Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Jill Wisenthal and I'm Tracy Alloway. Tracy, there's a
Speaker 2: lot we've discussed about multi strategy hedge funds, but there's
Speaker 2: still a lot we don't know. And specifically, although I've
Speaker 2: come to learn things about comp and alignment and the
Speaker 2: importance of risk management and risk models and all that stuff,
Speaker 2: I actually don't know, like how how the pods make
Speaker 2: good trade.
Speaker 3: This is part two hundred and ninety eight of our
Speaker 3: attempt to understand multi strat hedge funds.
Speaker 2: That's what it is.
Speaker 3: But you're right, we haven't really looked at it from
Speaker 3: the I guess the perspective of a PM who is
Speaker 3: actually working there, and what it takes to get hot fired,
Speaker 3: what it takes to avoid getting fired, and things like that.
Speaker 2: I have a feeling that like avoiding getting fired is
Speaker 2: a really big part of the story, Like you want
Speaker 2: to do well right, you want to make money and
Speaker 2: all that, but I also get the impression that you
Speaker 2: just want to hang onto that seat for a really
Speaker 2: long time, and that a big part of I don't
Speaker 2: know if the game is the word. But a big
Speaker 2: part of the game is yeah, holding onto that seat,
Speaker 2: avoiding being part of any given call, Avoiding having your
Speaker 2: name show up on Bloomberg in a story that gets
Speaker 2: read spiked about so and so out after losing two
Speaker 2: hundred and sixty million or whatever in the trade.
Speaker 3: This is exactly what I was wondering, like, how do
Speaker 3: the drawdowns actually impact a bunch of pms. Is it
Speaker 3: like really embarrassing and does it have like an actual
Speaker 3: effect on their trading? I imagine it does, and it
Speaker 3: must have an effect on their confidence as well. But
Speaker 3: I am very interested in this subject, and we have
Speaker 3: joked a number of times about, you know, if we
Speaker 3: were at a multistrat hedge fund things like that. So
Speaker 3: maybe we'll get a better idea.
Speaker 2: We definitely have to learn more about the pod level,
Speaker 2: because I do get the pressure from talking to some people.
Speaker 2: We talked to Running Cosgrave recently. It's like, oh, you
Speaker 2: just put a bunch of people in a room and
Speaker 2: if you have the risk management right, it kind of
Speaker 2: works out. Anyway, We're going to continue our journey of
Speaker 2: learning more about these big out.
Speaker 3: There's a natural affinity between podcasts and pod shops.
Speaker 2: Oh, it's pretty sad. God, wouldn't you hate it if,
Speaker 2: like if we screwed up or like we had like
Speaker 2: an episode that didn't do very well and our traffic
Speaker 2: was down or something, and there was like a big
Speaker 2: article on It's like Joey Tracy out after you know,
Speaker 2: after one month of underperformance of the podcast.
Speaker 3: Oh yeah, Well, this is the other thing, Like what
Speaker 3: happens if you outperform for like half the year and
Speaker 3: then you underperform for the second half of the year,
Speaker 3: And how is that actually calculated in terms of your comp.
Speaker 2: Totally And this came up before, which is that people
Speaker 2: who have really good starts the fund at the fund level,
Speaker 2: you don't want them taking off risk just to lock
Speaker 2: in their annual bonuses. These are important questions. Anyway, let's
Speaker 2: dive right into it. We have the perfect guest, someone
Speaker 2: with a long track record and experience across many as
Speaker 2: spects of this space. We're going to be speaking with
Speaker 2: Brian Yelvington. He's currently a consultant for executive search firm
Speaker 2: Carrington Fox, but he's been a former analyst in PM
Speaker 2: at several large multi strat funds, Millennium or Capital et cetera,
Speaker 2: A few others in there, and so up. Brian, thank
Speaker 2: you so much for coming on odd lots.
Speaker 4: Thank you for having me. Great to be here. I
Speaker 4: always enjoy the podcast and enjoy hearing the very subject
Speaker 4: you guys come up with.
Speaker 2: Oh, thank you, we'd love to hear it. We're gonna
Speaker 2: clip that and put it in the mix before we
Speaker 2: go on, like why do you just give us the
Speaker 2: real brief version of like who are you? And why
Speaker 2: are we talking to you? Other than the fact that
Speaker 2: if I go to your LinkedIn page there are a
Speaker 2: bunch of famous companies listed on it.
Speaker 4: Yeah, probably a few too many for my taste, to
Speaker 4: be honest, I've kind of been one of the few
Speaker 4: people who've been both a pod PM as well as
Speaker 4: kind of helped bring those people into a large multi strat.
Speaker 4: I left the risk taking world and went to work
Speaker 4: in the business development area. Business development is just to
Speaker 4: badly disguise you from this for manager selection, although it
Speaker 4: means very different things at very different firms. So I've
Speaker 4: seen it both from junior analysts side to a senior
Speaker 4: PM to the person who's the necessary, if not sufficient
Speaker 4: gatekeeper at a hedge fund.
Speaker 3: I'm trying to think where to start because there's so
Speaker 3: much for us to talk about. But if I'm a
Speaker 3: PM and I am applying to a multi strat, what
Speaker 3: would my CV or resume actually look like? And then
Speaker 3: b would I even be applying to a multi strat?
Speaker 3: Or would I be headhunted and they would find me?
Speaker 4: The chances are generally better that if you're an established PM,
Speaker 4: you would probably come either through direct from the BD
Speaker 4: team who said, we need somebody who represents the same
Speaker 4: risk that Tracy represents. We hear she's great, We'd love
Speaker 4: to speak to her, or through an executive search firm
Speaker 4: who's there's a lot of turnover in this industry and
Speaker 4: they do a lot of business as a result.
Speaker 2: So how do you know if someone is actually good?
Speaker 2: Because this seems to be like one of the core
Speaker 2: challenges in really all investing, right, like past results are
Speaker 2: no guarantee of future returns. Everything always says that you
Speaker 2: don't know what's just a lucky streak, et cetera. So
Speaker 2: let's go through this process you want to establish if
Speaker 2: someone is actually a good investor or trader or portfolio
Speaker 2: manager or whatever. Walk us through the steps of like
Speaker 2: how you actually would identify if Tracy is good at
Speaker 2: her job exactly.
