Diary of a Financier

Bookshelf update: Hedge Fund Market Wizards

In Bookshelf on Tue 27 Jan 2015 at 06:53

I think it was more than a year ago now, I finished Hedge Fund Market Wizards, the third installment in Jack Schwager’s epic compilation of interviews with legendary market practitioners.  I’m only just getting around to posting my favorite excerpts and takeaways now.  Enjoy…

Colm O’Shay (COMAC Global Macro) talks about reacting to the market, as opposed to waiting to conduct a deep analysis of every move–an interesting bit of counterculture when buzzwords like “thorough” and “due diligence” have grown tired:

“Trades don’t have to start on fundamentals. If you wait until you find out the reason for a price move, it can be too late. A great Soros quote is, ‘invest first, investigate later.’ You don’t want to get fixated on always needing a great story for the trade.

“I am an empiricist at heart. The unfolding reality trumps everything. I believe in hypothesis testing. The hypothesis is that something big is happening that should carry on for some time; I should participate in this.”


Jack Schwager himself weighs in on the Gold (GC/) debate:

“Gold is the only commodity where the amount of supply is literally about 100x as much as the amount physically used in any year… There is never any shortage of gold, so gold’s value is entirely dependent on psychology or those fundamentals that drive psychology… I would base any price expectation entirely on such factors as inflation and the value of the dollar, because those are the factors that drive psychology.”


Ray Dalio (Bridgewater) reviews what inputs he uses in constructing portfolios, for which he looks for interrelationships (correlations) between assets using forward-looking forecasts as opposed to broadly historical precedents:

“Instead of using correlation as a measure of dependence between positions, Dalio focuses on the underlying drivers that are expected to affect those positions. Drivers are the cause; correlations are the consequence. In order to ensure a diversified portfolio, it is necessary to select assets that have different drivers. By determining the future drivers that are likely to impact each market, a forward-looking approach, Dalio can more accurately assess which positions are likely to move in the same direction or inversely—for example, anticipate when gold and bonds are likely to move in the same direction and when they are likely to move in opposite directions. In contrast, making decisions based on correlation, which is backward looking, can lead to faulty decisions in forming portfolios. Dalio constructs portfolios so that the different positions have different drivers rather than simply being uncorrelated.”


Scott Ramsey, a CTA who uses a hybrid technical & fundamental approach, talks about his development as a money manager, which started when he was a broker. (This one really resonates with me.):

“Being a broker provided an excellent vantage point. By observing retail clients, I learned a lot about what not to do, taking small profits and letting losses run… I learned about the psychology of the markets and how certain traders were surprisingly accurate at picking tops and bottoms–the wrong way–based upon emotional decisions and market activity rather than technical or fundamental analysis… I also noted how the most obvious technical patterns were often the ones that didn’t work.
“I still look for those traits today. The more obvious they are from a chart standpoint and the more the opposite position makes sense from the fundamental standpoint, the more interested I am if the pattern fails. So why I try and keep emotions out of my trading, which is the real challenge, I try to imagine how the guy who took the textbook trade and is losing money feels. Where will he final capitulate? Is this the start of a big move the other way?”


Jaffray Woodriff (Quantitative Investment Management, QIM) discusses how he transforms basic market data into more meaningful, unique information that he uses in his trading system:

“[Bill] James was taking the basic data and formulating different types of [baseball] statistics that were more informative, and I was taking the price data and defining different quantifications derived from that data, that is, secondary variables, that could be combined to produce useful market signals.”




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