Monday, January 27, 2014

Drobny, Inside the House of Money

If you haven’t read Steven Drobny’s Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets, newly revised and updated (Wiley, 2014) you should immediately add it to your “to do” list. It doesn’t matter whether you’re a global macro trader or not. I’m not, and yet it’s one of the very few books I keep returning to and learning from.

Originally published in 2006, the book is a collection of twelve interviews with top global macro practitioners. Although times have changed—the interviews were conducted before the financial meltdown and since then global macro has gone mainstream—the book remains a font of trading wisdom.

Few of the interviewees are household names; notable exceptions are Jim Rogers and Peter Thiel, and Thiel has since closed down his fund. The other named traders (one is anonymous) are Jim Leitner, Christian Siva-Jothy, John Porter, Sushil Wadhwani, Yra Harris, Dwight Anderson, Scott Bessent, Marko Dimitrijevic, and David Gorton and Rob Standing.

It’s, of course, impossible to summarize this book, which is one reason it’s so valuable. But, just to give a bit of its flavor, here are a couple of excerpts.

First, from Scott Bessent, at the time of the interview running his own fund but now the chief investment officer of Soros Fund Management. He said that his fund uses technical analysis as a way to see what the crowd is thinking. “And we also use it to keep us on top of things we might not be seeing. We have a system that screens about 1,400 stocks and commodities around the world every week. We never trade based on it, but if all of a sudden 10 stocks in Indonesia show up, then we’ll look at Indonesia.” In response to a question about the source of his information, he said: “A lot of newsletters, thought pieces, magazines. We get very few ideas talking. We basically just sit around here and read.” (p. 271)

Second, from the thought provoking interview with Jim Leitner of Falcon Management. His fund—at least at the time of the interview—allocated 10 percent of its NAV to a baseline portfolio, which dynamically adjusts the weights on how much money it holds in equities, fixed income, commodities, currencies, and real estate, based on a momentum following model. It is a model “with no forecasting, no thinking, and no work to implement. We rebalance the model book every Thursday and do not do anything in between.” The fund’s overall performance the previous year was 29% as opposed to the 14% return of the baseline model, but, Leitner said, “the baseline model keeps me sharp. I know that there is always someone out there who is trying to each my lunch.” (p. 77)

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