Speaker 4: Well, first to caveat, you're never going to know, Okay.
Speaker 4: The reason that past performance is not indicative of future
Speaker 4: returns is because it's the future and we never know
Speaker 4: how somebody's going to act. So what I'm going to
Speaker 4: do during our first conversation Tracy is I'm going to
Speaker 4: ask sort of like you guys did a little bit
Speaker 4: about your background. I'm going to be looking for things
Speaker 4: like where we might know people in common, where you
Speaker 4: might have worked through a really good group or something
Speaker 4: like that that had a great reputation. And then we're
Speaker 4: going to get into the nitty gritty of the conversation
Speaker 4: where I asked you in great detail, you know, what
Speaker 4: is your edge? That part's actually not too detailed. You
Speaker 4: should be able to elucidate that sort of standing on
Speaker 4: one foot. Then I'm going to go into wait.
Speaker 2: Yeah, can you pause, just give me if that's an
Speaker 2: easy part, what is it? Because this is actually something
Speaker 2: that I'm completely in the dark about. How does someone
Speaker 2: go about articulating an edge in plan English during an interview?
Speaker 2: Like what does that actually sound like? You say? Okay,
Speaker 2: Like Brian, what's your edge. You used to trade fixed
Speaker 2: income at where and where? Brian, what was your age?
Speaker 4: Well, I probably didn't have a very good one, but
Speaker 4: my edge was usually from the research side. What I
Speaker 4: will tell you is pms who are extremely good at
Speaker 4: their jobs, have boiled down what their edge is to
Speaker 4: a very well defined two or three sentence elevator pitch
Speaker 4: style answer. And the reason that they're able to do
Speaker 4: that is because this is something they've been doing a
Speaker 4: long time, and they've made a huge number of mistakes,
Speaker 4: and they know exactly the alpha that they want to identify,
Speaker 4: are good at identifying and what they go after. So
Speaker 4: it's going to sound different for everybody. For you know,
Speaker 4: a macro RV type of fund, it may be that
Speaker 4: they really anticipate the the shifts and monetary policy. For
Speaker 4: a credit fund, it's that maybe they understand, you know,
Speaker 4: corporate actions and they're really good at reading between the
Speaker 4: lines of maybe even a specific niche of companies. So
Speaker 4: it's going to differ, but you can usually tell by
Speaker 4: someone's answer there how much they thought of it. The
Speaker 4: bad answers tend to be something that relies on experience.
Speaker 4: I'll note that there are too many octagenarian PMS or
Speaker 4: something that relies on well, I'm just really good at this.
Speaker 4: You kind of have to be able to identify it
Speaker 4: to be good at it.
Speaker 3: So going back to performance metrics, like what figures or
Speaker 3: numbers are actually available? Well, here, you know, does a
Speaker 3: potential PM come bearing sharp ratios? And then how does
Speaker 3: the potential hiring firm actually do due diligence on some
Speaker 3: of those numbers.
Speaker 4: It's difficult. And the reality is that you know P
Speaker 4: and L even within a firm as a BD person,
Speaker 4: and again BD is very different from firm to firm.
Speaker 4: But if I were to hire Tracy as PM.
Speaker 3: I'm regretted using myself as an example, by the way.
Speaker 4: No, we're going to have you do well, okay, right,
Speaker 4: we'll flunk out somebody else. But if we were to
Speaker 4: hire Tracy in some places, I might not even be
Speaker 4: aware of how she's doing six months after we hired,
Speaker 4: and others I would have kind of perfect inside p
Speaker 4: and ls are extremely closely guarded secrets and usually they're
Speaker 4: not discussed within the firm except for a very few
Speaker 4: select group of people. And nobody's going to attest to
Speaker 4: that P and L. Right, you of your own accord, Tracy,
Speaker 4: might provide some assurance to somebody. Maybe it's because your
Speaker 4: past cap or something. They can't ask, but you can
Speaker 4: certainly say, hey, by the way, there's proof that I
Speaker 4: did what I did. That's your priority.
Speaker 2: Wait why can't they ask?
Speaker 4: I believe that's the employment law. Yeah, you're allowed to ask.
Speaker 4: It might not been designed to protect hedge fund pms,
Speaker 4: but I believe it does cover them somewhat.
Speaker 2: Tracy, I've brought up a bunch of chodes. I told you.
Speaker 2: I have talked about the time that I interviewed at
Speaker 2: a prop trading firm, right many many times.
Speaker 3: Joe, Yes, are you going to tell the story again?
Speaker 3: You can if you want.
Speaker 2: I'll just tell the brief one, which is that when
Speaker 2: I was living in Austin, which you are, Brian, you're
Speaker 2: there now, I interviewed at a prop trading firm when
Speaker 2: I was right out of college. There were two hundred interviews,
Speaker 2: and they asked me about my own trading when I
Speaker 2: used to date trade on each trade by myself, and
Speaker 2: I told them a little about my trades. They made
Speaker 2: me play a video game to test my hand and
Speaker 2: I coordination, and then they made me play ping pong
Speaker 2: against the CEO. I'm not really sure what that was
Speaker 2: all about, but then I was one of I was one.
Speaker 2: I was one of four people who got to offer
Speaker 2: the job, and then for some reason I didn't take it.
Speaker 3: Didn't you work at a sandwich shop?
Speaker 2: To the now, I'm making sandwiches at the Wheatsville food
Speaker 2: co Op at the time, and all my friends were
Speaker 2: working there. I was like, I don't really feel like
Speaker 2: working the corporate life just yet. And everything worked out
Speaker 2: and it was fine. That's still one of the stranger
Speaker 2: times in my life. But it was kind of like
Speaker 2: this where they asked me specifics. All right, here's a
Speaker 2: more important question. It's great to say, like, if you're
Speaker 2: a PM, then you show, but the first you got
Speaker 2: to become a PM. What does an analyst do? So
Speaker 2: so a PM has a pod and they have analysts
Speaker 2: in their pod, what does an analyst actually do?
