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$25 Billion Hedge Fund Manager Explains 'How To Be A Great Trader'
Some perspective on 'efficient markets' from Elliott Management's Paul Singer,
The fact that the vast majority of investors and traders cannot (with rare exceptions) beat the markets over long periods of time is not an argument for efficiency. Rather, the reason is that they are mostly doing the same thing sharing the same set of assumptions, and following the same impulses.
The fact that a basic assumption about the world is widely held does not make it true, nor does it make trading and pricing decisions based on that assumption efficient regardless of how liquid markets pricing in that assumption appear to be!
Certainly there are periods of time when some markets and submarkets appear to be efficient, but those who have vision, creativity and an understanding of the broader context of markets will make greater returns and/or attain a superior risk profile (assuming they do not get run over by standing rigidly against the sometimes-deeply false passions of the day expressed by the consensus).
How do the select few more or less continuously make money when the “efficient” markets are moving all over the place? Why do most investors fail, over long periods of time, to keep up with their desired index? And why do some people blow up?
There are many factors that help explain why the small handful of long-term “winners” succeeds, but one primary reason is that they design unique strategies that do not rely on “efficient” markets to achieve success for long periods of time.
...
Every money manager makes mistakes in the course of a career. Sometimes the mistakes are isolated, and sometimes they come in bundles or waves. It is not necessarily fewer mistakes or a perfect process that accounts for Elliott’s consistent track record. Rather, we think that a strategic factor is very important in minimizing the impact of such miscues.
We are referring to the pursuit of “manual” situational trading (activist equity, hands-on participation in bankruptcies, and activist event arbitrage), as well as process-driven trading (in areas where process, not the value of businesses, drives the result) in which there is commonly an opportunity following a mistake to dig oneself out of the hole, move in another direction, and impact the situation so as to minimize the loss from the mistake or turn it into an opportunity for profit.
By contrast, outright directional investing does not present these opportunities. If one has an outright passive directional bet that goes sour, you can add to the position or subtract from it, but you are not as likely to be in a position to influence the result and turn it around. Of course, Elliott takes on some passive directional trades, but wherever possible we try to orient our capital toward situations whose characteristics give us the opportunity to lift ourselves out of mistakes.
This observation leads to a discussion about the quality of positions. We try at Elliott to evaluate potential holdings not only for their raw risk and reward probabilities but also on quality as we define it. Furthermore, our team is trained never to “fall in love” with a position or idea, but to be ready to change their minds on a dime if the facts change or a better analysis is presented.
At the top of the quality scale is a completely process-driven uncorrelated position that enables us to be active and control the process. We do not mean that such positions have the best profit potential or even the most attractive risk-reward profile. Nevertheless, lack of correlation with stock and bond markets reduces the need to hedge with unrelated instruments, and such positions frequently present opportunities for us to control our destiny. We like those situations the best.
At the bottom of the quality scale is an outright directional position with no opportunity to change directions if we make a mistake. We embark on such trades where the economics are compelling and the risks are known and manageable, but when sizing them, we take into account their “quality” characteristics, as well as the extent of other such positions in the portfolio as a whole.
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Another self indulgent Bankster trying to save his neck/
It sucks to get out<lobbied?
This article is extra bad. didn't learn anything
He did not talk about his real skill, disguising insider trades...
I think his real skill is paying off judges and abusing the legal system.......that's where his real alpha lies.
Umm yeah.....if he is not picking directional trades then he is doing some vol based crud or more likely spouting some Warren grade crapola...
I will put my P&L up against his and we will see who is more "fundy"
This is awesome advice! Thanks for the heads up. God bless you sir.
We know - BTFD.
Some people are smart, others like everyone here on ZH are not, including me. I have seen the errrors of my ways. Sorry you guys missed the boat.
Speech is silver, silence is golden...
You just hate freedom and America.
Oho land of not so free freedom french fries bot . They mentioned about britain batallion to start propaganda campaign n April . you're early .
Hitlery_4_Dictator
I would change the word “Not” to the word “Incapable”.
Key Examples of Misunderstandings: Hyperinflation, Private-Money, Finite-Planet
For sure, but I'm sure you are a dumb fuck as well.
I'm sure you will do well here at ZH. Your control of the commenting process is extant and profligate.
Tell Me Something That I Don’t Know
Hitlery_4_Dictator,
Who cares about individual? Or about me, besides my mother?
Let’s focus on the issue.
