Author: Ivanhoff

Christian Siva-Jothy was Goldman Sachs Group Inc.’s co-head of proprietary currency trading until 2004, when he launched his own SempreMacro fund. He closed his fund in 2011 after losing 27% in 2009 and 8.7% in 2010.

Here’s Siva-Jothy on why he closed his fund:

In this business you are only as good as your last few trades,” Siva-Jothy wrote. “Mine have not been very good. Whether I have lost my edge or simply need a break after 23 years I am not sure, but I certainly hope it is the latter.

No one gets paid for originality

Generally, I can’t see more than a year ahead because things change so rapidly it is very difficult to have a 5- to a 10-year view. I have a rolling one-year view of the world and I impose discipline on myself by keeping a trading diary. Every morning, I go through the same process: If I have any positions on, I ask why do I have the positions? What has changed?

Putting on positions because someone really smart that you respect has it on is a recipe for disaster because you don’t know why you got in or where to get out.

No one gets paid for originality — you get paid for making money.  I am happy to take other people’s good ideas and run with them, AS LONG AS I UNDERSTAND EXACTLY WHY I AM IN THE TRADE.

The way to make money is to chip away at small trades and then lever up when something big comes up.

I am a great believer that there are three or four major macro opportunities every year. If you catch one, your return will be in the high single digits; if you catch two, you should be up somewhere between 10 and 20 percent; if you catch three or four, you are doing incredibly well.

One of the most difficult things about trading is not to trade. That’s probably one of the most common mistakes that people starting out in this business make. Overtrading is as bad as running losing positions for too long.

On how to manage risk

To me, risk is about liquidity, and that is one of the reasons why I am never short gamma.

Markets can be unbelievably slow to figure out the consequences of big events that there’s no script for.

Implied volatilities are always massively undervalued during big events.

I learned not only not to sell options, but to actively look for options to purchase in times of stress and dislocation.

History can be a useful benchmark but only if everything is put into the right context

People spend far too much time saying things like, “This is what happened in 1987 and this looks very similar so I’ll put the same trade on” or “This is what happened in 1994 when the tightening cycle started; therefore the same thing is going to happen this time.”. I don’t like this approach. Markets are dynamic and people’s reactions are different. It’s much more subtle and nuanced that looking at what happened the last time.

Risk more only when you have won your right to do so

My philosophy has always been to trade up when things are going well and you have a high-confidence view. There’s a big difference between going from 30% to 20%, and going from zero to -10%.

From zero to minus 10% is an unbelievably meaningful drawdown. On the other hand, if we are up 30-40%, I am not going to be worried about a 10% drawdown as long as we’re being rigorous.

Confidence is a very, very dangerous thing. Simply because you’ve had a god run doesn’t mean it will continue. In fact, once you’ve had a good run, you’re at your most dangerous. Markets can take it aways as easily as they give it.

Source: Inside the House of Money, Steven Drobney

David Tepper has been one of the most followed and admired hedge fund managers for the past decade. He has the folksy wisdom of Warren Buffett, the analytical deepness of Jim Rogers, and the trading acumen of George Soros. He launched his fund Appaloosa in 1993 with $7 million of his own and $50 million outside money. Since then, he has averaged an annual return of 30% after fees. He invests in high yield bonds, distressed debt, and equities in the U.S. and emerging markets.

Tepper explains his investing philosophy with the phrases “trees grow” and “Those who keep their heads while others are panicking do well.” In other words, growth is natural and optimism tend to get rewarded over time. He is accustomed to invest a large portion of his portfolio into a single idea.

Tepper made most of his money out of the recoveries from big market corrections – emerging markets in 1997, the tech crash in 2000-2002, the financial crisis in 2008. Not during, after. His fund lost 25% in 2008. Made 120% after fees in 2009.

Big corrections create big opportunities. As Peter Lynch said a long time ago, “It is not entirely clear what causes deep market corrections, but without them, many of the best performing long-term investors would have never achieved their spectacular returns.”

It seems Tepper’s market approach has changed from being a trend follower to being a deep value investor. He was short going into the 1987 crash.

Going into the crash I had set up my entire portfolio as just short – I had no long positions. I made a fortune during and after the crash. It was very cool.

We don’t really buy high-flyers. We buy before they get high-flyers.

Patience and Confidence to act on your own analysis are key.

The main thing that makes Appaloosa stand apart from the pack is the depth of our analysis and the fact that we’re not afraid to be the first one to act on our convictions. If you look at our history over the years, we are usually the first mover in a country or situation, time and time again.

For better or worse we’re a herd leader. We’re at the front of the pack, we are one of the first movers. First movers are interesting, you get to the good grass first, or sometimes the lion eats you.

We’re value-oriented and performance-based like a lot of funds. But I think what differentiates us is that we’re not afraid of the downside of different situations when we’ve done the analysis. Some other people are very afraid of losing money, which keeps them from making money.

Tepper likes to replay his losses in his head:

It is the only way you learn from your mistakes.

Tepper says that losing 29% ($80 million) on Russia when Russia defaulted after an IMF deal “the biggest screw-up in his career”.

I’ve made a lot of bad trades.

