William Cash takes a seat on the couch with Ari Kiev, confidence-booster of choice to bruised Masters of the Universe
William Cash takes a seat on the couch with Ari Kiev, confidence-booster of choice to bruised Masters of the Universe
Every profession has its ‘dread’ killer words or phrases, which, however hard anybody tries to spin them, always carry the stain of failure. For pro tennis players, it’s ‘double fault’; for journalists, it’s when a price hits the ‘spike’; for City traders, ‘going to tape’ (i.e. playing back a telephone conversation with a client to clarify what was instructed in a sale order) is never a good moment; for hedge fund managers, the word ‘drawdown’ – often closely followed by ‘redemption’ – spells potential ruin and disaster.
Drawdown means losing money – meaningful money – on a trade or bet, and we are not talking a £500 each way bet on the 4.30pm race at Ludlow. We are talking when a star hedge fund manager sitting in front of his Bloomberg screen at his Georgian office in Mayfair loses tens of millions in a day on a single trade after completely misreading the market, or, more stupidly, having told his hedge fund pals at an awards dinner just a few days before how big his position is in a Florida-based property company, or German remortgage company, in the hope they will join him, wakes up to find his exposure is now being shorted by the street.
How such Masters of the Universe psychologically cope with such stress when the market closes, and they find themselves knocking down a couple of large Scotches at the bar at Claridge’s with the head of their trading team, trying to buoy themselves up for another 7am start, or a 6.30am flight to Zurich, when they know their clients – including a bank in Denmark, a university in California, and a couple of German and Swiss billionaires – will be calling them tomorrow to ask what the hell is going on…
Well, that’s when a Master of the Universe picks up the phone and calls Ari Kiev, the world’s top hedge fund shrink or therapist. After giving me a rare interview at the Ritz, having spent the day with a London hedge fund office, I call him ‘Dr Drawdown’.
Although the size of Kiev’s daily coaching and counselling fees – based in Connecticut – though he will come to you – can make the Bloomberg strained eyes of many fund managers flinch, his reputation is such that if you walk around the boutique offices of London’s ‘hedge fund alley’ in Mayfair, you will find his bestselling books Trading in the Zone and Trading to Win on almost every manager’s shelf (the closest hedge fund managers have to self-help books), next to the Christie’s Fine Wine and Sporting Guns catalogues and an unopened Art of War.
Kiev sees trading as no different from playing professional poker, chess, or even gold. Originally trained as a sport psychiatrist he has been helping top athletes – and now the world’s top traders and fund managers, including such legends as Steve Cohen in New York – for over 30 years.
He was born in New York, educated at Harvard – where he played for the college basketball team – and went to medical school at Cornell. Following two years in the US Air Force, he completed his formal psychiatric training at Columbia University. In 1970 he started his own research unit called the Social Psychiatry Research Institute.
When I meet a grey-suited Kiev at the Ritz, and we have a few drinks, his slightly grizzled persona and dogged mental toughness remind me of the Sam Mussabini track coach in Chariots of Fire: part running coach, part New York rabbi, and part shrink.
He’s seen it all, heard it all, and explains that his job is to get traders back into the ‘zone’ – or their optimal frame of mind – and to get back their trading confidence, usually by getting them back to such basics as setting targets, doing their own research, and getting them to understand the nature of risk; along with their own capacity and tolerance level for risk.
After a major ‘drawdown’, a star trader or fund manager’s confidence could be as shattered as a world-ranked tennis player who can’t serve over the net anymore at Queens Club or an opening Test batsman who can hardly push a single off the square any more in a country game at Hove.
Kiev has been working with professional traders for the last 15 years, helping them to set targets and re-creating positive mental states of mind, which increase the individual capacity to tolerate risk, especially in today’s volatile markets.