Speaker 4: Just as with the street, you know how they're analysts
Speaker 4: and function and analysts and rank as you will, pods
Speaker 4: will generally have analysts covering, you know, specific areas. Basically
Speaker 4: at most firms, it's sort of a euphemism. If you
Speaker 4: have trading authority you're either a trader, a SUBPM, or
Speaker 4: a PM. If you do not have trading authority, but
Speaker 4: you're still committing or contributing to investment decisions, you're an analyst.
Speaker 4: It's just a generic catch all term. But you are
Speaker 4: generally in charge of building the you know, specific type
Speaker 4: of surveillance that the pod needs. You may have names
Speaker 4: or industries or specific areas of a specific market to cover,
Speaker 4: and you're being eyes and ears, and you will have
Speaker 4: specific projects. Yeah, in our current environment, there's no no
Speaker 4: shortage of things to test out and look into as
Speaker 4: to how policies may change. So if you're in a macropod,
Speaker 4: you're probably pretty busy right now.
Speaker 3: Presumably you don't have to make perfect PowerPoint presentations for
Speaker 3: potential deals and things like that. It's much more idea
Speaker 3: generation and I guess like back testing.
Speaker 4: There's you know there. Again, it kind of depends on
Speaker 4: the type of pod that you're in. If you're in
Speaker 4: a very directional macropod, you're probably looking for a lot
Speaker 4: of historical analogs, you know, house pods, he responded in
Speaker 4: the past. If you are in a more quantitatively oriented pod,
Speaker 4: maybe something that does some form of arbitrage. He has
Speaker 4: lots of back testing, lots of mathematical confetency. But it's
Speaker 4: interesting who I've seen make the jump. I've seen a salesperson.
Speaker 4: We basically just sent out a weekly commentary with a
Speaker 4: model portfolio in it, and people loved it, and PM said, Hey,
Speaker 4: we want to talk to this person. Who you go
Speaker 4: talk to him? For US analysts public machine analysts. Joey
Speaker 4: and I actually have a mutual friend that you've had
Speaker 4: on the show before who was kind of writing for
Speaker 4: a newsletter, and it was a newsletter. I can tell
Speaker 4: you that most every PM I knew in macro was
Speaker 4: reading and he built his audience on Twitter or X. Sorry,
Speaker 4: that doesn't make a very good verb.
Speaker 3: All right? And then if I am running a pod shop,
Speaker 3: what exactly am I looking for in terms of potential PM?
Speaker 3: So I get probably past performance, even though as we discussed,
Speaker 3: it's not a perfect indicator of future performance. But am
Speaker 3: I looking at personality like would I hire a complete
Speaker 3: jerk who happens to be a star trader because it
Speaker 3: doesn't really matter how he works with other people because
Speaker 3: he's going to be completely independent, Or would I be
Speaker 3: looking at it very holistically and taking a sort of
Speaker 3: moneyball approach where I'm trying to fill in or plug
Speaker 3: specific gaps in my overall business with maybe players or
Speaker 3: traders that are undervalued by the market.
Speaker 4: I think you're always trying to play the moneyball approach. However,
Speaker 4: most puge funds differ a lot in how internally they communicate.
Speaker 4: There are some hedge funds where you're really not allowed
Speaker 4: to talk to people from other pods, Like I might
Speaker 4: say something to you Tracy, like I like the market here,
Speaker 4: I don't like it here, But I would never say,
Speaker 4: you know, I'm shorting the two year versus the three year.
Speaker 4: DBO one weighted something specific, and that's to avoid kind
Speaker 4: of cross contamination of the pods. Whereas there are others
Speaker 4: who really value the esprie de corps and they like
Speaker 4: to have people collaborate and those places. Not only are
Speaker 4: you going to have the typical meetings with BD and
Speaker 4: risk and the CIO, but you're also going to meet
Speaker 4: a lot of other pms to make sure that you
Speaker 4: know you're not a jerk.
Speaker 2: Let's talk more about getting a job as an analyst.
Speaker 2: There are probably a lot of people, maybe they're in
Speaker 2: college listening to this episode right now. I think that
Speaker 2: if I were young and in college and didn't have
Speaker 2: any obligations, I would like, Oh, this sounds really fun
Speaker 2: working for a multi strategy hedge funds. I would love
Speaker 2: to get my door in one. What would be like?
Speaker 2: What should I do to get that first role.
Speaker 4: There are a few firms that hire direct from college,
Speaker 4: direct from university. Those are very very small programs. Normally,
Speaker 4: there's only a few of them at scale. I would
Speaker 4: say typically people who first move into a pod as
Speaker 4: an analyst or perhaps a sub PM generally come from
Speaker 4: the cell side or maybe prop but they generally have
Speaker 4: spent a couple of years on the cell side, have
Speaker 4: a lot of the great training that the street can provide,
Speaker 4: and have advanced themselves to where they are saying, you know,
Speaker 4: I no longer just want to make markets. I actually
Speaker 4: want to trade my own risk.
Speaker 2: So you get a job on the cell side, and
Speaker 2: you establish yourself as someone who knows something, who people
Speaker 2: like reading from, and who people like reading their You
Speaker 2: know their takes and their models and have interesting insights
Speaker 2: to say about whatever asset classes is being traded.
Speaker 4: Either that or you have a business that actually would
Speaker 4: work good on the buy side happens to be in
Speaker 4: the cell side. But in terms of how you get
Speaker 4: that first job, I would say, be useful. I think
Speaker 4: that everybody is kind of concentrated on the you know,
Speaker 4: I want to be coming up with the ideas that
Speaker 4: go into the book, and you sort of grow into
Speaker 4: that slowly. But if you're somebody who you know has
Speaker 4: read the history or done the work or researched, you
Speaker 4: know what happens when on the first bed cut, what
Speaker 4: happens on the last what happened in the dollar the
Speaker 4: last time we had tariffs. Those sorts of analogs in
Speaker 4: the macro world are very good. If you understand restructurings,
Speaker 4: you're probably going to be pretty valuable to high yield
Speaker 4: or distress pod. You're not going to get that. You know,
Speaker 4: I've got the con kind of job right away, So
Speaker 4: you need to be useful in the job you're applying for.
Speaker 1: And then you.