If you're sure then you must know. Thanks for the insight. This must become common knowledge. Ciao
hi've had my ass handed to me more times than i can count. started constructing my own value area with pivot points every night for the next day's trade. I could never consistently do well at it. If i had to pick one method that worked well, it was listening to my gut. Sounds retarded, but, more often than not if it didn't make me money, it sure saved me from losing my shirt. still. its a tough gig. the highs were fucking awesome. but the lows - jfc - they were really low. i found that the intensity outweighed the discipline. I simply sucked at containing that raw emotion. you have to be ultra disciplined and take what the market gives you. it always gives up something, or, at least it did back then. my impression is that it still gives it up, but, not in any time frame that i would be able to understand anymore - its simply too fucking fast and viscious. don't get me wrong - love the price discoverers, but, i wonder sometimes, if the level that the game is played at - the toll your body takes - that even if you come out on the right side of the trade - if its really worth it.
and stops do nothing for traders anymore - today its a sure fire way to experience death by a thousand cuts. and i imagine HFT has made it even harder since i was flopping and chopping in the space 10 years ago.
today, for me - and as i get older - its all about trying to securitize wealth - diversify it and protect it with the bigger macro picture in mind that affects not only me but my family. its really the only thing i have any control over - and even that - some days - seems rather tenuous. so, stick to the knitting - to what you're good at and let others fight the machinations of the money changers and the HFT scalping motherfuckers. way i figure anyhow.
Thank you for sharing your experience and insights. This kind of honesty is rare in the investment world. I agree with a lot of what you said. I'm still in the investment space and indeed it can take a toll on the body at times.
"Ultra Disciplined".......
Indeed....
Being "RIGHT" is NOT Enough.
In Order to Master the Market, You Must First Master Yourself....What Most Find Themselves Unable To Do:
Size or Power Doesn't Matter
Those Who Can, Will Always Be Able to Make Money.....
This is Why ALL MEN are EQUAL in Markets........
And this Why in the Years to Come, The Courage of Your Convictions and Emotional Intelligence Will Come at a Premium.....
Those Who Rode to the Top WITHOUT Them Will Know Why the DOW BOTTOMED 89 % Down......
Hmmmmm.
It's not supposed to be a casino. It's for investing in businesses without doing the work.
Useless talkings.
I pooped this morning. ;-)
That's being "active and controlling the process". But it's hard to "change directions if we make a mistake".
Get inside information, buy huge blocks and make money. I am close.
Lucky you.
I work at the real economy. Deal with small business all day long.
I live in DC and things are deteriorating really fast. Businesses are cutting down personnel. People that I used to deal with no longer there. A big account closed down.
What the hell is he even going on about?
Give us an example or what a retail trader can do for fucks sake, this is a bunch of nonsense....
Like for instance today I put on a position where I sold two bond call options @ .30 Delta (/OZBH5) for every one Russel Future; both in the front month.
This position has a theta component, a short bond and bond vol component and a short the market component.
edit: The drawback is no margin relief on bond options VS Russel futures in a regular account like you would get with short bonds VS short spoos outright or short calls vs short puts in any underlying. Though it gives the flexibility to roll either down the calls and control delta if the RUT goes further up or get more short the market with no extra capital via selling puts in the bonds vs the calls.
'
'
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Perhaps this is exactly what is wrong with 'the markets'? I don't know if TRNE is BSing, or legit.
Avast the yardarm and hoist the rudder!
•?•
V-V
He (let's assume "he") is not BSing, and I don't see how his strategy in any way indicates that something is wrong with 'the markets'. He's simply buying and selling exchange-traded futures vs. exchange-traded options. No HFT (*), no insider info, no manipulation; nothing nefarious about it at all. Both he and his counterparty know exactly what they're getting into.
As mentioned in the edit, though, it's kind of an expensive strategy, because the broker will demand the full margin on both parts of the trade; the broker (rightly) won't accept that the two are necessarily inversely correlated. Those short bond calls alone will tie up a helluva lot of capital - though if he's doing this he probably has portfolio margining, which reduces the requirement considerably.
(*) OK, for all he knows his counterparty could be an HFT algo; but assuming he's putting in limit orders and gets filled at the price he asked, that's just fine. They do occasionally "provide liquidity" - when they feel like it, anyway.
I mortgaged the farm, maxed out all my credit cards, and took the kids lunch money, loaded up and bought the fucking dip in a 3X ETF on margin.
What else is there to know? I'm gonna be rich!
You must be an old fart near retirement, else you wouldn't be so conservative.
Everone on my block and their dog trades front month e-Minis on $300 margins. You only need six points on the ES to double your money. You didn't get the memo?
+100 Fuck I love Zh'ers! Triple long ETF on margin!! awesome.
What could possibly go wrong? "To infinity, and beyond!"
learn to take government money. Whether it is EBT, mortgage(use a shell company so when you don't feel like paying back you just close up the company) or student loan you don't pay back, "crop insurance", bet on falling prices for bond since the government is printing trillions, etc.
buy low and sell high.
