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.
Depends. I travel a lot (by choice). Problematically small personal/social life, so most waking hours are spent at least thinking about the market. Frankly probably in the 80-100 hour range. But a lot of that time is spent reading, which I would be doing even if unemployed.
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...)
Thanks for the AMA! What strategies do you think will suffer the most/least from the outflows that are now going into ETFs?
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.'
Come on bro, everyone on this website is chasing $. Let's not be coy about it. A range would be perfectly fine if possible. On another note, will Josh Rosen be a total bust in the NFL?
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?
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.
[deleted for anonymity reasons - apologies]
The comments... the story... the pay... 100% figured out his identity... This motherfucker's Bobby Axelrod.
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.
Do you have a view on the VIX or options surface with respect to the longer term expiries? Confused cash equity stat arb guy and former options quant here.
Alternatively, any views on who the buyers and sellers of vol are right now?
[anonymity issues - again]
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:
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
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.
Yeah I think it would be considered a target-ish. I was not exactly what you would call a good student though. I wasn't dumb or lazy, just not great with authority or non-work responsibilities (lots and lots of missed classes and late papers). It's kind of crazy, but I have literally never been employed anywhere other than at a hedge fund. Landed first job during fall of freshman year, and haven't looked back since. I studied history and economics (sort of, lol)
It's definitely busy, but I would characterize it as more hair-pulling and miserable than exciting. The disconnect now between 'real world' and 'financial markets' (in DM, at least) is stretching our analytic capacity. Maybe we should just hire Jim Cramer, to get more comfortable buying equities at these levels. All the cool kids are doing it, or so I hear.
My partner was actually in Korea recently. Interesting place. Good friend of mine is Korean-American
I think you need at your team someone who understands and think like Trump. Also someone who isn't biased about Trump.
Most importantly, you need someone who can understand current Trump's presidency and current shenanigan as a spiritual war between pro-Jew group vs Anti-Jew group. If you don't see this big-picture, I think you won't have a very good chance predicting the market.
Anyways, interesting that you have a friend who is Korean-American. I am sure you've heard a lot about political scandals in South Korea this year! I hear a lot of Americans are hoping similar thing to happen here?
I don't think in those terms, and fortunately our LPs don't either. I could show you scary numbers, like that we lost more than a fifth of the fund on paper in a month once, but that's kind of meaningless, because our biggest losses have always been from catching falling knives or betting on crashes too early (i.e. our bets have gotten marked down by terrifying amounts, but more than made up for ultimately at closure. We never lever to point of getting stopped out in these situations, because that would good and right fuck us). Timing really is the hardest thing.
In terms of realized losses, this year has not been great, because we have been uncharacteristically low conviction in our major themes, so pussied out of a few trades that maybe we should still have on. Down ~4% YTD, realized. Paper losses minimal, mainly because we don't have enough open spec positions to have moved much – we've been trigger happy on closing trades out at the slightest provocation. My actions this year are me at my worst, so maybe none of you should listen to me. Maybe I've lost the touch, or I'm just not built for these mkt's anymore.
Is the money worth sacrificing so much of your time? Time is the most valuable/precious commodity there is, we all only have a small allocated amount of time, and its getting shorter and shorter as each second/hour passes. Do you feel that when you're in your later years in life you may regret having spent so much of your time (80-100 hours) in the office?
I know this question might seem depressing, though sometimes it's good to remind ourselves when we get lost in the moment that life is very short.
Especially relative to my position/experience/success, I am fairly young (or maybe I'm just lying to myself because I feel old these days). But basically, this question for me isn't the deep hole of despair which it is for guys in their 60s or 70s, who are still working without deriving any joy from it.
One clarification I should make is that I don't spend 80-100 p/wk in the office. I travel a lot, I meet with policymakers, colleagues at other funds, politics people, academics, clients (as I have alluded to, we are fortunate in having a small number of clients, all with a lot of money in the fund, and all of whom have tremendous insight into markets, politics, and business), etc. I also spend a lot of time reading by myself. The point here being that if I spent 80-100 hours chained to a desk staring at charts and playing with spreadsheets, I would have quit ages ago.
But I love what I do. I have never met a consistently successful manager who does not love the work for what it is. I've always loved this game, and my conviction increases with every passing day, despite the challenges and stress that come with the territory, and these shitty mkt's
So, yes, time > money, 100%. But the best feeling is for money to no longer be something you think about. If I could remake the world, I would live exactly the way I do now, but add some excitement and logic into these fuckin markets. Maybe roll back Volck rule too... I miss my prop buddies and their shenanigans
I said in initial posting that I will not comment on individual managers. I can, however, comment on the generic grouping of 'household name' managers.