Speaker 3: Kind of touched on this before, but I would love
Speaker 3: to hear more what are the pools that multistraats are
Speaker 3: actually drawing from and have those changed over time, Like
Speaker 3: you know, when they first started popping up, were they
Speaker 3: hiring from fund of funds? And the cell side, and
Speaker 3: then as they progress, maybe get a little bit more
Speaker 3: experimental and start diversifying into other industries to draw pms from.
Speaker 4: Yeah, I mean, for instance, we've seen a lot of
Speaker 4: interesting commodities pms over the past few years, and a
Speaker 4: lot of those are at trade houses, or perhaps they worn't.
Speaker 4: For large boiling gas companies, a lot of which are
Speaker 4: really more engineering than trading, they'll look anywhere if there's
Speaker 4: sort of, you know, a definable edge. And we were
Speaker 4: talking a little bit about the process of interviewing. Part
Speaker 4: of what somebody is looking for is, you know, can
Speaker 4: we do what you do? I'll give you an example.
Speaker 4: Funds really want to expand their balance sheet and be
Speaker 4: as efficient with it as possible. If we look at
Speaker 4: gross notional exposure to net assets for multistrats, we hovered
Speaker 4: around ten ten x through about twenty twenty, and since
Speaker 4: then now we're between fourteen and sixteen and that's grossing
Speaker 4: sets up as a multiple of their investible assets. So
Speaker 4: that tells you they're looking for things that are a
Speaker 4: little bit more highly leverageable. But any edge they will
Speaker 4: look at. You know, fifteen years ago, no multistrap traded
Speaker 4: munis most all of them do. Now, you know, there
Speaker 4: were certain businesses like index rebounel, things of that nature
Speaker 4: basis type trades that once were the exclusive province of
Speaker 4: the street and now because in the ability of a
Speaker 4: lot of these multi strats to effectively lose use their
Speaker 4: balance sheet, they can engage in those businesses. Right.
Speaker 2: This is run of the themes that's come up as
Speaker 2: the sort of like post dog frank era or a
Speaker 2: lot of certain types of trades that used to exist
Speaker 2: in house at the major banks are now have now
Speaker 2: effectively been outsourced in some manner to buyside entities where
Speaker 2: it's more appropriate to take these risks. Let's talk about
Speaker 2: your time when you were a PM. We talked about
Speaker 2: the value of the seat and not getting fired. And
Speaker 2: I also get the impression that on a sort of
Speaker 2: day to day or week to week or trade to
Speaker 2: trade basis, there's a lot of constraints from the risk manager.
Speaker 2: Talk about the incentives of the PM to survive and
Speaker 2: make it to the next year and make it to
Speaker 2: the next bonus season.
Speaker 4: I mean, you can essentially think of working for a
Speaker 4: multistrat is you're running your own business. Okay, you're sort
Speaker 4: of running your own fund. But you only have one client,
Speaker 4: so you have to make very sure that that client's happy.
Speaker 4: Your constraints are usually put in, you know, two terms.
Speaker 4: You'll often hear the term capital thrown around. You know,
Speaker 4: Tracy manages seven hundred million in XYZ and Joe has
Speaker 4: fifty million in ABC, that sort of thing. The truth is,
Speaker 4: those aren't really easily comparable numbers, right. The hedge fund
Speaker 4: itself is inherently leveraged. They'll typically allocate somewhere between three
Speaker 4: and four times their notional value, maybe even more in
Speaker 4: terms of allocations to traders a billion dollars, you're allocating
Speaker 4: out theoretically three or four billion. But there are two
Speaker 4: numbers that are going to matter a lot to a PM.
Speaker 4: The first one is how much can I lose? That's
Speaker 4: your draw down, and there are two ways to measure that.
Speaker 4: Most hedge funds are going to measure it on a
Speaker 4: peak to trough basis, meaning even if you're up five,
Speaker 4: if you give back suppose you're stopped is seven. If
Speaker 4: you give back seven, then that's going to be your
Speaker 4: draw down, even though you really weren't down from zero
Speaker 4: much at all. The other way to measure that is
Speaker 4: from zero from flat. So you can actually be fired
Speaker 4: from one of these places and be up money on
Speaker 4: the year. When it happens, you just gave back too
Speaker 4: much of your sort of new money.
Speaker 2: So actually explain that further a why would you fire
Speaker 2: someone who's managed money profitably? But then here's another related
Speaker 2: question to that is, like you hear about, Okay, someone
Speaker 2: gets fired from place X, and then they go get
Speaker 2: a new job at place y. But if there objectively talented,
Speaker 2: and maybe they're not, but if by some measure that
Speaker 2: it can be established that they're talented, why are the
Speaker 2: pods so quick to fire them? I mean, I get, yeah,
Speaker 2: you lose money, that's not good. But if you know
Speaker 2: losing money happens if the person has talent, why the
Speaker 2: quick fires.
Speaker 4: It helps if you think of the multistraat itself as
Speaker 4: managing a portfolio themselves, but it's a portfolio of risk takers.
Speaker 4: Not to be reductive, but generally most of those types
Speaker 4: of decisions are made on a fund by fund basis.
Speaker 4: In other words, you know, maybe this person is not
Speaker 4: as uncorrelated to what we have as we already thought.
Speaker 4: They are not really making a lot of money. They
Speaker 4: just exceeded their draw down, because it's not like they
Speaker 4: don't know that it's a picatrough number. They're perfectly aware
Speaker 4: of it. Or perhaps there's another opportunity in the market
Speaker 4: to replace them with someone better. They're always looking to
Speaker 4: optimize their portfolio of risk takers as far as the
Speaker 4: other firm. They could be thinking, this person does fit
Speaker 4: what we need and we really like their risk profile.
Speaker 4: Even a really great PM is going to have a
Speaker 4: significant draw down every two to five years, and there
Speaker 4: aren't too many who've gone ten plus years with no
Speaker 4: losing gears. You know, you just don't want to be
Speaker 4: that person who experiences that five percent of the time
Speaker 4: broad down in your first few months. And a new thought.
