I'm bored: Macro Hedge Fund PM Q&A

Howdy folks, this market has me bored to tears [edit: I'm truthfully also just having a harder time getting a read on conditions than at any point in my career, so that is prompting both frustration and introspection], and just for work-unrelated reasons, I have a bit more free time on my hands at present. So, as I grasp for meaning in this cold harsh world, I thought perhaps I would derive some satisfaction out of answering whatever questions this community may have.

Don't be afraid to ask a dumb question, though brace yourself for some vitriol depending on my mood. Regardless, I will try to answer stuff. Reluctant to delve too deeply into background. I have worked in HF's for my entire (brief) career. I will not comment on specific funds or individuals ('judge not lest ye be judged'). I don't specialize in any one geography or asset class, though the book has a relatively heavy tilt towards DM. Increasingly involved in vol mkt's. We sort of just do what you'd expect a macro fund to do... rates, FX, credit, some equities and real estate, and really whatever looks interesting. We have done a bit of work that looks more like PE than anything, though that is a tiny portion of activities.

I'm very much a qualitative, discretionary guy (the few, the proud, in macro today) though I wish I had better technical and quantitative ability. My approach is grounded in global history, which has been a life-long passion of mine. I can't guarantee I'll get to all questions.

 

As a history student soon to be starting at a distressed HF, your comment on global history resonates with me. What is your thought on why historical context can be so important for understanding markets? Do you have an outlook for the future of discretionary global macro as well as any other popular strategies? I can probably guess your thoughts on the majority of L/S equity from some of your previous comments.

 

It's just the tried and true (and cliché!) fact that people don't tend to change their behavior: considering our relative youth the timeline of the history of the universe, we are little changed neurologically from when we were cavemen. So, 'plus ça change...'

I think I've commented before that I'm very bullish on the median returns of discretionary HF's, and very bearish on the size of the industry. While I could spend days on this topic, I basically am a big believer in the power of subconscious processing power. It's probably our only hope of beating machines.

Obviously, I can't comment decisively on the direction of the industry, but I will say with confidence that it is overgrown at present, and the 'slow burn' going on right now is overdue. Too many managers just aren't good at what they do. I just hope I can continue to perform. And if I can't, I don't deserve to stay in business, and as a capitalist, I am ok with that. Only time will tell. (and yeah, anyone who knows me or who has seen my comments knows what I think about 99% of equity funds...)

 

How do you learn about distressed and practice what you learned? I'm very much interested in distressed credit but I have no idea how to develop experience in the field.

Cash and cash equivalents: $138,311 Financial instruments and other inventory positions owned: $448,166
 

Hard to say. A lot of smart guys have looked into this, especially since it can really fuck a lot of the L/S equity books (low dispersion, and all that). You probably know that in the active management community there's more than enough ETF hate to go around. It's probably mostly because ETF's hurt their feelings and self-worth, lol. I'm not as skeptical as some. Though I am concerned that we just honestly don't know how ETF's will weather a significant downturn. This isn't exactly my wheelhouse. Talk to the ETF analysts or Delta One traders, they have more of an insight into the reconstitution, etc process. I will say, that there's not that much of a relationship between ETF flows and HF flows. The marginal investor in a hedge fund isn't weighing "2/20 fund, or Vanguard index?," they're usually just trying to get us to lower our fees or whatever. You'll see popular actively managed mutual funds (that can't perform net of fees) be the real casualties of ETF's (they're already getting hit pretty hard). We're closed to new money, so luckily I no longer have to concern myself with cap raises or the FoF scene

 

Won't comment on that, sorry. I make more than I probably deserve, though our clients seem happy to pay (we have weirdly idiosyncratic client base, and it's almost more of a multi-family office at this point. No institutional money, which is a huge advantage imo. UHNWI's for the win!). Fortunate to have lots of my own money in fund, which is bulk of 'comp.'

 
macro bruin:
Won't comment on that, sorry. I make more than I probably deserve, though our clients seem happy to pay (we have weirdly idiosyncratic client base, and it's almost more of a multi-family office at this point. No institutional money, which is a huge advantage imo. UHNWI's for the win!). Fortunate to have lots of my own money in fund, which is bulk of 'comp.'

Care to expand on why UHNWI is better than institutional?

 

Are "qualitative, discretionary guys" a dying breed and can one build a career going forward on this skill set (which I personally find more interesting). Also, what traits do you attribute to your success in the HF world coming up? What did it take to reach PM and what have you learned makes a successful PM?

"Truth is like poetry. And most people fucking hate poetry."
 

