investments, management, she was funneled into the client services part of the industry. That's another example of these, the kind of intersection interaction between pedigree in terms of elite degrees, but also being part of this, these inner circles. And I interviewed people who met their, you know, their first bosses at hedge funds from, for example, their, their dorm mates from their rich or elite boarding school that they went to in high school. This came up. So it happens even before the junior Earth freshman year of college, you talked before about accountability.
- [42:20]
Alfred Marcus
So what, what are the problems with lack of accountability? And, and how would you address the. Those problems?
- [42:31]
Megan Tobias Neely
Absolutely. So I think, you know, one of the things that came up that I, you know, goes back to what I was describing, how this, the hedge fund managers I interviewed described how they wanted to create these environments of openness and where people could call one another out and raise issues, you know, as problems arose. So that help. They thought that this would help to promote a meritocracy. Right. If everyone can speak up, share their ideas, make the work better, that was really supported. But one of the things that kind of contradicted that was when I heard of examples when people would face discrimination, discriminatory or sexist practices. So, for example, sexual harassment, very hard to speak up against about. And one from where this arose at what, what that my interviewee reported to me is she said she had encountered these sort of uncomfortable dynamics with this colleague where she had to put boundaries up. And then it wasn't until she rode, took a shared a cat taxi with other women at her company to go to event. And as they're writing, they're talking and it all of a sudden they, these stories come out where they realize all of them have been targeted by this man. And so it wasn't until there was a kind of critical mass of them that recognized this impact that they felt enabled to speak up. And even then, and this is partly like a legal, a legal issue of how you deal with sexual harassment, but they still had to work with this man after doing so, until basically he, after several years, he then went on his way because, you know, people didn't really want to work with him. But the company wasn't willing to fully take action because of. I heard they thought it had to do with the legal ramifications, but they described how it was incredibly awkward. But what I found is like, for example, when I asked about sexual harassment, at first women said, no, that doesn't happen. Or, you know, it's not an issue in this industry. But then what I noticed is at fieldwork events, men kept asking me out on dates and things and making, you know, and making comments like, you know, there'd be things like Joe, they'd make jokes. There would be free bars that were sponsored by some corporate sponsor, and they'd say, oh, let me buy you a drain for, you know, things like that. Or, you know, one man who was a recent divorcee, his friends sort of, you know, encouraged me to just have scotch with them and Kept talking about him being recently divorced and available and he was really embarrassed about it, I should mention in his behalf. He apologized later. But anyways, this came up so much that I thought well how is this happening to me but not these women. And I realized it's so routinized that they don't realize that this is part of sexual harassment. And the same thing was true with discriminatory practices. So I interviewed one black woman who described you know, at first, when we first met, we interviewed six times over the course of a. Of a couple years. And at first she really liked her company. She was at a new. Had joined recently joined a new hedge fund. She was really happy. And then as through the course of our meetings she found out that her. A white colleague who was less experienced than her was earning over double her pay. And so she raised, called it out. She said well you know, I should get paid. X, Y, Z. This is I'm com. You know, this is my skill set, what I've accomplished. And she basically said she was put in her place. And she said, you know, it was as bad she felt like the interaction from this. Her manager who was a white woman was akin to being called a derogatory from. It was like you should. She's described it as saying you should be the. What was communicated was you should be grateful for the job. And after that she was called in to what she told me was the director of human resources office. And that kind of piqued my interest because I didn't usually hear of human resources departments at these companies. You, you'll have them at a Bridgewater or Citadel. These really large hedge funds, but more mid sized hedge funds tend to not have much in terms of human resources. They often outsource it and what they sometimes have is what. What are called corporate shrinks. And this is like in the show Billions that captures it well to mediate interpersonal disputes. And it turned out that what who she was calling the head of human resources was actually the. The hedge fund manager, the head of the company. And and so very clearly it became very clearly that, that he was wanting to meet with her because he wanted to know if he. She was intending to press charges. And so yeah. And so she described how you know, it just became more and more uncomfortable and eventually she left the firm and she didn't press charges. And people kept telling me, you know, pressing charges for something like that is a career ender because it's such a small close knit industry that if you speak up, if you become labeled as A problem maker, you'll never get a job again. And I, and I interviewed people where that happened too.