According to Kiev, Trading in the Zone is an almost Proustian mental exercise that allows traders – or private investors for that matter – to return to a ‘positive’ mental state base on recalling past, positive trading experiences, where serotonin levels were high and the trader was able to almost instinctively decide what bets to make, how to cut losses, where to take gains, and when to get out of the market.
The following Kiev quote sums up much of the philosophy that he ‘coaches’ to Hedge Masters of the Universe whose alpha male confidence levels may have taken a pounding: ‘They call me up and I can hear the strain in their voice… they’ll say, “the house is crashing down , Ari, can we talk?”’
Are they ever crying? ‘I haven’t had anybody cry, but I’ve had a number of people who have called me and said they’ve been so beaten down, they’ve just quit the business.’
So your role is getting them back on their feet again, giving them confidence again to trade? ‘That’s just one of my functions. I’m dealing with a range of things, from people who are falling, to people who have now grown and grown and are now running big funds and they really need some training and some conversation about leadership.
‘They need to be able stop being nice guys; they need to be able to have some tough conversation with people which they haven’t been trained to do. I hear people saying “I can’t handle it. This guy I went to college with, this guy’s my friend, and I was the best man at his wedding”. You have to help them see what the issues are. Maybe it makes more sense to tell the truth, to put some procedures in practice that are going to help the business. Maybe you are not doing the guy any favour by keeping them on.’
Do you ever advise people who are taking a series of drawdowns to go into rehab? ‘If someone says they are depressed, this guy, “he’s anxious, he is having panic attacks, he’s having problems, he can’t concentrate”, I would suggest that he see somebody – that he see a psychiatrist.’ Managing the drawdowns is very critical; you have to convince people in drawdowns that they’ve got to get smaller, they have to reduce their risk, they have to take the hit, they can’t hold on to positions that are working against them…’
And not keep doubling up like in a casino?
‘Absolutely not, that’s fatal,’ says Kiev, sipping on his Chardonnay. ‘What happens is you are afraid you are going to be out of business. People will say to me “I’m really down and I don’t see how I am going to get out”. They know they are down, but they are still tempted to double down. My advice generally is to cut your losses, even if they bleed.
‘To get it back, it’s gonna take time. You want to get it back with your feet on the ground, you want to get it back in a ration way, you don’t want to get it back in one fell swoop because the guy who’s gotten into that hole is very likely a guy whose default mechanism when he’s pressed against the wall is to swing some more; it’s very hard.
‘He has to go through some withdrawal, because this impulse is to do the very thing that got him into trouble. It may also be the very that that – once – made him very rich.’
When someone has a big drawdown, is it the actual money loss that troubles them, or the fact that they’ve failed? Is it an ego thing or the pain of losing the cash? ‘It’s usually more than just the money. If he doesn’t have enough money to continue, then it may be a reality. It may be that he is going to have redemptions. He may have had a billion dollars and now he is down to $400 million.
‘He is afraid one of his big investors is going to pull another three, so he’s going to be down not just what he’s lost, but what’s been redeemed, and he’s really going to be in trouble. What is he going to do with all his analysts? Another variable is the guy is feeling he’s lost it, or maybe he never really had it, maybe it was all a fluke, maybe he was lucky. He made a lot of money over a ten year period, maybe he thinks he’s lost the edge…’
One of the very biggest problems of all, Kiev says, is the problem of star hedge fund managers being unable to cope with the extra responsibility of managing a team, or a rapidly expanding team, as their funds under management grows into a billion plus from being just a few hundred million.
‘The assumption that people that you hired can manage themselves is a real problem for many of the star managers. I have seen this repeatedly. Where a guy starts a fund and immediately hires a bunch of analysts. The he’s sitting there, waiting for the analysts to provide him with the work he’s accustomed to doing, and now he’s depending on other people’s work; that’s a very different model than what he may been successful at. That’s a classic scenario for disaster.’