Speaker 3: I used to know a credit guy who always said, like,
Speaker 3: you're not a proper credit trader until you've had at
Speaker 3: least one major blow up. Maybe maybe that's true. But
Speaker 3: on this note, Okay, if I get a big draw down,
Speaker 3: I understand maybe it depends on where I am with
Speaker 3: my career, and if I get it in the first
Speaker 3: six months of working at a shop, that would be
Speaker 3: very bad. But if it's in you know, year six
Speaker 3: or something, maybe it doesn't matter so much, But how
Speaker 3: embarrassed am I when that happens? And am I like
Speaker 3: publicly shamed within the organization for this happening? Or how
Speaker 3: does it work exactly?
Speaker 4: You know, it's sort of funny because obviously we had
Speaker 4: a period just a few months back where there were
Speaker 4: a lot of headlines about large losses. Is the marketplace
Speaker 4: views it, it's going to feel awful to the PM, right,
Speaker 4: you never want to be on the screen for a loss.
Speaker 4: But whenever you see somebody up there with one hundred
Speaker 4: million dollar loss, that means they had one hundred million
Speaker 4: to lose, which means that they were managing a large
Speaker 4: book and they were taking a lot of risk. And
Speaker 4: if you'll notice, some of those pms from a few
Speaker 4: months ago are still exactly where they were. You are
Speaker 4: really generally better off getting bounced for a large loss
Speaker 4: than you are a small one.
Speaker 2: This goes fits with something one of my beliefs that
Speaker 2: a billionaire is someone who either has positive one billion
Speaker 2: dollars in net worth or negative one billion in one
Speaker 2: billion in debt, because you have to be like really
Speaker 2: rich to have lost that much money. And anytime you
Speaker 2: hear about like a former billionaire and they lost everything.
Speaker 2: They're almost all as still somehow living large. So being
Speaker 2: deeply deeply in debt is almost as good as having
Speaker 2: tons of money. So I'm glad to hear this. How
Speaker 2: does that constrain your actual trading? Okay, you know that
Speaker 2: draw down number, you know at the point we're going
Speaker 2: to get stopped out of the seat, How does that
Speaker 2: actually translate into thinking about the trades that you put on?
Speaker 4: I hate to do And it depends, But it sort
Speaker 4: of depends on where you're at. Because even though common
Speaker 4: draw down for limits are usually somewhere between seven and
Speaker 4: ten percent for what's called a stop out, you might
Speaker 4: end up getting your capital reduced well before that at
Speaker 4: three and a half or five, and that makes it
Speaker 4: really really hard to come back. The key is, you know,
Speaker 4: do you have a process, do you have risk management
Speaker 4: and portfolio construction where you are still applying your risk management.
Speaker 4: I'm only going to risk as much my risk capital.
Speaker 4: What is between me and a capital reduction or draw down?
Speaker 4: I'm going to be pick here. I'm going to trade smaller.
Speaker 4: There are a lot of funds that have you know,
Speaker 4: internal coaches, psychologists like it's windy Rhodes is based on
Speaker 4: real people who do real things. And you know, certain
Speaker 4: firms will sit you down and talk to you, or
Speaker 4: they'll make you take a time out. Other firms will
Speaker 4: just say that's it, you're out. But psychologically it makes
Speaker 4: you you want to get it back, which is not
Speaker 4: a great feeling because even when you get there, you're
Speaker 4: just at flat and it really impacts your risk taking tolerance.
Speaker 4: I think one of the best things that you know,
Speaker 4: I ever heard was if you're kind of in a
Speaker 4: losing street, just get flat and go away. Don't keep
Speaker 4: any marginal things. You can always buy it back later.
Speaker 4: You can always sell it later. But get your mind right.
Speaker 4: But it does negatively affect you and you kind of
Speaker 4: stew your thinking either to I'm going to take more
Speaker 4: bets to get it back faster, or I'm not going
Speaker 4: to do anything because I'm going to be so picky.
Speaker 4: Overtrading is really common. I'll give you a for example. Well,
Speaker 4: people coming from the cell side almost always overtrade when
Speaker 4: they first get to the buyside. The reason is trading
Speaker 4: has a positive expected value for them. They are in
Speaker 4: the bid ask. Not only that, but facilitation desk on
Speaker 4: the cell side. They lose money if VALL explodes, but
Speaker 4: they generally make a lot of more money after it subsides.
Speaker 4: The bid ask widens out and they could collect a
Speaker 4: lot of clients flow in the back end of that.
Speaker 4: One of the questions that I always ask people is,
Speaker 4: you know, tell me about your biggest draw down. What
Speaker 4: did happen, When was it, what was going on? What happened?
Speaker 4: Would you do? And the sell side traders will always
Speaker 4: have very quick times to recovery, and they expected to
Speaker 4: get it back, but that's not the positive expected value
Speaker 4: you have on the buy side. It costs your money
Speaker 4: to trade.
Speaker 3: Brian, tell me about your biggest draw down and what
Speaker 3: it was and what you did well.
Speaker 4: My biggest drug I was losing my job. I can't
Speaker 4: name numbers, but essentially I violated my own risk. I
Speaker 4: usually never speculated on outright vault, and I had a
Speaker 4: long VALL position, and I normally would have structured that
Speaker 4: as a spread, and I didn't. And though I was
Speaker 4: directionally right, I bought really expensive wall and therefore didn't
Speaker 4: make much money. Got hit on volatility in a much
Speaker 4: larger fashion than I thought I would, And I was
Speaker 4: in that camp of not a big draw down, and
Speaker 4: it was almost unreal to people that I knew, Like,
Speaker 4: why would they let you go? Because there's not a
Speaker 4: lot of verifiable information out there. That always sounds very
Speaker 4: suspect to people. I wish I could be more colorful
Speaker 4: for that.
Speaker 3: No, no, no, then that's really helpful. But on this note,
Speaker 3: I'm also curious. Do pms ever go to like risk
Speaker 3: managers or the people above them and beg for like
Speaker 3: either more money or more risk tolerance.
Speaker 4: Oh? Absolutely, And a lot of firms actually have, you know,
Speaker 4: programs where if you have something that's really scalable that
Speaker 4: you think is very functional, they may give you sort
Speaker 4: of a side account and you get paid on that,
Speaker 4: but it's not part of your regular book. Once you
Speaker 4: work in BD, a lot of the people who you
Speaker 4: bring in sort of ask you questions like, Hey, I
Speaker 4: want to do this, Who should I ask? When should
Speaker 4: I ask? I generally tell pms, unless it's an actual
Speaker 4: trade idea, don't just ask for more capital unless it's
Speaker 4: one of two situations. Number One, you just got there
Speaker 4: because they love you, you haven't done anything wrong, and
Speaker 4: they just probably paid up to get you. Number Two,
Speaker 4: you've just made a hundred million bucks. Other than those
Speaker 4: two situations, don't ask for things.
