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Paolo Pellegrini Is Coming Back As A Quant, Laments Loss Of Traditional Investment Thought In A Fed-Dominated World

Tyler Durden's picture




 

It appears Paolo Pellegrini, the brains behind Paulson & Co. most profitable trade, is coming back... as a quant. As we reported in August, the billionaire manager's former fund - PSQR - had decided to return all capital to investors citing "challenging market conditions." It only took Paolo 3 months to realize that money is no longer to be made in a macro world dominated by central bank infighting, in which a schizophrenic market goes up or down by several percentage points on a daily basis depending on what word feels out of place in any given central banker's speech, and instead will focus on "quantitative disciplines" along the lines of DE Shaw and RenTec. And why not: the only ones left making money in this market are momentum chasing strategies which have millisecond frontrunning arbitrage over the rest of what is left of the heard. As to the visionary's current market views, his mantra is "don't fight the Fed" even as he sees bond trading at ridiculously high levels, although with a caveat: "of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis.  That is very difficult, though, to predict." As we predicted earlier in the year not only are macro funds soon going to be extinct but the same fate lies in store for the traditional long/short 130/30 group. Very soon every fund will need to have their own quant/HFT group (SAC has already quietly amassed almost 20 HFT pods) just to be able to attract outside investors. After all why else is the woefully underpaid SEC admitting it has no idea how to fix the market now entirely dominated by HFT, and will merely extend its completely worthless "circuit breaker" model for another three months, then another three months, and so on.

Some other observations from Paolo Pellegrini's interview during today's Hedge Fund congress:

“I think that this year essentially I was concerned about the unresolved issue of what I call a demand deficit.  The United States is still over ¼ of world GDP and world demand.  Europe is another 25% plus.  So you can’t have a situation where all of a sudden you lose these streams of demand that was generated by increasing leverage over time and not have some consequences.  It was interesting today there was some piece about Iceland and the fact that Iceland, after all—after being a disaster story early on because it took some difficult steps and did not try to bail out a failed private banking sector—is now in effect doing better than Ireland, which instead used something that is much more similar to the American approach and now they are going to have to pay for that.  [a topic we discussed here."

"My concern was that the demand deficit would come into play.  It seems that we are going through a very determined effort by the Federal Reserve to target asset prices.  It seems to be some of the conclusion from various conferences and others—Goldman Sachs came up with a view that the level of the stock market is the best level of the financial condition. So if you look at that and then you see, what are we going to do—we can buy bonds, we can’t buy stocks, so we buy enough bonds so that the stock market reaches some sort of an acceptable level.  To me all of that is the reality and it’s difficult to fight the reality.  Everybody says, ‘Don’t fight the Fed.’  Of course you don’t want to fight the Fed, until the Fed loses control which is what happened obviously in the sub-prime and financial crisis.  That is very difficult, though, to predict.  In terms of the way I manage my portfolio at this point, and it’s really part of why I thought it was important to take a break in terms of managing outside money, is that I’ve gone from a situation where I was suggesting that I would be able to profit from high levels of volatility and large market moves, to one where I say this is a very difficult situation—let’s try to figure out a strategy to figure out the real purchasing power of my capital.”

Pellegrini also commented on his current strategy, “I’m stepping back, I’m trying to put together a more stable team, focusing on more quantitative types of disciplines, I admire a number of investors: DE Shaw and RenTec are obviously interesting examples.  I think that there is so much arbitrary input in the investment process at this point, given all of the regulatory and central bank actions, that it is difficult to have a linear process of thinking about the world and how to make money.  It’s sort of more complicated than that—there is a lot of unpredictable externality from decisions that are a combination of personal ideology of different players and political realities of different points of time.”


Full clip:

 

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Thu, 12/02/2010 - 18:52 | 773576 SwingForce
SwingForce's picture

I love Paulo! He had the brians of subprime, yet got tipped less than a waiter at Houston's on a Saturday Night http://www.xtranormal.com/watch/7586879/

Hey Elizabeth on Dylan's show: http://www.msnbc.msn.com/id/31510813/#40480024

Thu, 12/02/2010 - 19:03 | 773614 velobabe
velobabe's picture

i use to believe in Elizabeth, not so much any more. she believes in the treasury.

Fri, 12/03/2010 - 09:22 | 774768 Richard Weed
Richard Weed's picture

It seems to me that Pellegrini is a "one trick poney"... Made about $100 mil for himself off of Paulson... cannot trade his way out of a paper bag.

This man obviously does not understand Macro.

Certain Macro funds did very well this year... the one I work for is +37% ytd.

Investment environment is perfect for us... sorry Paolo.

Thu, 12/02/2010 - 18:55 | 773592 velobabe
velobabe's picture

interesting times, indeed!

Thu, 12/02/2010 - 18:58 | 773605 Double.Eagle.Gold
Double.Eagle.Gold's picture

The guy sounds like he's afraid to say what he really thinks, as though the consequences would be life threatening.

Thu, 12/02/2010 - 19:03 | 773615 wawawiwaa
wawawiwaa's picture

I was there at this speech today... Every time one of these guys gets his ass handed to them it is because of an "externality." He wasn't complaining about the FED and Central Banks when they set up the mother of all shorts which he took advantage of now was he. Hats off to the guy for making a killing on the subprime trade!!

Thu, 12/02/2010 - 19:13 | 773638 kengland
kengland's picture

"Laments Loss Of Traditional Investment Thought In A Fed-Dominated World"

That says it all. Of course the state of global affairs are destroyed. It doesn't matter. Long and strong

Thu, 12/02/2010 - 22:59 | 774095 hedgeless_horseman
hedgeless_horseman's picture

Long and stong and fast.  Must not forget fast.