- [47:06]
Alfred Marcus
But what about like this social impact? Do you get accountability for that? And I guess also the, there's increasing involvement on hedge funds in politics.
- [47:18]
Megan Tobias Neely
So yeah, when that helps get it kind of the point, you know, I make in the book is that we know these kind of dynamics happen in all sorts of workplaces. This is not an unusual finding, but what's unique in this setting is that it's part of, and this is something we know about sexual harassment and discrimination in general is it's part of reinforcing the power structure of organizations. And so what it does is helps to bolster that hedge funds, M and M power and authority and sense of invincibility. And that seeps out, you know, that shapes. Then they're feeling justified to charge high fees that give them the high incomes and amass large wealth. It helps kind of embolden them to take action to prevent, you know, they, they do a lot of lobbying action and fund lobbying efforts to, you know, encourage, to kind of protect their low capital gains taxes and lack of oversight. So I think this is part of, to get to your question. Like it's part of a process that gives them this sense of superiority and power that then enables them to become more active also in politics. And I did one of the big industry events that I did field work at was before an election cycle. And the MC of the whole event was a very famous newscaster and some of the major panels were all lobbyists from D.C. and basically all these hedge funds and other alternative investment leaders who wanted to go to this event. It was to get insider information as well as access to Washington D.C. to shape the policies agenda that would be happening, you know, which in terms of what these lobbyists were doing. And at that event, you know, the wealthiest person in Manhattan was right next to me in the crowd. You know, there were all kinds of people who you wouldn't think are associated with hedge funds who showed up especially to the networking part of the event. And I think it's, and it was, it's so indicative of this revolving door between Washington D.C. and the hedge fund industry and how intertwined they are in terms of who works. You know, there are a lot of people who go back and forth working in Washington and working at hedge funds and it's partly for that sort of power and access.
- [49:26]
Alfred Marcus
I think the current head of the Federal Reserve and the Department of Treasury both came out of that world as opposed to the you know, tradition, more traditional Goldman Sachs route to D.C. yeah.
- [49:40]
Megan Tobias Neely
And what I wanted to mention, too, this is part of one of the things I was investigating is that There's. During the 2008 financial crisis, part of the regulatory response led to investment banks having a lot of, you know, oversight and kind of incursion from tarp, which I don't say this to in any way blame those efforts. They were made important kind of inroads that were needed to be done. But at the same time, what happened is we saw a lot of capital flight to shadow banks. So this unregulated, less regulated.
- [50:10]
Alfred Marcus
Right. It's hard. I think a huge issue right now. Yeah, go ahead.
- [50:14]
Megan Tobias Neely
Yeah. And the IMF did a large report following that crisis detailing this, that and what. So people were predicting initially that hedge funds would sort of, you know, start to diminish in size during that crisis. And really they just came bigger. They came back bigger and stronger, even though they were hit early in it. And it's because of these dynamics, you know, and I think that the fact that people are getting appointed from them is indicative of that. That newfound power or that really came out of crisis on an even bigger scale. And that's also really captured well by some of the political geopolitical term and all that happens worldwide, but they become involved in. So, for example, hedge funds are very wrapped up in Puerto Rican and Argentine debt. And to the extent where, let's see, Elliot, for example, was one hedge fund that withheld an Argentine vessel in collateral as part of getting back their debt, which I think really captures well how emboldened they are to become more and more involved in geopolitics because of these ties and the scale of their resources and power.
- [51:30]
Alfred Marcus
Are they part of the shadow banking involvement that has risen up now? I think a lot of them are. They become shadow banks and they're playing the role of banks in making loans that real banks now can't make. And there's a real danger in that ultimately.
- [51:51]
Megan Tobias Neely
Absolutely. And that's because, yeah, shadow banking just refers to any sort of lender who provide is part of the financial sector that is less regulated. And these are largely, yeah, hedge funds, private equity and other and other firm types like those.
