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Steven Drobny, Inside the House of Money (Book Review )

If you haven’t read Steven Drobny’s Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets, newly revised and updated (Wiley, 2014) you should immediately add it to your “to do” list. It doesn’t matter whether you’re a global macro trader or not. I’m not, and yet it’s one of the very few books I keep returning to and learning from.

Originally published in 2006, the book is a collection of twelve interviews with top global macro practitioners. Although times have changed—the interviews were conducted before the financial meltdown and since then global macro has gone mainstream—the book remains a font of trading wisdom.

Few of the interviewees are household names; notable exceptions are Jim Rogers and Peter Thiel, and Thiel has since closed down his fund. The other named traders (one is anonymous) are Jim Leitner, Christian Siva-Jothy, John Porter, Sushil Wadhwani, Yra Harris, Dwight Anderson, Scott Bessent, Marko Dimitrijevic, and David Gorton and Rob Standing.

It’s, of course, impossible to summarize this book, which is one reason it’s so valuable. But, just to give a bit of its flavor, here are a couple of excerpts. (more…)

Key Lessons For All Traders

Find a Trading Method That Fits Your Personality

Traders must find a methodology that fits their own beliefs and talents. A sound methodology that is very successful for one trader can be a poor fit and a losing strategy for another trader. Colm O’Shea, one of the global macro managers I interviewed, lucidly expressed this concept in answer to the question of whether trading skill could be taught:

If I try to teach you what I do, you will fail because you are not me. If you hang around me, you will observe what I do, and you may pick up some good habits. But there are a lot of things you will want to do differently. A good friend of mine, who sat next to me for several years, is now managing lots of money at another hedge fund and doing very well. But he is not the same as me. What he learned was not to become me. He became something else. He became him.

Trade Within Your Comfort Zone

If a position is too large, the trader will be prone to exit good trades on inconsequential corrections because fear will dominate the decision process. Steve Clark, an event driven manager, advises, you have to “trade within your emotional capacity.” Similarly, Joe Vidich, a long/short equity manager warns, “Limit your size in any position so that fear does not become the prevailing instinct guiding your judgment.”

In this sense, a smaller net exposure may actually yield better returns, even if the market ultimately moves in the favorable direction. For example, Martin Taylor, an emerging markets equities manager, came into 2008 with a very large net long exposure in high beta stocks in an increasingly risky market. Uncomfortable with the level of his exposure, Taylor sharply reduced his positions in early January. When the market subsequently plunged later in the month, he was well positioned to increase his long exposure.

Had Taylor remained heavily net long, he might instead have been forced to sell into the market weakness to reduce risk, thereby missing out in fully participating in the subsequent rebound.  (more…)

Steven Drobny, The Invisible Hands (Book Review )

In his preface to the new edition of The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money (Wiley, 2014) Steven Drobny contends that “real money investors rem
ain stuck in their antiquated ways. They will view their investments from a notional allocation standpoint, and diversify their holdings by asset class names, not by underlying risk characteristics.” Investors are unprepared for another crisis, despite the fact that “quantitative easing is coming to an end, and tremendous uncertainty exists everywhere.” Hence the renewed timeliness of the interviews, conducted in the spring of 2009, with traders who managed to navigate the financial crisis of 2008.

With the exception of Jim Leitner, who was also interviewed for Drobny’s Inside the House of Money, the managers—ten who run global macro hedge funds and one real money manager—remain anonymous. Drobny “chose the anonymous route to increase candor as well as keep the focus on the ideas as opposed to the personalities.” (p. xxx)
The Invisible Hands is a terrific book even though many of the strategies described in it are difficult if not impossible for the individual investor to implement. But the thinking behind these strategies and the way their risk is managed are often so compelling that everyone who is active in the markets can learn a tremendous amount from the interviews. Moreover, even though most of the contributors are anonymous their life stories are fascinating, sometimes even inspiring. (more…)