The worst trade we’ve made was probably in 1998. It was Russia and we thought Russia could devalue but they wouldn’t default. But they did both. So we kind of miscalculated that. We were too long and I couldn’t get out of that trade. We were down 20 something percent.

We had huge emerging market and junk positions that we sold down to avoid disaster, so we were able to act fast. Our biggest mistake was not realizing how illiquid markets could get so quickly. Many firms went out of business at the time, and at one point, I wondered if we would be able to survive. That was kind of an interesting lesson for a lot of people.

Tepper bought back Russian bonds after the default in 1999 at five cents on the dollar. He made 61% on that trade:

It was like minting money. It was almost worth all the hell we had to go through.

Size matters. The amount of capital you manage can impact your approach significantly. Tepper routinely returns principle and profits to his investors after a strong year.

The question is what size gets you – except more fees for the manager. But it doesn’t necessarily make the investor more money.

Fixed income funds should naturally be a little bit larger than, say, equity funds. You want to be big enough that you can see everything and small enough that you don’t kill yourself with size. So I think different sizes are right for different types of funds.

Say you want to buy 5 percent of a $2 billion company, and have it be meaningful. That means it’s a 1 percent position in a $10 billion fund. So if you’re an equity fund, if you keep getting bigger and get to $20 billion, that means your position is now only a half percent position. The 1 percent position doesn’t do much for the fund and so the half percent position does half as much. So there’s an aspect to the business, in equity funds especially, that gets funky on size.

No market approach works all the time. There are times to be aggressive and there are times to sit and wait.

Sometimes it’s time to make money, sometimes it’s time not to lose money.

The key is to wait. Sometimes the hardest thing to do is to do nothing.

Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.

The media says that hedge funds are the new masters of the universe… We’re just a bunch of schmucks.

Tepper is also famous for his charity work:

The more I make, the more I’ll give away.

Scott Bessent is probably the only one in the world who worked with investing legends like Jim Rogers, Jim Chanos, George Soros, and Stanley Druckenmiller in different stages of his career. He oversaw Soros’s $30-billion fortune between 2011 and 2015. Last year, he launched his own fund. Here are some of his more interesting market insights:

Short-selling is a unique and specific mindset

I went to work with Jim Chanos, who just did short selling. Jim was always trying to go against the crowd. He constantly picked things apart and looked for what the market had wrong.
One thing Jim was never great at was figuring out why it would end. He never really looked for the catalyst that would change the market’s focus. He was usually right, but what I’ve learned since is that it’s more important to be there when a mania ends, that spotting it early.
What I came away with from my time with Chanos was that you don’t have to be skeptical about everything.
There are also other problems with shorting. There’s a difference between investing or buying stocks and shorting. If you are a long/short player and one of your longs goes down 10 or 20 percent, you’ll buy more. If one of your shorts goes up 10 or 20%, you’ll get out.

On how Soros and Druckenmiller “broke” the Bank of England

The breaking of the pound was a combination of Stan Druckenmiller’s gamesmanship – Stan really understands risk and reward — and George’s ability to size trades. Make no mistake about it, shorting the pound was Stan’s idea. Soros’s contribution was pushing him to take a gigantic position.
With the pound, we realized that we could push the Bank of England up against the trading band where they had to buy an unlimited amount of pounds from us. The plan was to trade the fund’s profits and leverage up at the band’s boundary. The fund was up about 12 percent for the year at the time, so we levered the trade up to the point where if they pushed us back up against the other side of the trading band, we would lose the year’s P&L but not more.
The UK economy was already weak, so when they raised interest rates to defend the currency, the average person’s mortgage went up. They basically squeezed everyone in the UK with a mortgage. When they raised rates from 7% to 12% with the stated goal of defending the pound, we knew it was unsustainable and they were finished.

On his worst trade

Being short Internet stocks too early in 1999. Right trade, wrong time. It taught me the lesson that you can be right and lose all your money. Also, if a stock is going to zero it doesn’t matter where you short it, you’re still going to make 100% because you can short on the way down. You made just as much money shorting $100 million in Enron at $25 as you did shorting $100m at $50. it ‘s better to have more conviction and do twice as much.

Stock Picking is full of macro bets

Recently, I was at a money manager roundtable dinner where everyone was talking about “my stock this” and “my stock that”. Their attitude was that it doesn’t matter what is going to happen in the world because their favorite stock is generating free cash flow, buying back shares, and doing XYZ. People always forget that 50% of a stock’s move in the overall market, 30% is the industry group, and then maybe 20% is the extra alpha from stock picking. And stock picking is full of macro bets. When an equity guy is playing airlines, he’s making an embedded macro call on oil.

In trading, when there’s nothing to do, the best thing to do is nothing

Soros used to give out a lot of money for other people to manage. George wasn’t bothered when people started losing money, but he was always worried that they weren’t feeling the pain properly because it was his money and not theirs. If people managing his money were down in November or December and he saw their trades getting bigger, he’d pull the money immediately. Also, if the manager was down and their trading volume picked up dramatically, he’d pull it. The worst thing you can do when you are having a hard time is flail. In trading, when there’s nothing to do, the best thing to do is nothing.

Source: Inside the House of Money, Steven Drobny