Quote from hughb:
Have you ever read "How I Made..." by Darvas? Why can't hedge fund managers just stick to something simple like that? Why do you guys use "quants" to look for a holy grail? How many LTCMs have to go bust before quants realize none of their strategies work forever, or even for a long time? Not trying to be a confrontational smartass here, I'm honestly curious as to why it doesn't seem that hedgehoggers can evolve as their systems start crashing and burning.
Yep, one of the classics (Darvas)...
First off, re, hedgies, there is no "you guys." Hedge funds are neither an asset class nor a monolithic group. Hedgies come in so many different shapes, sizes, and strategy flavors, the only thing that really unites them is a pay-for-performance incentive structure. To say "I'm a hedge fund manager" is like saying "I'm a musician." What does that mean? The range is so wide, it could mean almost anything.
Second, re, holy grail, who's looking? Some of us have already found it
In all seriousness, the only holy grail I know of is the triple threat of talent, due diligence, and process, coupled with a best-fit application to your own strengths and weaknesses.
One might argue a guy like PTJ has found the holy grail, in the sense he has gone 25+ years without a losing year in his own trading. (And even in 2008, when his main fund lost single digits, his own trading made money... it was some other complicated stuff, like emerging market debt plays, that got hit.)
When you find traders who have made money for decades, you pretty much also find that 1) they have figured out how to apply bread and butter principles that work, over and over again, and 2) their trading does not look the same every year, as they flex and bend and adapt to changing market conditions.
Re, crashing and burning, there are a lot of bad managers out there no doubt. But think about this:
- as a general rule, 9 out of 10 small businesses fail
- from a potential earnings perspective, running a hedge fund is one of the most attractive businesses on the planet
- the barrier to entry for starting a fund is relatively low (not quite falling off a log, but not that hard to do)
- there are tens of thousands of Wall Street guys who made money in a bull market period, made some good calls as an analyst, came up with a trading program that looked good on backtesting or whatever, and said to themselves "why not give it a shot?"
The failure rate of trading in general, and hedge funds in particular, is held out as evidence of how hard markets are / how terrible most managers are.
But I've always considered it curious that no one normalizes these failure rates against the competitive norms of business in general and life in general.
The 90/10 rule applies in all kinds of places. 90% of what's out there, in any category, is generally mediocre to bad. And when it comes to discipline, 9 out of 10 people can't even stay on a diet. So markets are going to have their share of mediocre practitioners too (especially given the illusion of talent that bull market conditions create).
Quote from hughb:
Mercenary trader has a page for managers to apply for capital, what do you look for in somebody before you set them up? Please don't say you look for ex-football jocks.....
I'm not involved in that side of the biz personally... too focused on trading and global macro... but in general terms I don't think it matters whether you're a jock, a nerd, an ivy league alum, a gas station attendant, or a left-handed bolivian arm wrestler with a midget fetish. The key thing is a consistent and credible track record.