Dying breed in quantity, hopefully not in quality. HF's should by definition be a small, niche industry of the most talented minds in finance. In order to get back to that equilibrium, that vast majority of funds today will have to go out of business. That's the harsh reality that most managers are emotionally unwilling/unable to acknowledge.

What it took to become a PM... curiosity and honesty. Things like ambition, networking, grit, etc etc are just prerequisites, and they aren't hard to force yourself to adopt. But if you are not fundamentally introspective, innately curious, and intellectually honest, I do not think it is possible to outperform in macro on a long time horizon. Those of course are broad personal characteristics, rather than specific skills and behaviors. The skill set (your 'tools') are pretty straightforward, but the true value add comes from creative synthesis, not rote application of industry-standard knowledge.

 
macro bruin:
HF's should by definition be a small, niche industry of the most talented minds in finance. In order to get back to that equilibrium, that vast majority of funds today will have to go out of business. That's the harsh reality that most managers are emotionally unwilling/unable to acknowledge.

Why is it the case that the HF industry should consist of only "the most talented minds in finance?" Can you elaborate?

“Elections are a futures market for stolen property”
 

Something I am very curious about.

Why wouldnt you hire an investigator, agency, etc... to find the guy? You're willing to spend hours and money on travelling, meeting policy makers, reading, etc... but don't want to spend resources to find this fella who seemed to be one of a kind. Seems like he could be a terrific asset for the organization.

Anyway, thanks for taking the time for this thread.

 

I think Martinghoul said that. He's smart and talented at former (though this is based on his comments. I do not know him in real life... or honestly I guess there's a good chance I do and we just don't know one anothers' online personas haha). I'm dumb and occasionally lucky at latter (obviously being overly humble, but I really do usually feel more lucky than skillful...). In all seriousness, yeah I guess I agree, but statements like that are always more about definitions that the statement itself. Another good one I saw somewhere is "everything in macro is about timing and position sizing/leverage" (and position sizing and leverage are the same thing when you think about it)

Basically, we have several talented derivatives analysts with STEM backgrounds who add alpha by providing liquidity in niche markets, coupled with the conceptual views that my guys and I work on. So we do both, but I fancy myself a 'crystal ball' guy. So they're the tactical complement to my strategic ability.

 
macro bruin:

Basically, we have several talented derivatives analysts with STEM backgrounds who add alpha by providing liquidity in niche markets, coupled with the conceptual views that my guys and I work on.

Care to elaborate on the bolded part of your post? I hope you aren't referring to head-faking day-traders then scalping back to the price they wanted...

 
macro bruin:
Hard to like long vol as a structural trade, even at these levels, just because it's so damn expensive. A young guy I met put it well a few weeks ago when he described most vols right now as 'too expensive to buy and too cheap to sell.'
Thanks for the insight. I don't do this professionally-- just in my PA, but I'm starting to swap out some of my ETFs with at the money calls (where the ETFs have a liquid options market), just as insurance. And it looks like the surface stays pretty darned cheap for expiries a good several months out- I remember a lot more upward slope to it a few years ago.
 

I'm very intrigued with the current state of the Middle East (defining it as the Gulf Coast + the Levant) and have spent years reading about the region's history, the current geopolitical and economic situation. When I heard about the news in Qatar this morning, I couldn't help sharing my long term thoughts with anyone that would listen in my office.

Basically, my dream situation would be to cover the ME region across asset classes...or maybe just on a macro perspective. I understand the capital markets there are fairly small, but in what capacity/role in finance should I be looking at to do the above? Sovereign credit?

 

I may be literally the only person in the industry who is agnostic! So I guess that implies that I'm not bullish on prospects... if I were, I would be concerned about our FX strategies. ''Tis is more a product if ignorance than anything else... BTC has been an annoying headline more than anything else for me. I should probably read more. Please post good resources if you have

 

BTC (Bitcoin) can only process max of 7 transactions per second (theoretically)...in practice its really 3 transactions per second. ETH (Etherium) can process 25 transactions per second (theortically)...in practice its closer to 15 XRP (Ripple) will have no such limit, and is supported by most major banks...and is currently planned to be used for blockchain reporting for transactions in the future (some number of years away) (imagine how checks clear today...it can take over a week to find that a check was fraudulent...with Ripple, that goes away)

BTC has first mover advantage...larger population of users...used as a store of value to avoid hyper inflation in places like Venezuela where there are few alternatives. Other than the limit of supply caused by the math...nothing else special about it...but BTC was "first" and it has an easy to understand name.

ETH - designed to be the currency used to pay for distributed computing....but can also be used just like Bitcoin as a store of value, and easily transferred from person to person...so technology wise, its a little "better" than Bitcoin.