What makes the difference between the good fund managers, the great ones, and the mediocre? ‘I think the best guys are really very skilful in avoiding drawdown; the best guys are good at getting out of losers; the best guys are good at pressing the bet when they see the opportunity. They are making the most of their money; they have the eye of the tiger; they have great purpose, great intensity and willingness to really stick it out…’
How do the not-so-great managers show themselves under extreme pressure? ‘Even when a trader gets ahead again and gets up, he doesn’t want to sell out of his positions even though they can go down further because he doesn’t want to admit when he’s wrong.
‘He wants to hold on, hoping against hope that it’s going to return to a higer level. One of the things that you do when you’re in the zone is you say, “OK, I just missed it, I struck out, I have to get up and bet again. Let me take my losses. And let me now allocate what I have into things that are potentially profitable as opposed to holding onto things that are going down”.’
Kiev says he got into thinking of trading as being like high pressure mental sport as a result of being appointed in 1979 as the first psychiatrist to the US Olympics Sports Medicine Committee. ‘I got to work with Olympic athletes as a psychiatrist and began working with them in terms of stress management.
‘I taught them about the importance of setting goals and pacing themselves and taught them visual imagery rehearsal. Most importantly, I taught them about keeping the target in mind, then doing whatever was required to reach the objective. I then began applying the same lessons to traders and hedge fund managers.’
So the mental skill and discipline sets required for becoming the next trading king like Louis Bacon (a fanatical squash player) or Steve Cohen are similar to the psychological skills required to be a Tiger Woods or Roger Federer? ‘Not exactly the same set, but I’m saying that some of the lessons learned from winning at sport are clearly applicable to winning trading.’
Back in 1985, New York hedge fund manager Cohen attended one of Kiev’s Life Strategy Workshops where he was teaching some of the same principles of visual imagery rehearsal and centring that he had been using with Olympic athletes. Cohen thought some of these winning-at-sport principles could be relevant to trading.
‘I began to talk with Steve from time to time about the application of these ideas to trading and when he started a hedge fund in 1992, he invited me to meet with his traders and I did and that was how it all started.’ (During the last 15 years, Cohen has become one of the most successful hedge fund managers in the world.)
Target setting is a vital key to Kiev’s coaching technique. ‘I’m really helping people to set goals, to have larger visions, to then develop strategies consistent with those. It is amazing how many people, even though they are there making a lot of money, haven’t really focused on building a process, using the target as the lens through which they see the nature of the work that they’ve got to do, and manage their risk.
‘If you want to make that much money you can’t have these losses. You’ve got to hedge your bets. You’ve got to have more discipline. You’ve got to have a risk manager. You have to have statistics, maybe the target’s a big one. You have to maybe dig in, maybe ask yourself what work you need to do it.
‘Now that’s where you run into self doubt, fear, anxiety: all the suggestions around that interfere with people being as focused on the target. The best guys are very focused, very, very driven…’
When Kiev comes in to see a driven, but down, hedge fund manager who badly needs to boos their ‘Sharpe ratio’ (a performance index that evaluates hedge fund performance according to risk) or to meet with his trading team, the first thing Kiev wants to see is individual performance figures. In this, Kiev is like a racing trainer devouring the latest form figures.
‘I particularly look at the risk statistics and what that tells us about what trading behaviour an individual requires to raise the level of his performance. If you look at the profile and you see the fellow is making money is most of his trades, or say 60 per sent of his trades, but that he is losing more in his losing trades than he is making in his winning trades.
‘You then have to start asking why is he holding on to his losers? You then talk to him and it turns out he believes his positions are going to turn around. Well, that’s fine sometimes, but if you look at the behaviour over a longer series of events and trades, you begin to see what they are not doing well, how they might be modified.
‘You ask whether he is comfortable thinking in a non-consensus way, whether he has developed some original ‘networks’ to get a better handle on the industry, whether he is calling Taiwan to find out how the prices are. It’s a whole range of things and the more I do this, the more I understand the interface between psychology and the trading arena.’