Speaker 2: Wait, let's learn more about violating your own risk book.
Speaker 2: There's a famous story from Stan Druckenmiller. He apparently like
Speaker 2: bought the very top of the internet bubble, and he says,
Speaker 2: you asked me what I learned. I didn't learn anything.
Speaker 2: I already knew that I wasn't supposed to do that.
Speaker 2: I was just an emotional basket case and couldn't help myself.
Speaker 2: So maybe I learned not to do it again, but
Speaker 2: I already knew that. When a fund manager is sort
Speaker 2: of like violate or a PM is violating some of
Speaker 2: their own things, do they know it? Do they feel differently?
Speaker 2: Do they get like some sort of acidic taste in
Speaker 2: their mouth? When I like go on tilt when I
Speaker 2: play poker, I always sort of know it, but I
Speaker 2: can't help myself anyway. Like I just do it and
Speaker 2: I go all in and I know I hadn't then
Speaker 2: I have to embarrassingly walk out of the table. Like
Speaker 2: what does that feel like? Talk about like what's going
Speaker 2: on in someone's brain when they're like taking these risks
Speaker 2: that on paper they shouldn't be.
Speaker 4: Well, usually you only recognize in the rear view. If
Speaker 4: you slow down and think through the trade, you know,
Speaker 4: you sort of realize that, hey, you probably shouldn't do this.
Speaker 4: But I think you're parallel with being on tilt at
Speaker 4: a poker table. It's it's that knowledge, you know, as
Speaker 4: can you call somebody or after you raise that instant
Speaker 4: feeling that man, I just leaped up. It's that feeling,
Speaker 4: only you're going to feel it for a few days,
Speaker 4: and you're going to get a little email or call
Speaker 4: from your risk manager, and then you're not going to
Speaker 4: know what that sit down is going to be like.
Speaker 4: It might be, Hey, no big deal, get back out there,
Speaker 4: you know, don't worry about it. It may be an
Speaker 4: entirely different conversation. You may be told to go to
Speaker 4: HR don't take your jacket, or take your jacket, I
Speaker 4: should say. But it isn't a bad feeling. And I
Speaker 4: think some of the better mentors that I've had through
Speaker 4: the years have kind of taught me like that mental
Speaker 4: health thing and where you're at is very important. And
Speaker 4: I think it's even worse when you're at a multistraat
Speaker 4: or a situation where you have a single plot that's
Speaker 4: it if that one client isn't happy, you are probably
Speaker 4: out for at least six months and potentially much longer.
Speaker 4: The BD process to bring a new PM on board
Speaker 4: is somewhere around three months on its own.
Speaker 2: Do you do post mortems on winning and losing trades?
Speaker 3: Kind of?
Speaker 2: You know, like after I forget talk about poker, you
Speaker 2: go back and you run the poker hand through a
Speaker 2: solver and you see if you played it correctly, often
Speaker 2: whether you made money or lose money. Is there an
Speaker 2: equivalent process that's done in the trading world.
Speaker 4: N hundred percent. As a matter of fact, if you
Speaker 4: guys have never had Brent Donnelly on, he wrote a
Speaker 4: book called Alfit Trader, and I've probably never seen that
Speaker 4: information written down in one place before.
Speaker 2: But right, yeah, we should have them back on or
Speaker 2: something to talk about just now, but keep tell us
Speaker 2: more about it from your perspective, Yes.
Speaker 4: You know, and that is part of the other process,
Speaker 4: like we mentioned edge, like the other parts of the
Speaker 4: beating process that I want to know the process by
Speaker 4: which somebody selects trades. I want to know about their
Speaker 4: portfolio construction, and I want to know their approach to risk,
Speaker 4: Especially on risk, you'll find that very good pms, and
Speaker 4: especially these firms, the firms themselves, even though the PM
Speaker 4: may not see it, they know exactly how many bets
Speaker 4: you've taken. They know about your hit rate, they understand
Speaker 4: your skew. They can sort of tell when you're deviating
Speaker 4: from your wrist mandate. They have a lot of analytics.
Speaker 4: But it's been my experience that the best pms look
Speaker 4: at it themselves. They're almost religious with it. You know,
Speaker 4: how did I do today? It's very similar to an
Speaker 4: athlete watching tape or a dancer. My daughters loves dance.
Speaker 4: You know, she'll watch tape of herselves. This is what
Speaker 4: I missed, this is what I didn't do. And the
Speaker 4: great benefit of doing it in a statistical fashion is
Speaker 4: you can remove, oh, I won't count that because it
Speaker 4: was a Tuesday and a full moon. Any excuse you
Speaker 4: have goes out the window. Those are the numbers on
Speaker 4: this note.
Speaker 3: And since Joe brought up poker earlier, are there like
Speaker 3: popular ways to become a better better better? Does that
Speaker 3: work for all?
Speaker 2: Better?
Speaker 3: A better better better? And I'm thinking, you know, I'm
Speaker 3: thinking back to Liar's Poker. That's a famous example. And
Speaker 3: then wasn't there something at Jane Street that Sam Bankman
Speaker 3: Freed was doing a bunch of different like gambling games
Speaker 3: things like that.
Speaker 4: Yeah.
Speaker 3: Like what is popular in terms of I guess building
Speaker 3: up your risk returnals.
Speaker 4: Well, I think anything where you have some element of strategy,
Speaker 4: And I think one of the reasons that poker is
Speaker 4: so popular is that it combines not only strict strategy
Speaker 4: like you might see in chess, but also a fair
Speaker 4: degree of complete randomness and you're going to take some
Speaker 4: bad beats and that's going to happen in trading. It's
Speaker 4: easy to forget, but a really good PM might have
Speaker 4: a fifty two fifty three percent hit rate on their trades.
