Alpha Magazine Hall of Fame – The Builders

by PlanMaestro

This is the third and last part of excerpts from interviews with some famous hedge fund managers from Alpha Magazine Hall of Fame 2008. We already cover the fundamental investors and macro traders. Now is time to check the quants and the multi strategy houses (Steve Cohen, Kenneth Griffin, Leon Levy, Jack Nash and James Simons). Here we are not talking about individuals, we are talking about large firms that even more than systematizing a strategy they have created organization where culture and technology are at the core:

  • For the individual investor there is not much to learn about them. Algorithms are too valuable to share and disclosing marketing advantages is like a magician showing his tricks
  • Very few mentions of risks or advantages of the process of research or leverage or shorting or risk management or anything specific to investing
  • The investing process is not the core of what they do, they are better at building marketing franchises and providing the best resources for above average investors or excellent scientist.
  • Brilliant traders and investors are almost impossible to keep within an organization, however scientists, algorithms, brands, culture and processes are sticky
  • Not sure this emphasis on building empires is all good. Steinhardt’s remarks in the previous part on the excessive emphasis on asset gathering and relative performance in the industry ring true

Institutional Investor’s Alpha Magazine – June 2008

The Industry

  • There’s more overlap among quant investors that I might guessed. So we may think – and we have some reason to think- that we’re the best at what we do, but that doesn’t mean that everything we do is completely different from what everybody else is doing –Simons
  • We saw firms that grew to fast. They took money just because it was available but didn’t have the resources to properly manage or administer it. We were very careful to avoid that –Nash

Culture

  • The best science is done in a open exchange of ideas. So when a new researcher comes in here, we want him to learn everything about the system –Simons
  • Bad ideas is good. Good ideas is better. No ideas is terrible –Simons
  • I think that our willingness to be open, to change direction if necessary and to make decisions differentiated us. That included cutting losses when the time came –Nash
  • I try to keep this firm well diversified, so when and if people leave, the firm just keeps going, which I think is the mark of an institution as opposed to just a one-hit wonder –Cohen
  • I’m not out there buying and selling assets on a day-to-day basis. The guys who work for me are much better at doing that. But I’m certainly involved in asking, Where is the portfolio today? Where do we want to take the portfolio? What are the key risk we are taking? Are we being well compensated for those risks? –Griffin

Hiring

  • We had a very rigorous process for deciding who we would hire. It included psychological testing, which looked for flexibility, open-mindedness and decisiveness -Nash
  • “I didn’t know how to build a business based on traders. I didn’t know how to judge them. If a guy was extremely good, it would take a while to prove that, and by the time he’d prove it, he would probably be too rich for me to hire. But I did know how to hire scientists and mathematicians” – Simmons
  • We wanted people that could act well under pressure – in both good times and bad. How they handled the good times was perhaps more indicative of their character than how they handled the bad –Nash

Technology

  • And I do believe that our technology gives us a substantial competitive advantage in the marketplace. How many firms can handle a million transactions a day? –Griffin
  • Some 20 to 25 percent of all options contracts in America will come through our four walls –Griffin
  • If there’s some event that looks like it indicates more volatility in the markets that the computer could have guessed we’ll override the system –Simons
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