- [52:09]
Alfred Marcus
The other vulnerability is that the actual worth of the. If they're private equity and they own lots of other businesses, they're establishing what these businesses might be worth if they sold them, but who knows what they're actually worth? And I think. I think this has affected, like, a lot of university endowments currently and the People who have invested in them are not that really well protected because you have to keep your money in these funds for a really long time. And any performance information is not well regulated by the government and comes from the funds themselves who are. Who are doing the evaluations. Is my characterization wrong or.
- [52:55]
Megan Tobias Neely
Oh, no, you're absolutely correct. And I think, you know, especially really large university endowments like Harvard's has been called out as being. You know, Harvard has been described as a hedge fund with the university attached. Because when you look at the money, you know, going into these endowment units and the people who are running them and what they're making, they also personally, what they're making, the bonus structures, it really shows you sort of the. It's very revealing of the actual power dynamics at a university. And this was something I dug into when I was first doing my research, when I was at the University of Texas at Austin for my PhD and I remember we had in. In this was like 2011 or 12, we had about a million in cuts to different centers, so area studies, and they. And, you know, that million dollars was really debilitating for a lot of these centers. That's a lot of money at a, you know, on a university. But what I looked at when I was just curious. So I looked at the Texas endowment, and the same year they cut a million dollars from those centers. They paid out 13 million in bonuses.
- [54:00]
Alfred Marcus
To the people who were running the. So their views of the world are very much like the hedge fund. Their interests are so entangled with the hedge fund that it's probably hard for them to really supervise them well and hold them accountable.
- [54:19]
Megan Tobias Neely
And they'll justify it as saying, well, we wouldn't be able to get qualified investors if we don't give bonus. The kind of rationale they give is like, if we don't give the same bonuses as they would get on Wall street, we won't get the top talent. That's the logic that they just use to justify. But it is, you know, I think when I look at these kind of money flows, for me, it's really about revealing who has, you know, what the power structures are of these institutions and who gets to decide the future of them as well.
- [54:46]
Alfred Marcus
Could this whole system explode at some point in time? I mean, it seems to me there are a lot of weak links, and there could be a cascading type of crisis that occurs because of the weak links. Is that something that worries you or is it just me?
- [55:04]
Megan Tobias Neely
Well, I think it, you know, and this was something that really interested me with the 2008 financial crisis because that's actually our best example of it. I mean it did re. It really revealed fraud that was happening. And this is true with when you, you know, research on financial crises over time when they happen, when a bubble, when there's a bubble and it bursts, we always, it always cut show brings to light the fraud and corruption that was happening that good times kind of concealed. And I remember, you know, this is one of the things I've always thought is kind of interesting about Michael Lewis's big short that got a little, little bit lost in the movie adaptation. But even in the book he doesn't go into as much. So during the crisis I was following, one of the things he writes about is all these hedge fund managers that realized what was ha were happening and so they deliberately shorted all the big bang because they knew a crisis was coming and then they made, you know, billions and billions of dollars. Yeah, well, one of the things that I noticed when I was following that in real time was that the political ideology of some of those hedge fund managers was more radical actually than what the book and the movie captured. Like there were hedge funds who were doing that shorting and really thinking of it as anarchy that they were trying to sort of blow up and expose a fraud, you know, a system that didn't work. And I think, you know, it kind of captured. One of the things that crisis captured was those chains of how, you know, our home loans, our debt are linked to, you know, to the success. And both those, when they do well, but also when they fall, they're betting against it. They want, you know, when they, when they realize there's bubble, they're planning on it to collapse. And so when we have all kinds of life events where that affect a lot of us that hedge funds, people like hedge fund managers are actively labeled able to profit from the good times and the bad times. And those are linked to a very complicated and opaque system financial system that other institutions are tied to. And this is globally as Kimberly Huang spider web capitalism so well captures. So I think, you know, I think we, we very much likely will have future events. That's one thing we know about finance capitalism is that crises become more close together. And so I'm sure we'll have more of them in the future. And one I'm definitely watching right now is the AI bubble and what's, what's going to happen with that because that's where a lot of investors have funneled their money in the last five plus year, 10 years but I don't know. You know, I think that the response to 2008 to sort of re. Patch up the system and rebolster the system as it was currently done, but while, you know, putting in checks and more, a few more checks and balances to try to better regulate it and prevent it from such extreme collapse, I think it's very telling. And this is something in my first book, Divested with Ken Ho Lynn, we argue that that response, you know, it was meant to address systemic insecurity and uncertainty and risk, but it did nothing to change the system of inequality that that system holds up, that we're all part of.
