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Trading Wisdom for Aspiring Hedge Fund Managers
- Thread starter darkhorse
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Quote from darkhorse:
JS Comment:
Do you agree that the great trades are obvious? Why do so many market participants miss what is unfolding right before their eyes?
No - many great trades are not obvious at all. And many 'obvious' trades are horrific losers (e.g. short JGBs for the last 15 years or so, or short US Treasuries in more recent times). Besides, as you pointed out, the timing is key to generating high returns relative to risk, and the timing is rarely obvious even if the eventual outcome might be 'highly likely'.
So, I think this tidbit from Colm O'Shea is worthless. Obviousness has little or nothing to do with how likely your trade idea is to make money. A better insight would have been to say "Don't be scared off a trade just because you think it's obvious - sometimes the market misses what is obvious to you".
Quote from Ghost of Cutten:
No - many great trades are not obvious at all. And many 'obvious' trades are horrific losers (e.g. short JGBs for the last 15 years or so, or short US Treasuries in more recent times). Besides, as you pointed out, the timing is key to generating high returns relative to risk, and the timing is rarely obvious even if the eventual outcome might be 'highly likely'.
So, I think this tidbit from Colm O'Shea is worthless. Obviousness has little or nothing to do with how likely your trade idea is to make money. A better insight would have been to say "Don't be scared off a trade just because you think it's obvious - sometimes the market misses what is obvious to you".
Like the guys in the book the big short that thought buying the credit defaults were to good to be true... every time they talked to people that they thought might create doubt in the trade it only confirmed it more
Steve iseman I think it was... and that should have been an obvious trade...
Quote from Ghost of Cutten:
No - many great trades are not obvious at all. And many 'obvious' trades are horrific losers (e.g. short JGBs for the last 15 years or so, or short US Treasuries in more recent times). Besides, as you pointed out, the timing is key to generating high returns relative to risk, and the timing is rarely obvious even if the eventual outcome might be 'highly likely'.
So, I think this tidbit from Colm O'Shea is worthless. Obviousness has little or nothing to do with how likely your trade idea is to make money. A better insight would have been to say "Don't be scared off a trade just because you think it's obvious - sometimes the market misses what is obvious to you".
I still think the idea has merit as food for thought, specifically in a macro context. There are situations where the right thing to do is blazingly clear, but most market participants either do not see it or don't have the capacity to act on it. One of the greatest obvious opps ever was in q2 2009, but very few had the cash or the guts to seize the day.
Re, short JGBs or short USTs, I wouldn't classify those as obvious trades in the sense of clearly being things to act on. They are moreso popular ideas that oversimplify a lot of complex variables, perhaps coming to wrong conclusions, and do so without a clear catalyst.
Perhaps part of the problem is that a word like 'obvious' is subjective. What is obvious to one person is not obvious to others. Prior to the Iraq war it was obvious to a lot of people that equities should be avoided. To Louis Bacon it was obvious they should be bought and he made a killing.
So I more or less agree with your reformulation of what O'Shea said. But I still wouldn't call his statement worthless because the whole point is to facilitate contemplation. If a statement that is not fully clear helps bring about clarity, and reinforces a useful principle, it has some value.
Quote from marketsurfer:
In my opinion, and that's all it is, the CAGR long term hedge funds are invested in by institutions, pension plans and other "controlled" money sources--- not the UHNW hedge fund investor--- in general, of course-- there are exceptions. Sure , lots of dentist types with 5 million who want to invest--- but I'm talking about professional hedge fund investors not accredited investors. One guy I know is invested across 100 different hedge funds, if you want his money, he doesn't permit lock ups and doesn't pay management fees-- performance only-- every quarter he cuts the bottom 10% of performers and replaces them with 10 new ideas. He trades hedge funds like we trade stocks--- before I got into this business I had no clue people of this vast wealth even existed. It still amazes me at times.
Without necessarily disagreeing with you here, I would argue "money is money" - e.g. if a dentist has 5 million and wants to invest at your minimum, be it 250K, 500K, 1MM or what have you, and he is the type of individual you would like to have as a client, then that should be great.
In Pit Bull Marty Schwartz talked about having horrible institutional investors who hounded him morning noon and night. On the other hand, there are also smaller investors out there (the dentists and retired small business owners of the world) who can be very cool. Which is why I would argue, as long as you have clients you like (or at least don't hate) and have an investment minimum that makes sense to you, it doesn't matter how jet set your OPM is - and in fact it might be better to be spread across a larger base of more loyal investors anyway, at least for the first few years.
p.s. Ten new hedge funds a quarter sounds like a hell of a lot. Does this guy have a five person team doing nothing but vetting new managers? Are there even that many good managers to be to found? No fees I'm cool with for a large enough allocation, but if a guy told me he was going to trade me like a stock I think I would politely tell him to piss off. Life is too short to have dickheads for investors unless you really, really need their money.
Quote from marketsurfer:
In my opinion, and that's all it is, the CAGR long term hedge funds are invested in by institutions, pension plans and other "controlled" money sources--- not the UHNW hedge fund investor--- in general, of course-- there are exceptions. Sure , lots of dentist types with 5 million who want to invest--- but I'm talking about professional hedge fund investors not accredited investors. One guy I know is invested across 100 different hedge funds, if you want his money, he doesn't permit lock ups and doesn't pay management fees-- performance only-- every quarter he cuts the bottom 10% of performers and replaces them with 10 new ideas. He trades hedge funds like we trade stocks--- before I got into this business I had no clue people of this vast wealth even existed. It still amazes me at times.
He cuts underperformers every quarter? That's a CLASSIC retail investor mistake.. if a sound strategy is experiencing underperformance, particularly prolonged underperformance, the rational move is to put MORE money into it.
10,000 plus funds-- 5 trillion of assets with more coming everyday creates quite a universe from which to choose....
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