Alpha Magazine Hall of Fame – The Traders

by PlanMaestro

This is the second part of excerpts from Alpha Magazine Hall of Fame 2008 from interviews with some famous hedge fund managers. In the first part we review the more familiar fundamental investors. Now we go to the more esoteric stuff: macro traders (Louis Bacon, Bruce Kovner, George Soros, Michael Steinhardt and Paul Tudor Jones). I would emphasize a couple of things.

  • There is a lot of hogwash in the macro traders’ camp, but these managers are the best and if we learned something the last few years is the need to understand bubbles and how to ride them
  • I was very surprised with the few mentions of leverage or shorting or risk management. Is it part of the fabric already?
  • Paul Tudor Jones seems like a lot fun and reasonable. Not sure if I want to be a slave of the tape the rest of my life though.

Institutional Investor’s Alpha Magazine – June 200

The Industry

  • The crowded nature of the hedge fund community has changed the character of trading so that you can see waves of risk-taking and derisking coming from the hedge funds themselves – Kovner
  • But a hedge fund is a superior way of running money -or it has been. But as the industry gets bigger and bigger and takes up a larger and larger segment of the market, it renders it more difficult to outperform and to justify the fees – Soros
  • They go for size and are less interested in absolute performance. They are more interested in relative performance – Steinhardt
  • I was very sensitive throughout my career to the idea that the bigger you are, the bigger your risk is – Steinhardt

Volatility

  • Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic – Tudor Jones
  • Many of the successful macro guys today, they’re all kind of in my age range. They came from that period of crazy volatility of the late 70s and early 80s, when the amount of fundamental information available on assets was so limited and the volatility so extreme that one had to be a technician – Tudor Jones
  • I lost my stakes a couple of times which taught me risk control and risk management. Losing those stakes in my early 20s gave me a healthy dose of fear and respect for Mr. Market and hardwired me for some great management tools. Oh, incidentally and by necessity, I became a pretty good fundraiser – Tudor Jones
  • The macro space will be great. I think we’re going into one of those slow or zero-growth periods in the US, which will give us a lot of volatility. – Tudor Jones
  • While I’m a staunch advocate of higher education, there is no training –classroom or otherwise- that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what during that brief volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it – a sort of baptism by fire – Tudor Jones

Mindset

  • He gave me an ongoing tutorial in disassociating oneself from the results of the trade, yet still have passion about it. – Bacon on Tudor Jones mentorship
  • The prevailing paradigm underestimates or disregards the element of uncertainty. I consider myself an insecurity analyst, not a security analyst – Soros
  • I see the younger generation hampered by the need to understand and rationalize why something should go up or down. Usually, by the time that becomes self-evident, the move is already over – Tudor Jones
  • Being a hedge fund manager is particularly suitable for the pursuit of truth – Soros
  • When I got into the business, there was so little information on fundamentals, and what little information one could get was largely imperfect. We learned just to go with the chart. Why work when Mr. Market can do it for you? – Tudor Jones
  • When I was investing, I measured it one way – which was raw performance – Steinhardt

Strategy

  • The view I started with and embodied in Caxton’s fund was that business cycles were very important and that they occurred all over the world, and it was useful to observe them and to advantage of the opportunities across four different asset classes (equities, fixed income, commodities and currencies) – Kovner
  • When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form –Tudor Jones
  • While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it. – Tudor Jones
  • One of the most important skills you need is to constantly reinvent where you put resources. Commodities markets were quiet for years, Now they’re very strong – Kovner
  • We feel that we are versatile enough that we can move into a number of different strategies, and if doing that means that we’re global macro, then we’re not going to argue with that label – Bacon
  • The lesson was that picking the right investment will trump any lousy trading around it – Bacon
  • We tend to make top-down, interest-rate-driven investments. We’ve been pretty U.S. and European –centric throughout most of Moore’s history, and we have been pretty closely focused on what happens with the interest rate cycle and the reactions that it drives around the world – Bacon
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