XRP - designed to be used by banks...same basic crypto, but can be used to process more than just "cash" transactions...can also hash contracts, medical records, really anything identified by data. Also, designed to have no limit on number of transactions that can clear per second...so this will most likely become the crypto that is used by the masses...but it not used yet.

(who would use a credit card to pay at a restaurant if you had to wait hours or days for a purchase to clear?...that's what it can be like to use Bitcoin these days on heavy transaction processing days...ETH clears in about 30min...Ripple would clear instantly...just like a credit card does now)

Last time i checked, using current prices and amount of currency that has been "mined" for each ccy, total value of the cryptos are: BTC - 40 billion USD ETH - 20 billion USD XRP - 10 billion USD

however, since prices are volatile, these numbers change as price changes

 

By definition, I consider an unconstrained mandate to effectively mean that there's no start/end point: it's a continual process of revising (a) beliefs about the nature of reality and (b) beliefs about my past chains of argumentation, which have been expressed in the form of trades.

With that said, I pay attention to:

  • Market beliefs: what are different markets saying they believe is occurring? Different markets will tell you different things, reflecting the characteristics of participants (equities vs credit markets being the obvious example)
  • Historical analogues: what archetypal market conditions are we approximating right now, and where have things typically gone from here?
  • Pricing: What are the implied probabilities of different events, and what risks is the market pricing incorrectly? Sometimes it's easy (i.e. there's an explicit P(x # of fed hikes) at any given time, but the market's assessment of the likelihood of recession in Indonesia or something like that is more of an artfully-derived variable

The intersection of these three things, with an emphasis on how #1 and #3 fit into #2, is I guess how I approach the world conceptually

 

I studied/study NLP in college and have noticed that a lot of hedge funds are using NLP techniques fairly extensively. How much are you using Information Retrieval in your own strategies? You mentioned you read a lot / get your information from misc sources, so it seems that these sorts of techniques could actually be beneficial.

 

Really no such thing as a typical weekend, anymore than there's such thing as a typical weekday. I travel a lot, especially on weekends. I find that the 10x or 100x ideas always come from stranger, more spontaneous places than one will find in research, bbg screens, or any kind of reading. Traveling to meetings, conferences, spontaneous trips to meet with LPs, team building stuff, etc. Gotta take time to recharge too: beaches, skiing, fun trips, relaxing at home. But I'm probably too much of a workaholic, I do at least 10-20 hrs of work-related stuff on weekends...

On latter question, algorithms are just automated decision making processes. Nothing fancy. And yeah, reading and researching the shit out of securities (across liq spectrum) is literally what an investor does all day... If you have money to invest, and you can successfully/accurately value illiquid securities and buy them at attractive prices, you'll make money. That's what investing is! Tot that I would know – I'm a speculator!

 

Having an extremely extremely difficult time playing UST duration. Horizon is just cloudy for me, and keep flip flopping belief (therefore no significant explicit risk exposure to US rate levels, though we do have some tactical curve trades on which are performing ok). Primary driver of mkt narrative since reflation fade seems to be Fed rolloff prognosis, but I feel like that's more just a product of low conviction on the really important fundamental factors, rather than legitimate belief that a bit of fed selling (or really, just less bidding!) will increase supply tangibly (i.e. the way they're planning the caps, supply impact really just won't be that extreme, if they follow even a comparatively aggressive path of normalization in the long end). If I had to take a swing in one direction, I would be a net bullish on rates based solely on a deflation conviction. But, like I said – extremely low conviction, as I have concerns about the calculation of price indices and how index miscalculation interacts with market interpretation (i.e. what 'actually' drives duration? What the market thinks is happening with consumer prices, or what is actually happening with consumer prices? and if a gap develops between the two? And if that gap were then to close? etc etc). And one more frustrating aspect is interaction between safe haven status and geopolitical developments. I've been reading interesting stuff on ED$ flows, and that's making me increasingly comfortable with owning duration. (Like in the future, if crazy shit starts to actually happen geopolitically, instead of just everyone talking about crazy shit potentially happening on the horizon, what will be the new safe haven? Would it still be the USD if fulcrum of geopolitical risk were in the U.S.? Would it be Japan, with global B/S's assuming neg yielding assets just to shelter their money (in a curr that isn't even that sound structurally imo)? Would it be in the EUR, where there's redenom, etc risk?) These are all questions that I'm considering, but where history, which has never failed me so far, is simply failing to provide a roadmap... I should probably just look harder.

Argh, really sorry for the muddied thinking and stream of consciousness rambling– it's just a long way of saying I have zero conviction on 10s. Part of why I'm going through borderline existential crisis lol

Re reading materials, I don't know how experienced you are. That would make a big difference in recommendation.