Speaker 4: It becomes what their skew is how much they make
Speaker 4: on their winners versus how much they lose on their losers.
Speaker 4: So anything where you're actually becoming more in tune to
Speaker 4: your own risk taking, your ability to think in what
Speaker 4: most people call probabilistic terms, or thinking in bets after
Speaker 4: they any Duke book, any exercise like that, and I
Speaker 4: think poker is probably just the most popular. It's also
Speaker 4: a great fun I don't know whether i'd say team
Speaker 4: building game, but it's a fun social game that people
Speaker 4: play often around hedge funds, and it fits with the
Speaker 4: gambling mentality, so we hear about it a lot, but
Speaker 4: there are a lot of different internal games that people
Speaker 4: engage in.
Speaker 2: I just have one last question, and it goes back
Speaker 2: to the role of the analyst, and you mentioned, oh,
Speaker 2: maybe you know, an analyst could be valuable if they
Speaker 2: really know the history of what happens, if they're X
Speaker 2: or Y. I can just look that up on three
Speaker 2: on chagbtr perplexity these days, like, how realistic is it
Speaker 2: in your view that firms could meaningfully reduce analyst headcount
Speaker 2: by using artificial intelligence, or if they save money on
Speaker 2: by using artificial intelligence, would that just create new roles
Speaker 2: for more sort of advanced research. Where are we at
Speaker 2: with this? You must talk to people about what they're
Speaker 2: doing with this.
Speaker 4: I think there's lots of things they can do. And obviously,
Speaker 4: you know you're talking about pret secretive organizations, so there's
Speaker 4: an enterprise sharing issue there to deal with. But yeah,
Speaker 4: a lot of things could be really computerized. But you're
Speaker 4: also looking for people who are going to be able
Speaker 4: to tie the story and the narrative and with what
Speaker 4: was going on with the instruments, and it's probably not
Speaker 4: something so simple as you know, what did the dollar
Speaker 4: in do the last time the FED hiked? It might
Speaker 4: be something more like what was a red screens puts
Speaker 4: foot steepener doing the last time the FED hiked, which
Speaker 4: you're going to require a lot of modifications to those
Speaker 4: AI models. I'm always hesitant to talk about this because
Speaker 4: I can remember we were told that all the paper
Speaker 4: companies were going to go out of business because everybody
Speaker 4: was going to read everything online. And what happened. We
Speaker 4: just all printed it.
Speaker 2: Oh, yeah, that's true. And they and they a lot
Speaker 2: of them also sell cardboard boxes and so they benefited
Speaker 2: from e commerce. Those same companies actually absolutely.
Speaker 4: Georgia Pacific is probably huge in Amazon's warehouse. But I
Speaker 4: think that there will always people who because this industry
Speaker 4: thrives on you know, I can do this even though
Speaker 4: the odds are very much against me, and they will
Speaker 4: definitely use any edge they can get informationally as far
Speaker 4: as analytics or anything like that. But usually there's something
Speaker 4: that you're going to have to ask that maybe not
Speaker 4: everybody understands or nos. I think everybody who's in this
Speaker 4: business got into it in one way or another, and
Speaker 4: somebody handed them what I just generically call, you know,
Speaker 4: street born, which is the market Wizard's books or any
Speaker 4: of those types of things, and they're fantastic because what
Speaker 4: I got out of reading those types of books is
Speaker 4: there's a lot of different ways to make money. You
Speaker 4: just have to find out what you're good at and
Speaker 4: how you can apply your particular set of skills and
Speaker 4: attributes to doing it. And I think that there's going
Speaker 4: to be somebody who gets really good at asking you
Speaker 4: one of these am models market questions, and that person
Speaker 4: who's going to get built up. We're already seeing increase
Speaker 4: for heads of AI at several different funds, and I
Speaker 4: think that that's going to continue as they explore more
Speaker 4: and more, you know, what they can actually do with it.
Speaker 4: They have no problem spending money on the either the
Speaker 4: AI or the human being. It will ultimately come up
Speaker 4: to who can perform.
Speaker 3: So how do you avoid I guess group think among
Speaker 3: your pms, because the whole point of multistrats is those
Speaker 3: uncorrelated returns, and you don't want everyone just putting on
Speaker 3: the same trades, either literally or maybe through another angle.
Speaker 3: And I'm thinking specifically about journalism. So some newspapers used
Speaker 3: to always move reporters from a certain beat after they'd
Speaker 3: been there for like ten years or something, and the
Speaker 3: idea was just to shake it up a little bit
Speaker 3: and make sure that they're not getting like too cozy
Speaker 3: or too comfortable with that particular industry. The downside of
Speaker 3: doing that, of course, is that you lose expertise. But
Speaker 3: I'm just wondering, like, how do people, yeah, how do
Speaker 3: people avoid that group think aspect and make sure that
Speaker 3: everyone's doing you know, new stuff kind of independently.
Speaker 4: Well. One way is limiting the communication between the pods.
Speaker 4: Some places do not really allow their pods to communicate.
Speaker 4: Another way is basically structurally, you don't want to see
Speaker 4: people hang on to each other's trades. You're going to
Speaker 4: be looking at this from you know, a macro view
Speaker 4: within the firm. You're going to see this type of
Speaker 4: trade that this person had on is increasing in size
Speaker 4: in the firm. But by and large, if you've fired right,
Speaker 4: you're going to hire independent thinkers, and a seasoned PM
Speaker 4: will tell you I might like somebody else's idea, but
Speaker 4: I can't really trade it properly unless it's my idea too,
Speaker 4: I kind of have to adopt that as my own.
Speaker 4: So group think is not as prevalent as you would
Speaker 4: think because it's structurally prohibited in some places and the
Speaker 4: places where it's not. You know, a seasoned PM is
Speaker 4: like any I may love that trade that you pitched me, Joe,
Speaker 4: but yours and I can't. I'm not doing my job
Speaker 4: if I say, Joe, when are we getting out of this?
Speaker 4: That's not what I'm paid to do. So part of
Speaker 4: it is on the part of the PM internally, and
Speaker 4: then the other part of it is on the fact
Speaker 4: that they don't want to be seen as copying the
Speaker 4: p next guy's trades.