I trade a trend following system on 14 markets - basically 10 week price breakouts with 14 day lows as stops - works for me - I dont pretend to know where the fuck any market is going but am secure in the knowledge that there are plenty of people out there who think they do and place bets accordingly - results of which create trends that I can ride. That said, 2013-2014 was a prick of a period in metals, currencies, commodities, fx and rates. Oil shorts around 100 marked the end of that shitty period back in September last year. Looking back over the last 15 years returns have ranged +5% to 30% with a few 2013 rolling 12 months at -20%- its those "outliers" [he said hopefully] that scare many away. Guess all I am trying to day is my shit makes sense to me - got no frikkin idea about his shit
That sounds risky. Play it safe and have your kids buy you a Dennis Gartman subscription for father's day and take the opposite of every trade recco.
Del
I like the idea of trend-following systems: based purely on price movements, but no technical analysis mumbo-jumbo, tea leaves, epicycles... Never tried trading one myself, though. I suspect the devil is in the details: why 10-week breakouts and not 8 or 12; why 14-day lows, and so on.
Have you read Michael Covel's book on it, PB? Any opinions?
Devil is indeed in the detail, no major reason to choose 10 week brakout over 8 or 12, same for stops. Its really all about deciding on a set of rules and sticking to them. Win rate is circa 35% so you need to get used to taking losses [usually small] - its about discipline and not tinkering with the approach [which I have done to my detriment in the past] Market selection is very important, correlation is worth looking at. I try to have at least 2-3 markets in each sector [metals/fx/rates/energy/commods]. Often it ends up being one or two trades a year that make the money - eg brent last 6 months, yen moves of last few years, sugar in 2010. Point is you dont know which market is going to have a decent pay day [large trend] hence having a diverse group of markets is critical - I have traded as many as 35 and as few as 10, current 14 markets works for me in terms of margin/equity max and expected drawdown. Covell's book is as good as any.
Thanks for sharing your experience, PB; much appreciated!
Elliot invests soley in distressed debt and has an army of lawyers and debt analysts.
No one is trading like this guy unless they have billions in their coffers to buy distressed debt and CDS on this shit.
The way these guys trade/invest is so different than what 99% of the investing public does that it isnt even comparable. They run their books like a business and have support staff to do the number crunching and other framework type work.
~dIPSHITMIDDLECLASSWHITEKID
Read the Market Wizard series.
" Not bad for a city college boy! "
2 crossing moving averages trader makes headlines and call him self money manager.
We embark on such trades where the economics are compelling and the risks are known and manageable
Only trades where the risks are "known and manageable"?
I'm not sure I understand. Does he mean something like "I can see the future"-known? Or "I know everything"-known?
Risks are known and manageable = the fix is in.
It's all a racket and it's not real. Reality (nature) bats last.
When I was young, I took a lot of risks. Most of my stocks tanked, but, thanks to a few stocks (I was early into Amazon), I did pretty well. I'm too old to be taking lots of risk now, so I'm out of the market, waiting for it to tank again, and then I'll put everything into Coca Cola; they've been paying dividends every quarter since the great depression.
The reason they have been paying dividends forever is they charge twice the going rate for carbonated flavored water as anyone else. :)
Their biggest costs are delivery and advertising.
You have to be in the CLUB first
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I like the point about about the quality of positions. I believe the bad idea quality is a root for 80% of underperformance!
Here more on the similar topics:
http://prudentvalueinvestor.blogspot.com/2015/01/risk-management-part-1.html
Four word summation: " Be contrarian; stay agile ". Mr. Singer's attempt to sound scholarly will backfire to all but the most gullible. Maybe that's how he screens-out the suckers... Suckers love convoluted, confusing explanations of things they cannot understand.
Never tried trading one myself, though. I suspect the devil is in the details: why 10-week breakouts and not 8 or 12; why 14-day lows, and so on.
Have you read Michael Covel's book on it, PB? Any opinions?
Devil is indeed in the detail, no major reason to choose 10 week brakout over 8 or 12, same for stops. Its really all about deciding on a set of rules and sticking to them. Win rate is circa 35% so you need to get used to taking losses [usually small] - its about discipline and not tinkering with the approach [which I have done to my detriment in the past] Market selection is very important, correlation is worth looking at. I try to have at least 2-3 markets in each sector [metals/fx/rates/energy/commods]. Often it ends up being one or two trades a year that make the money - eg brent last 6 months, yen moves of last few years, sugar in 2010. Point is you dont know which market is going to have a decent pay day [large trend] hence having a diverse group of markets is critical - I have traded as many as 35 and as few as 10, current 14 markets works for me in terms of margin/equity max and expected drawdown. Covell's book is as good as any.
Some gems here..Really ? Dose of reality on this game is gained when you stand outsides casinos and flame the egos of winners (there will always be some) and they tell you their stretegies for that day.