Recommended reading

I thoroughly enjoyed reading Ben Mezrich's Ugly Americans on the flight back to Tokyo. It's the true story of an American who came to Japan, rode an expensive Ducati, dated a beautiful Japanese woman, and made millions of dollars in the stock market.

All in all, pretty much like my life, except my motorcycle is slower, I don't earn anywhere near as much money, and my girlfriend, who reads my blog, is the most beautiful woman in the world. (Hi, Honey!)

Toward the end of the book, however, I noticed an apparent error. The main character, John Malcolm (an alias), has arranged to receive 10% of the profits on an enormous series of stock and futures trades he plans to make through his hedge fund. Since the trades end up generating $500 million in profits, Mezrich has Malcolm keeping $50 million.

Sounds simple enough, but the trades were made with money supplied by the hedge fund's investors. That means those investors get most (usually 80%) of any profits the fund makes. The remaining 20% goes to the fund as "incentive fees". So Malcolm's fund would have earned only $100 million on the trades, not $500 million. And Malcolm would have pocketed ten million, not fifty. Still not bad for a day's work, but a lot less than Mezrich describes.

The only way Mezrich's description makes sense is if Malcolm took his 10% off the gross profits of the deal, which would mean he snagged fully half of the fund's $100m take. That's theoretically possible, but it strikes me as unlikely that his boss would have signed off on such generous terms. If he did, Mezrich should have made it clear.