Hedge Hunters: Hedge Fund Masters On The Rewards, The Risk and The Reckoning
It clearly must be difficult describing what makes a great trader. Certainly, no one has yet managed to describe the mix of instinct, knowledge and determination in such a way that it can be distilled into ten handy, bite-sized chapters and leave us exclaiming, ‘Oh yeah, that’s what I’m going to do.’ Hedge Hunters is no exception.
The book consists of eighteen short interviews with different hedge-fund managers – some of whom you’ll have heard of; some of whom you won’t. The chapters tend to follow a pattern: a bit of background on the interviewee (or interviewees), some details on the fund and its positions, a question or two about what the subject learned from his biggest mistake and a couple of pages about how successful he’s been since (all the interviewees are men).
They read like wire service profiles – unsurprisingly, since the writer, Katherine Burton, has been covering hedge funds in New York for Bloomberg since 1993, and this book is published by its printing offshoot, Bloomberg Press.
Equally, all these people are actually or potentially Bloomberg clients. Whether that entirely accounts for the banality of the interviews in the book, I don’t know, but the profiles certainly lie at the cotton-wool end of soft journalism. After reading a few chapters, you almost long for the objectivity and journalistic rigour of the average corporate press release.
What can be gleaned from Hedge Hunters is that great traders use whatever methods work for them. As Burton writes, there is no single ‘winning recipe for outstanding performance’. Instead, there are a plethora of styles and approaches that suit the backgrounds and personalities of these various managers, as well as the sectors they invest in.
According to Hedge Hunters, star investors share many qualities: ‘They’re sceptical, intellectually curious, and independent thinkers. Passionate about their profession and their goals, they take the long view. With integrity as much of a priority as performance, they build a track record first, a business second. Perhaps the most challenging hurdle they’ve cleared is to balance confidence and conviction with the recognition that they’re fallible.’
This is not the most exacting list of personal virtues. As a basis for making a killing in the financial markets, it probably has as much validity as your star sign.
Interestingly, it’s equally clear that hedge-fund managers haven’t a clue what makes a good trader either. Some cite ‘self-confidence’ or ‘self-assurance’. Others seem to have given up trying to work it out at all, and instead have farmed their human resources department out to what might politely be called quacks. At Cedarview Capital Management, a New York-based credit fund, for instance, prospective traders are asked for a handwriting sample and given what is known as the ‘tree test’, in which they are asked to draw – you guessed it – a tree. A graphologist analyses the results, gaining ‘insights’ into the applicants’ ‘character, integrity, intelligence, and motivation and ensures that the person fits into the team-player culture of Cedarview’.
Over at Julian Robertson’s hedge-fund seeding operation, which the legendary trader set up after shutting down Tiger Management (then the largest hedge fund in the world) in 2000, things are even squirrelier. In the 1980s, Robertson hired a psychiatrist to help the fund identify winning managers. The shrink came up with a test that endeavours to measure such attributes as intelligence, critical thinking and the ability to fit into ‘a familial setting’.
The test consists of eleven subtests that measure verbal aptitude, perceptual skills and ‘processing speed’ (presumably the ability to think quickly). A personality test divines whether an applicant will fit into the firm’s culture, and screens for personality traits, such as narcissistic tendencies, that might prevent him working in a team. Robertson says he views the tool as a test – ‘a very good basis on which to judge people’.
Given Robertson’s reputation for picking managers, many of whom have gone on to run their own, very successful, hedge funds, it might be inappropriate to suggest his psychometric testing is a load of scientific-sounding codswallop. Presumably it served to weed out the intellectually incapable and the socially challenged. Whether it identified tomorrow’s great traders or not is another matter.
So we’re left where we began. No one really knows what combination of education, intelligence, understanding, instinct and sheer bravado make for a good trader.
If Hedge Hunters makes one thing clear, it’s that infallibility isn’t one of the characteristics to look for. Most of Burton’s subjects admit to at least one spectacular failure, some of them nearly terminal. John Armitage of Egerton Capital, a $6-billion equity fund based in London, says that to be a great trader, ‘you have to be obsessive, you have to have guts, you have to know when to stick to your convictions and when to walk away’. Unfortunately, you can’t pick any of that up from reading a book.
Reviewed by Hugh Lundin