Speaker 2: All right, but just real quickly, maybe you don't want
Speaker 2: to do groupthink or copy the next guy's trades. But
Speaker 2: if there's a hot beta, right, you're always looking for alpha.
Speaker 2: But if there's a hot beta like AI beta or whatever,
Speaker 2: or falling inflation beta like some of these long term trends,
Speaker 2: but that's not your thing. Do pms find ways to
Speaker 2: backdoor their acid class into the hot trade in a
Speaker 2: way that like may the fact to become trade crowding.
Speaker 4: Yeah. A former boss of mine used to say, there's
Speaker 4: never been a risk management framework the smart trader could outwit.
Speaker 2: That's what I'm wondering. That's like, is it this cat
Speaker 2: and mouse game where you're, in part trying to outwit
Speaker 2: the person who could tap you on the shoulder by
Speaker 2: trading something that looks like something else.
Speaker 4: Yeah, there's a lot of downside to doing that, you know,
Speaker 4: if you don't have a trade kind of properly thought out.
Speaker 4: But you know, in general, if I hire one of
Speaker 4: you to trade credit and the other one to trade
Speaker 4: the front end of the yield curve, and you know,
Speaker 4: all of a sudden, Brazil is very hot the real
Speaker 4: and you're both asking me for limits on the real Like,
Speaker 4: you won't have limits in something that you don't already trade,
Speaker 4: so you can't really deviate for your mandate too much.
Speaker 2: It's kind of a I'll just find a credit spread
Speaker 2: that's correlated with the rail yeah.
Speaker 4: Or you know, there are a lot of ETFs that
Speaker 4: basically contain macro trades if you will, and I have
Speaker 4: often wondered, you know, are those there so that mutual
Speaker 4: fund managers can you know, and investigate equities, can speculate
Speaker 4: on the yield curve. But there are always ways to
Speaker 4: do it. You just have to kind of hire the
Speaker 4: right people who aren't necessarily going to do that. And
Speaker 4: if you get in trouble for something like that, I
Speaker 4: sort of like to say that this is the second
Speaker 4: most waryuristic streight in America. Word gets out is large
Speaker 4: of an industry, it is, it's not that big in
Speaker 4: an individual areas. And if somebody has really done something untoward,
Speaker 4: then it's people are going to hear about it.
Speaker 2: Brian Yelvington, thank you for coming on odd Lots and
Speaker 2: talking about getting and keeping multistraat jobs. Our journey continues.
Speaker 2: Thank you so much. Really appreciate chatting with you.
Speaker 4: Thank you, thank you for having me. It's great to
Speaker 4: get to talk to you guys.
Speaker 2: Tracy, if I were like young, I think I or
Speaker 2: if I were in college or something, I think I
Speaker 2: would have taken that trading job.
Speaker 4: Now.
Speaker 2: I mean, I like the way my direction, life direction went.
Speaker 2: But if I wanted to do over, I'm curious what
Speaker 2: that fork in the road looks like.
Speaker 3: There'ought Yeah, that's so sad will.
Speaker 2: Be a different puck, you know, Like I feel like
Speaker 2: I would I would trade you know what happened, there
Speaker 2: would still be an odd one. I would trade for
Speaker 2: a while, I would blow up. I would get a
Speaker 2: job in journalism, and then I would be one of
Speaker 2: those journalists who reminds all of their colleagues all of
Speaker 2: the times that they used work and finance. You know,
Speaker 2: I would find like the person on the call, they're like,
Speaker 2: I just love the you know, It's like I was like, oh,
Speaker 2: I used to work in a multi strategy hedge fun. Yeah, yeah, yeah, yeah,
Speaker 2: well I used to be a trader. Anyway.
Speaker 3: Sorry, keep going, Joe, how many times have you brought
Speaker 3: up that interview with the trading company on this note?
Speaker 4: Yeah?
Speaker 3: Okay, that was really interesting. One thing that kind of
Speaker 3: jumps out at me is the last discussion about you know,
Speaker 3: how do you avoid everyone just taking on the same risk.
Speaker 3: It really seems to me like it's correlation built on correlation,
Speaker 3: built on correlation, right, And I often think correlation is
Speaker 3: one of the hardest things to actually nail down on
Speaker 3: Wall Street. So you know, you gotta wonder so far,
Speaker 3: so far, you know, a bunch of multistrats survived April
Speaker 3: pretty well, so I guess we'll see.
Speaker 2: I think if I were a risk manager and I
Speaker 2: had one person trading credit and the other person trading
Speaker 2: the short end of the old curve, and suddenly there
Speaker 2: are month to month return started looking identical, and it
Speaker 2: happened to be identical with the person who traded Brazilian rayal.
Speaker 2: That would set off a red flag for me. You know, like,
Speaker 2: I feel like the return profile itself is probably part
Speaker 2: of the hint, right that even if you can't really
Speaker 2: articulate why this person's traded is secretly this person's trade
Speaker 2: in disguise. If there re tuned profile looks too similar,
Speaker 2: that probably sets off some red flags.
Speaker 3: We got to talk to a risk manager, don't Yeah,
Speaker 3: we should do that.
Speaker 2: Okay, if you're a risk manager, you want to talk
Speaker 2: about what that job is like or if you know,
Speaker 2: one shoots a message.
Speaker 3: All right, shall we leave it there.
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the All Thoughts Podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow our producers Carmen Rodriguez at Carman Arman dash Ol
Speaker 2: Bennett at Dashbot and Kilbrooks at Kilbrooks. From our Odd
Speaker 2: Lots content go to Bloomberg dot com slash od lots
Speaker 2: were the daily newsletter and all of our episodes, and
Speaker 2: you can chat about all of these topics twenty four
Speaker 2: to seven in our discord Discord dot gg slash od lots.
Speaker 3: And if you enjoy odd Lots, if you like our
Speaker 3: ongoing exploration of multistrap funds, then please leave us a
Speaker 3: positive review on your favorite podcast platform. And remember, if
Speaker 3: you are a Bloomberg subscriber, you can listen to all
Speaker 3: of our episodes absolutely ad free. All you need to
Speaker 3: do is find the Bloomberg channel on Apple Podcasts and
Speaker 3: follow the instructions there. Thanks for listening, then, in the
Speaker 3: e