Kiev, Hedge Fund Masters

Ari Kiev is a prolific writer on the psychology of trading. Today I will focus on his 2005 book (Wiley) Hedge Fund Masters: How Top Hedge Fund Traders Set Goals, Overcome Barriers, and Achieve Peak Performance.

The main theme of the book is that a trader must formulate a vision (a combination of his or her approach to the market and a profit target) and then commit to it, do everything possible to make it happen. Vision, he argues, “gives [a trader] conviction in the face of an unpredictable universe.” (p. 35) It also provides a benchmark against which to measure performance and serves as an antidote to mediocrity.

Although Kiev is no stylist, he works hard to give a sense of what it means to live in the gap—the gap between where a trader is and where he wants to be. Admittedly, the images are something of a jumble, but taken individually they have a certain power. My favorite, about bridging the gap, is that of the Road Runner “running full tilt beyond the lip of a cliff; the bird gets to the opposite cliff only if he does not stop to look down at the abyss beneath him.” (p. 49) The moral of the story, according to Kiev, is that the trader has to overcome the instinct for self-preservation because it inhibits action. (Presumably living in the gap doesn’t mean failing to get to the opposite cliff, miraculously surviving the fall only to die a slow and painful death in the abyss, although this macabre image may resonate with more than one trader.)

Another image makes me beg to be a Wal-Mart greeter rather than a trader. Here the trader is skydiving. The situation in which he finds himself is the context that defines the quality of his experience. He must manage his fall. “For the trader the context is the market.”

As a consultant to hedge funds, Kiev’s job is to boost traders’ returns. I assume that someone in the firm is always managing risk and that its traders are not duds since either they would not have been hired in the first place or they would already have been shown the door. So for the independent trader, especially one early on in his career, it can sometimes be dangerous to extrapolate from the advice that Kiev gives to hedge fund traders. For instance, take his claim that “the object of the game is not so much winning as it is playing all-out.” (p. 232) He offers a binary choice—playing to avoid losing or playing at 100%. I understand that he is not recommending trading with reckless abandon or ramping up size when there’s no compelling reason to do so. And I also understand that fear-based trading rarely produces anything but more fear. And that half-hearted efforts result at best in mediocre results. Unfortunately, I have a recurring image of the independent trader playing all-out without a clear edge. That’s a sure path to the abyss.

There’s no question that Kiev’s basic message—aim high and work relentlessly to achieve that goal—is part and parcel of the American dream, which has now been globalized. And waking up every morning revitalized to get to the opposite cliff is a worthy challenge. Just remember, there’s no safety net for the Road Runner.