Hedge Fund Market Wizards: How Winning Traders Win

Sometime back I had a friend who asked if we had noticed more about one of the hedge fund, Cornwall Capital which was featured in the movie, The Big Short (story written by Michael Lewis). Curious, I went to dig up more about the fund and came across one of the founders, Jamie Mai who similar to the other hedge fund managers in the movie had successfully shorted the housing bubble during the 2008 global financial crisis. In the process of wanting to find out more about Cornwall Capital I soon chanced upon the book: Hedge Fund Market Wizards in which the author, Jack D. Schwager had interview Jamie Mai.

 

Hedge Fund Mkt Wizards

 

Jack D. Schwager is an industry veteran on hedge funds and perhaps best known for his interview compilations of various hedge fund managers over the past 20 years. While Hedge Fund Market Wizards was his latest in his series (having released in 2012), other notable publications include Market Wizards (1989), The New Market Wizards (1992) and Stock Market Wizard (2001).

Hedge Fund Market Wizards has a total of 15 chapters, divided into 3 different parts, as classified by 1) Macro Men, 2) Multi-strategy Players and 3) Equity Traders. Clearly, each part had interviewees employing similar trading strategies but varied executions. Renown investors such as Ray Dalio, Michael Platt and Joel Greenblatt have been featured in the book. Typically, each chapter covers a fund manager’s track record, their background and trading career.

I would be lying if I said I weren’t impressed by their track records, but one aspect which stood out among them was that in all interviews they have mentioned that their risk management was a critical aspect in their trading careers. Some of these include portfolio diversification, position sizing, extensive due diligence, ability to control emotions while trading were some key aspects in controlling risk. On several occasions, they felt that their performance was largely attributable to mitigating against real losses as opposed to hitting winners. One ratio which was frequently used was the Pain to Gain ratio in order to measure up cumulative net gain against the cumulative loss realized to achieve that gain. For example, a GPR of 1.0x would imply that a trader would have an equal monthly losses to the net amount gained.

One core advice offered by one of the interviewees was by Steve Clark who manages Omni Global Fund. He mentions to “do more of what works and less of what doesn’t”. His message, although in theory is common sense but realizes that many traders tend to fail to adhere to this principle. Many traders tend to deviate from what they do best perhaps due to boredom or having a sense that is they are good in one type of trade, they should be good at other types of trades as well.

Overall, an easy read. Pretty motivational as well to have read how many of the traders started from humble beginnings and worked their way up to be successfully fund managers.

 

Cover Photo Credit: billionaireinvestor.wordpress.com

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