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Hedge Fund Managers' Vernacular

  
Analysis, Education, Life
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As there is a considerable amount of industry-specific jargon used in Hedge Fund Managers’ monthly reports, please see the below glossary to explain some of the more arcane terminology.

* Challenging conditions = double-digit down month

* Cautiously optimistic = single-digit down month

* Constrained risk profile = we bottled it at the bottom

* Alpha = imaginary friends

* Beta = punting

* Alternative Beta = punting in stuff we can’t spell

* Negative gamma = we lost money, but it wasn’t our fault

* Positive gamma = we lost money, but it wasn’t our fault

* Theta/Kappa = our research department has been on a junket

* Negative correlation = everyone else made money

* Prudent cut in leverage = we went to Antigua for our holidays

* Liquidity issues = “Thank-you for calling XYZ International Capital Markets. Unfortunately all our sales operatives are receiving their P45s at present. Your call is important to us, so please try again later, perhaps if there is ever another bull market in this rubbish…”

* Re-optimised portfolio = we threw out the baby, bathwater and the bath

* With hindsight… = ouch

* Healthy growth in AUM = how bad must the opposition be?

* Modest outflows = they wanted to redeem the lot, but our small print is world-class

* Material outflows = would anyone like to re-invest in my new minicab venture?

7 ways someone can claim a 90% winning rate

  
  Education
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1. Mr. Hindsight

This person can point to any chart, and identify his buy and sell points with absolute precision. Usually recognized as an expert in his field of analysis, he can create stunning buy and sell signals for past data. Problem is, he usually can’t do it going forward. ADVICE: Ignore past “predictions,” and only follow Mr. Hindsight in real time. You’ll soon see his true ability.

2. Ms. Vague

Her market predictions are akin to reading the works of Nostradamus. She’ll say “the market will be up today, unless GDP figures are disappointing.” After the numbers come out, the prediction can be made to fit the outcome – “well, the numbers were only somewhat disappointing” or “other forces overpowered the market, so even though I was right, the market fell.” ADVICE: Turn off financial TV shows, since this is where Ms. Vague and here cohorts lurk.

3. Mr. Sneaky

This guy will have an ad that states “95% winning closed trades.” Sounds great, BUT it usually means that 5% of his trades are currently open losers, usually big losers, that he has held onto for a long time. ADVICE: Make sure all open trades are disclosed, too. Treat open and closed trades as the same. Don’t fall for the “this losing trade can always come back and be profitable” ploy.

4. Ms. Quick Exiter

In and out like a flash on winning trades, Ms. Quick Exiter will typically have losses 5-10 times her winners. But, she gets a lot of winners, and she wants to dazzle you with winning percentage. ADVICE: Look at total net profit. You probably will see a losing strategy, even with a 90%+ winning percentage.

5. Mr. Liar

If Mr. Liar can do anything to cheat, he will. In the past, he has stuck all his losing trades in one account, put all his winners in another account, and of course, only shows you the winning account. But, he has many other tricks up his sleeve, certainly more than I can name here. ADVICE: Track his trades in real time. Make sure they are specific and detailed enough so they cannot be misinterpreted.

6. Mr. Long Term

“The stock market will rise,” says Mr. Long Term. He is absolutely right, if you don’t pin him down on time. It may take 100 years, but stocks will eventually rise. But, the first 99 might wipe you out. Long term forecasters hope you’ll forget their predictions if they are incorrect. ADVICE: Treat any prediction, especially long term ones, with extreme suspicion. The fact is most experts are just guessing.

7. Ms. Really Can Do It

A rare and exceptional talent, this person is the real deal. No gimmicks, no tricks – just super high winning percentage and super high profits. ADVICE: Ask yourself “why would this person sell me their amazing secrets for $79, when if she is so good, she can trade and make unlimited amounts of money?” Answer: No one will ever sell you the ultimate key to trading success, and if they did, it would cost a lot more than you could afford.

So, now you know the seven members of the 90% winning trade club. Avoid these folks, and you’ll almost certainly become a better trader.

No Risk Management=Your losses

  
  Education
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“There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future. You can also lose a good bet, but if you keep placing good bets, over time, the law of averages will be working for you.”
–Larry Hite, Trader

Continuing:

“Life is nothing more than a series of bets and bets are really nothing more than questions and their answers. There is no real difference between, ’should I take another hit on this Blackjack hand?’ and ‘Should I get out of the way of that speeding and wildly careening bus?’ Each shares two universal truths: a set of probabilities of potential outcomes and the singular outcome that takes place. Everyday we place hundreds if not thousands of bets – large and small, some seemingly well considered and others made without a second thought. The vast majority of the latter, life’s little gambles made without any thought, might certainly be trivial. ‘Should I tie my shoes?’ Seems to offer no big risk, nor any big reward. While others, such as the aforementioned ’speeding and wildly careening bus’ would seem to have greater impact on our lives. However, if deciding not to tie your shoes that morning causes you to trip and fall down in the middle of the road when you finally decide to fold your hand and give that careening bus plenty of leeway, well then, in hindsight the trivial has suddenly become paramount.”
–Larry Hite, Trader

Continuing:

“Ancient man had no risk management. Everything was left to ‘fate’ and the whims of the gods. Because ancient man felt that he was merely a victim of circumstance he did not see a need to plan for the future. Therefore, he had no future. In his book Against The Gods: The Remarkable Story Of Risk, Peter Bernstein plots out the history of man’s discovery of the law of probabilities and risk management. Suffice it to say, economic progress seems to run parallel with man’s ability to discover, quantify, and manage risk. Risk and reward are two sides of the same coin. One is not present without the other. You cannot receive the reward unless you are willing to take the risk and you cannot expect to keep that reward unless you learn to mange that risk. It is imperative to master both subjects if you expect to be successful in any endeavor, especially the arena of investing/trading.”
–Source: Pearce Financial LLC

The only thing you can control as you face the markets each day? Your losses.

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