As unsatisfying as this answer may be, 'it depends.' Some of them, you meet or work with and conclude 'this is a god among men.' If you haven't had this experience, it is difficult to describe: it's as if they are operating and existing on their own plane, above that of us mere mortals (or maybe I'm just a sucker who drank their kool-aid). Others, you come away thinking 'how the fuck did this guy even get a job in the first place!'
Success is path-dependent. When you trade so successfully that people write books about you, you will inevitably be psychologically impacted. PM's are not accustomed to this lavishing of attention, or prepared for it (in contrast to NBA players, or whoever, where success and celebrity are nearly synonymous). So, in a nutshell, what I have observed is that, if you're so successful that you get a bunch of attention, you get both distracted and arrogant, and you become a target for others (which is a big risk factor for guys who play in illiquid/distressed situations, or who do activist stuff). The biggest issue is just the arrogance – you think you're hot shit, and want to make big ballsy calls, which almost always turn out wrong
You would be surprised by the number of managers who stay below the radar, specifically because they anticipate the risks associated with attention. These managers' long-run risk-adjusted returns are often superior to the big dog household names.
Read sell-side research. Do not rely on it, and never accept their 'projections,' but I still think it is the number one way to get familiar with the thought processes of traders and PM's. You'll get a feel for the more sophisticated side of markets. I don't read it at all anymore, except occasionally to gauge consensus (if I were a trader, I would need the daily mkt color, but fortunately I'm a medium to long term guy), but it was instrumental when I was in high school and college learning the ins and outs of market flow
Read all the classic books, and textbooks. There have been many good lists published.
Trade your own money, after sufficient study. (Or at least work through the process of generating trade ideas)
This will get you up to speed knowing all the consensus/establishment stuff, then those become your tools in doing original and creative analysis. Or, you'll learn all this stuff and decide the business isn't for you.
Thanks for doing this.
Two questions: one on your views, and one piece of advice solicitation.
Say central banks get hot on issuing digital currency. Still fungible for users, more able to implement negative rates in monetary policy, easier to track money (anti money laundering implications, sanctions enforcement). Could you see a trade coming out of this? What would you go long/short? An outright FX play, a rates play, or would you think conventional transaction banking goes belly up and short some safe bank credits or stocks?
I'm a history buff (perhaps not so relevant as I primarily engage with pre-WWI Western European monarchies), language nerd, I enjoy macroeconomics more than finance, and in finance I've done both top-down and bottom-up, derivatives and vanilla lending.
How should I position myself with discretionary macro funds - or should I forget about it?
Thx for the good question. The issue of a cashless society is an interesting one, which I have been meaning to think about more.
Apart from practicality reasons (which are uncontroversial), the reason CB's get such a hard on for all-digital currencies (in their control, of course – we aren't talking BTC), is that it makes their monetary policy implementation tighter, and allows them to try to suppress economic cyclicality even more (i.e. 'no inflation? set fed funds to -150bps!')... I don't know what the right psychological characterization would be, but probably something like 'control freaks.' It makes monetary policymakers endlessly uncomfortable that there are 'inefficiencies' and 'slippages,' in the system which make their control 100%.
Expansionary monetary policy, whether conventional or otherwise, is basically about pulling spending forward. There are a zillion ways to think about the mechanism, but time value of money has always been the most straightforward way for me. If real rates are positive, that provides a marginal incentive to wait to spend your paycheck. If real rates are negative, that provides a marginal incentive to spend savings or borrow money (same thing, really). In this framework, the whole 'pushing on a string' problem of monetary policy now, is that there's only so much future spending to pull forward, no matter how negative rates go. So even with the ZLB/ELB out of the way as an issue, breaking through that bound by going cashless only gets you so far. These are just super rough, off top of my head, thoughts, I haven't given this adequate thought
I can't verbalize straightforward trades, since cashless-ness would represent regime change of sorts, which is never just one or two trades. I might actually look into this as a project – always best to stay ahead of the curve. If we do produce anything interesting, I'll DM it to you, as a courtesy for reminding me of the importance of the topic.
You sound like a smart guy (glad to see a fellow language buff, I am fluent in 3). Definitely don't abandon HF's. Though your advice request was a bit vague, so not sure how to respond...