Thu, 12/02/2010 - 19:16 | 773648 SwingForce
SwingForce's picture

No doubt his tan level has benefitted from the new year's eve ATM report.

Thu, 12/02/2010 - 19:17 | 773651 Spaceman Spiff
Spaceman Spiff's picture

I'm sorry this is off topic, just wondering if someone could explain this to me:

In regards to the Fed's document disclosure yesterday,  If the fed loaned to all these organizations in secret during the financial crisis and insider CEOs bought their stocks during that time, how is that not insider trading?   Everyone thought there was a liquidity crisis and that the banks were insolvent, and these guys were getting money in secret from the fed while buying their stocks.   To me it seems like the essence of trading on nonpublic information.   But I'm just a simple sucker/small investor with delusions of buying companies based on value.

Thu, 12/02/2010 - 19:51 | 773721 DisparityFlux
DisparityFlux's picture

They got plausible deniability of insider information -- saw the buy signals tooted on Cramer's Mad Money show.

Thu, 12/02/2010 - 22:55 | 774079 JohnG
JohnG's picture

"how is that not insider trading?"

And if so, is the Fed complicit in insider trading?

 

Oh wait, they are the inside.

RICO where are you??

Thu, 12/02/2010 - 19:18 | 773654 SwingForce
SwingForce's picture

His Boss went long GLD and BAC as a hedge, as a hedge. 

Thu, 12/02/2010 - 19:22 | 773662 ColoradoBikerChic
ColoradoBikerChic's picture

Paolo didn't say anything, lots of hesitation and no info.

Not much more than a good 'politician' would, danced around the core question at 1:40 mark...

 

"in this year, what trades were working and which were not ?" ...  no answer, just a continuation of his previous rant.

Thu, 12/02/2010 - 19:30 | 773673 SwingForce
SwingForce's picture

That's funny, at the 1:40 mark of Eliz's vid I cracked open a Silver Bullet...

Thu, 12/02/2010 - 19:27 | 773667 squexx
squexx's picture

Just another one of the guys who will be hung out to dry when push comes to shove!

Thu, 12/02/2010 - 19:35 | 773684 SwingForce
SwingForce's picture

Awe, the eyes have it! This guy said nothing, because he is nothing! He has no money under management, he's not pushing investment advice, I don't know why he was on Bloomberg.

He's got nothing at risk, what needs to dryout? Just askin', that's all.

Pick his (monkey)brains while you can.

Thu, 12/02/2010 - 19:54 | 773707 Mercury
Mercury's picture

If traditional, fundamental based investing in the U.S. capital markets is dead, why isn't quant investing (absent strategies based solely on market mechanics) also dead?  Isn't the later ultimately or directly derivative of the former?

Thu, 12/02/2010 - 20:44 | 773822 FreedomGuy
FreedomGuy's picture

It makes me think that there are roughly three options for the general investing public like me. A:leave investing to the pro's. You cannot do simple value investing anymore. B: Invest but understand you are the furry mammal running between the dinosaurs. They may crush you or you may make a living on the crumbs. C: Don't play. Buy gold/PM's to avoid currency and debt meltdowns and do the best you can with diverse relatively safe investments with your other money. That could mean buying and selling antiques, watches or just plain savings account, but things you understand. The 80's and 90's where you could just plant your money, forget about it and see it grow are gone. This is the era of manipulation and central economic planning. It's a government-corporate insider game I think. I kind of think that is what Pellegrini is saying.

Thu, 12/02/2010 - 22:25 | 774010 desgust
desgust's picture

It's only the 3rd. Otherwise you end up gotten eaten and defecated.

Thu, 12/02/2010 - 21:36 | 773912 gwar5
gwar5's picture

If guys like Pelligrini feel like it's tough to make money I feel pretty good just playing defense. 

Sometimes not losing money is the same as making money.

Thu, 12/02/2010 - 23:02 | 774105 hedgeless_horseman
hedgeless_horseman's picture

May I sell you some zero coupons at par?

Thu, 12/02/2010 - 22:06 | 773975 prophet
prophet's picture

Unprecedented activity in the markets continues to increase.  Accidents waiting to happen keep hitting all time highs. 

Thu, 12/02/2010 - 22:08 | 773983 Salinger
Salinger's picture

the medium is the message - TD nailed it

Thu, 12/02/2010 - 22:29 | 774019 desgust
desgust's picture

Is he hungry and looking for some corpses?

Thu, 12/02/2010 - 22:33 | 774028 desgust
desgust's picture

LOL Mr. "sort of" (20, 30X?) what an idiot!

Fri, 12/03/2010 - 00:02 | 774222 omi
omi's picture

waste of 5 minutes

Fri, 12/03/2010 - 07:04 | 774668 tttigra
tttigra's picture

aaa ee cough cough aaa sort of eeee... what the hell.. read Michal Lewis's The Big Short and you will see what kind of an idiot he is. That's why he got just a small tip from the big hit by Paulson. He now tries to go his own way but closed his firm a couple of months ago. If he stays in the market I'm sure he will lose all his fortune. Such cockiness from such a hollow guy.

Tue, 12/07/2010 - 23:05 | 787855 sator
sator's picture

his intervention sucks but...

who are you to talk like that? Paulson perhaps?!

do you really think a book explains it all?

"Such cockiness from such a hollow guy."

 

Fri, 12/03/2010 - 09:28 | 774780 Richard Weed
Richard Weed's picture

It seems to me that Pellegrini is a "one trick poney"... Made about $100 mil for himself off of Paulson... cannot trade his way out of a paper bag.

This man obviously does not understand Macro.

Certain Macro funds did very well this year... the one I work for is +37% ytd.

Uhhhh... "challenging market conditions" is perfect for us... sorry Paolo.

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