- [58:06]
Alfred Marcus
The private equity has really gotten around all of that in is. Is unregulated largely, and it's taken over and it's assuming a lot of this risk without much accountability. That's my editorial for today.
- [58:20]
Megan Tobias Neely
Yeah. Yeah. It's such an important topic.
- [58:23]
Alfred Marcus
Yeah, I mean, I guess, yeah, I kind of think this is a debate we probably shouldn't have here, but I kind of think AI is for real. I mean, the bubble may burst, but it may. There's something fundamentally reshaping everything we do about it. But I think the valuations of what private equity is holding now, both in terms of their loans and the companies that they're holding, is not for real. And that that's going to come unraveled at a certain point. That's my. That's my. And I want to warn our listeners not to make any of their investment decisions based on what I see.
- [59:07]
Megan Tobias Neely
Same here.
- [59:11]
Alfred Marcus
We should begin to wrap this up. What are you working on now?
- [59:15]
Megan Tobias Neely
Yeah, well, that actually leads to it. Well, so one thing I did over the last, let's see, a little over five years or I started this in like 2018. I redid interviews with venture capitalists and technology startups as kind of comparison cases for the hedge fund case to understand whether what I found at hedge funds was indicative of other elite industries or whether it was new to them. And generally I find a lot of the same sort of processes at play. And that research got a little bit slowed down because of the COVID crisis and things like that. But one of the things that I did field work during the Musk takeover of Twitter now X and one of the things that research looks at is how the same kind of ethos around flatness and what's called decentralized, you know, what they think of as being a decentralized firm, but actually is a kind of a discourse that rebolsters that chief executive, how this also plays out in tech and how that leads to this authoritarianism and this kind of authoritarian mindset that you see Musk and Peter Thiel espoused. So I'm currently writing a book on that that kind of links the organization of that industry to what we see today in terms of the, the involvement in, in the government of people like Elon Musk and, and how they bring that sort of mindset from tech into government. And then I also, that when a project done that kind of grew out of that research that is the focus of my current research is on AI scientists and how they organize their work and how they actually think about implications of it. Yeah. And I really enjoy that because I think it actually helps with some of the alarmism around AI. You know, they are very pragmatic about what they think could happen, what is happening. But I think when you get, you get there's a lot of media hype around AI. So part of the goal, kind of like with my hedge fund research, is to get a bit beyond that hype and think about really what's happening on the ground, who it's impacting. And the AI scientists are some of the best people to come get their insights on that and how, you know, they make sense of what their work, you know, work they're doing and how that's going to impact their worlds and our worlds as well.
- [61:26]
Alfred Marcus
It's only different than these investors. But I mean, VC is really legally the same as a hedge fund because they're both private equity. They're both based on the same grabbing money from people who have excess money and who want it to be invested. And they're just. The way I see it is private equity invests in the failures and VC invests in the unlikely but very lucrative potential successful firms of the future. But they're both doing legally, I think it's a lot of the databases are kept by the same people to the extent that we have good databases on them under that general term private equity, anyhow, that's a whole other. This has been a great interview. I've really enjoyed it. And so I'm going to bring it to a close. Thank you for this revealing look at hedge funds and the inequalities embedded in high finance. The book is Hedged Inequality and Insecurity on Wall street, published by the University of California Press. For listeners, I'm Alfred Marcus and this has been on the cusp on the New Books Network where we examine how strategy and ethics intersect in organizations and in civic life. Thank you for listening. If you have comments or suggestions for future podcasts, please be in touch at amarcusmnedu amarcusmnedu.
- [63:06]
Megan Tobias Neely
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