Well, in certain illiquid markets you, at least for the time being, basically still basically have prop groups. Yeah, they aren't called that, but mkt makers have so much discretion in those markets that it might as well be an old school embedded HF. The head of the HY desk at Goldman made some stupid amount of money 'making markets' last year, that just isn't possible off of bid-asks. It got some play in the press, I believe.
But no, I don't think removing Volcker would honestly change much. The trend (and it's probably systemically healthy, on balance) is towards less risk on bank balance sheets. You also can't forget about shit like Basel and other accords... it's not just Congress calling the shots on institutional risk appetite. I can't say I have a huge issue with the decentralization of market making we've seen, but I will admit that I am concerned about how liquidity could perform in the case of a sustained or rapid downturn. And I just miss some of that now deceased culture... the camaraderie on those desks is nothing today compared to how it used to be. Mind you, I never sat in one of those seats, but I have many friends who did, and have done much business over the years with them.
Volcker rule always seemed to me like addressing symptom rather than actual problem. My favored policy would be somehow (the 'how' is the hard part, lol) removing still massive moral hazard from system, but loosening restrictions on activities (magnitude of compliance spending is fucking insane today, and that's unequivocally net negative for society... those people don't create any value!). If there was no guaranteed backstop (because let's face it, for most of the big boys there still is one), prudence and prop could coexist. The problem is the moral hazard, but the easy thing to address was the prop.
But I don't know, I'm not an expert whatsoever on market making or prop.
Mallaby's Greenspan book was great. AG's tenure was quite something, looking back on it. Pretty sure everyone I know has read the book at this point, so that's not much of a value add. My award balancing obscurity and quality is Andreades' History of the Bank of England, 1640-1903. It hopefully goes without saying, this book is not for everyone, but I came away with very helpful insights
EM has been good to us recently... famous last words. It's worked (SO FAR) because humans do the same silly things over and over again. Perceived uniqueness is generally just a symptom of a lack of temporal perspective
So many places I still want to go to. A full-length safari, 'done right' probably ranks towards the top of my list. Really just can't afford to take that kind of time away at this point though. Favorite spot when I have energy is probably Paris, and when I'm totally burnt out, a tiny island whose name I will never divulge :-)
My work usually takes me to the short list of usual suspects (financial centers), but I've also spent a decent amount of time on the ground in EM's. I've never understood people who can trade them without knowing what the country feels like... with that said there's an element of reflexivity or endogeneity or whatever you wanna call it that reduces the utility of being on the ground: price action largely comes out of places like London, NY, HK, etc, and a lot of the folks trading the stuff don't reeeaaally know what it's like on the ground, so it can take time for real conditions to get properly discounted. I guess that could be classified as an 'on-the-ground arbitrage,' but it can take so long that there's often little reward to be reaped for your precocity and diligence
i just stumbled onto this thread and have thoroughly enjoyed reading thru. I'm a leveraged prop US rates trader myself (some outright duration, some RV....manual execution, so not an algo trader...living somewhere between quant analysis and manual market feel...started off on a ibank govt desk before going prop with a typically short time horizon for trades...hours to days).
I'm wondering how would you evaluate a US rates day trader like myself, if say you were looking to hire?
(i'm in the process of interviewing at multi-manager funds, and since you describe yourself as more qualitative than quant, and more long term vs short...i'm curious what your perspective might be).
Honestly my partner kinda handles that stuff more than I do. Our execution people are full-on math-y, our idea generating people run the gamut. But not a huge team, so we're all kinda there talking through shit together on a regular basis
What's most important to me is that the STEM people can understand the humanities/soc-science people and the humanities/soc-science people can understand the STEM people. Similar dynamic that's important to me is for trader-types and economist-types to be able to engage thoughtfully. Best ideas usually have come from the clash of traditionally antipodal personality types... when you bring people together who perceive life in fundamentally different ways, you're more likely to figure out what the fuck is actually going on (if they can understand what the other is saying!)
I'm older than 30 and younger than 50 :-)
Sorry I'm not more helpful, but my trajectory has not been representative... got interested in this stuff way way early on, mentor found me totally by accident during my first year of college. Worked hard and got really really lucky from there forward. Best general advice would be (1) know yourself and (2) know your environment: best practices for climbing the ladder at a bank are very different from at a hedge fund, and similarly, climbing the ladder at a big, institutionalized firm is very different from making it on your own. Which of those environments will allow you to go furthest and get the most out of your time on earth depends on what kind of person you are.