To date, Kiev has written four books, Trading to win, Trading in the Zone, The Psychology of Risk and, most recently, in May 2005, Hedge Fund Masters. All the books deal with different themes, bust have similar conclusions. Trading to Win talks about setting a target and trading in order to make X amount of dollars.
‘That’s a big conversation I have with people. One big fund manager had me in last week just to talk to ten huge traders about the importance of setting goals, as opposed to operating a little more passively in terms of taking what the market will give you.
‘So when you say I’m gonna make $100 million this year, my view is you decide to commit to that – then figure out how big a position it has to be, how much work you have to do, how many people you have to hire, what companies you have to visit, what models you have to build… Unless you start working reverse engineering for that number, you are not going to reach that number.’
Do American traders and managers tend to set their goals higher than their English counterparts? ‘Maybe,’ he says. ‘It’s a little more challenging to set a target and then figure out how you’re going to get there. It’s a more aggressive approach. Believe me, even in the United States, some people don’t like it; in England, some people love it. So, it’s individual but the orientation towards really hitting the numbers maybe is an American approach.’
How do the seminars work? ‘I like to ask every team I work with to bring in their trading stats. I want to hear about how they handled their positions, why they got out so soon, and why they held on when it was going against them. Sometimes it is a one-on-one situation and sometimes it is a portfolio manager.’
How quickly can you help to turn around a hedge fund king’s run of poor performances? What do you say to them on the phone after they have lost £100 and clients are calling in another £250 million in redemptions by the day? ‘It’s a question of going through the routine. When they have a big drawdown, they question what’s going on, and sometimes they think they have just lost their edge. My job is to get them back into a positive frame of mind.’
A fairly typical example will be a hedge fund manager who, say, specialises in telecoms and media. Only, all of a sudden, he thinks things are happening in energy and he gets involved in the energy trade. But he doesn’t really know energy.
‘Somebody is telling him about biotech, which is fine, but usually when people tell you what to get into, they don’t tell you when to get out of it. So you start looking at it. You see the guy has gotten away from his strength and the first thing he’s gotta do is tear down, reduce his risk, get back to hitting singles, not try and make back all the money has lost and drawn down, which people sometimes do. They get in early, they start chasing money, and they really put themselves in jeopardy.
‘You really have to go back to basics, you have to set some reasonable targets, and you’ve got to build up some rhythm. And then you’ve got to find out what dropped out of your strategy.’
Another frequent problem with managers and traders and private investors is the paradox of why certain people are good at picking long, but are hopeless on the short side. ‘They are balancing their book with high-beta tech stock and many of them they don’t know anything about it. I then say, “Why are you making these random bets? Did you ever think about doing the same kind of work on the short side as you’ve done on your long side?”
‘You know visiting the company, sizing them up, seeing there are structural weaknesses, and making money on the short side is not just simply taking a flyer.’
As a hedge therapist who has worked with both top American fun managers and traders, and then some of the best British counterparts, I asked how they coped differently when a big drawdown comes along, with the stress of losing hundreds of millions in a day or so.
‘The Unites States is more competitive and more crowded than here. American firms tend to minimise what the sell side tells them. So they are a little more sceptical of the quality of information, they are getting from the analysts… it is not uncommon in New York for me to say well, what kind of support do you have?
‘Well, I need an analyst and I need to dig deeper, I need to develop a consultant from Taiwan, I need to have a mining specialist, I need a geologist to help me understand the oil space. In England, they are a little more conservative, more willing to rely on the pool of analysts in their firm or who aren’t necessarily reporting to the managers.
‘When you approach it with this sort of proactive approach you begin to find all sorts of communication problems, the analysts aren’t talking to the portfolio managers… it can all fall apart very quickly.’
Fortunately, for the disheartened hedgie, out a few hundred million pounds, Dr Drawdown is on call 24 hours a day and can be at the Ritz in London from his home in Connecticut within 48 hours.