A Few Keys To Win In Financial Markets

Hedge fund investors have already been disappointed by recent earnings. That’s because hedge fund returns have dropped short of returns for the stock market for a number of years now.

Toward the end of last year, We took an inventory of the hedge fund managers I had been working with as a performance coach–a group spanning a number of firms and strategies–and found three interesting commonalities among the best performing managers. This year I have been struck by the degree to which these three qualities have anticipated outperformers within and across trading organizations. A look at these characteristics offers valuable insight into what it takes to make money in markets these days.

Success Keys#1: Outperforming money managers embrace multiple ways of making money.

We’ve usually known about the value of diversification and that smart money management firms seek diversification of client capital. What we’re viewing among individual traders and managers, however , is an embrace of the concept of “multi-strat”: developing multiple strategies for making money across varying market conditions.

It used to be the case that successful managers were distinguished by their “style” of investing. Some were growth investors; other folks focused on value; still other folks embraced momentum or craze following. Success was regarded to be a function of remarkable discipline in following your style.

Increasingly, however , really become clear that devotedness to a single style of trading or investing leaves funds managers vulnerable when market segments change and no longer praise that approach. It has become challenging to trade short-to-medium term traction and trend, for example , in markets sporting record low volatility.

Therefore, successful traders have varied. One manager, for example , trading a “tactical” short term approach in addition to a “strategic” longer-term way. The former harvests returns the moment markets are relatively trendless. Another manager collects alternatives premium from richly listed structures in addition to trading ideas directionally. Yet another director combines short-term, event-driven trading of flat price between liquid commodities with complex spread trading within all the commodities. In all of these circumstances, the focus is on having multiple ways to win. Staying with a single preferred strategy has ceased to be evidence of discipline; it is a signal of inflexibility.

Success Keys#2: Outperforming money operators embrace mathematics, integrating “quant” and discretionary approaches to all their work.

To be sure, there is an immense amount of “pseudo quant” work in the financial world. I recently evaluated a hedge fund task candidate who boasted of his successful “models”. It had been that these were simple step-wise regressions using a large number of predictor variables. The candidate wasn’t able to explain to me how this individual accounted for nonlinearities in the info, and he could not make clear how he ensured that his models did not overfit his data sets.

Even now, a surprising number of the most powerful hedge funds are manage by mathematicians. Proper quantification offers a rich assortment of tools for identifying chances across multiple assets and time frames. Several managers I’ve known have developed multiple trading systems, as well as meta-systems to choose those systems on and off relying on evolving market conditions. It is hard for discretionary managers to add such breadth and flexibility.

A lot of outperforming managers I’ve countless have run models that identify areas of growth–within specific economies as well as across countries and regions–and use these kinds of to inform stock selection plus the weightings of holdings within just portfolios. One savvy supervisor identifies several predictors of outperformance among fixed salary markets and uses this information to create relative value portfolios that optimize reward relative to risk.

In the old days, managers were praised for their “market calls” and superior intuition. Progressively, successful managers are distinguished by their holding of multiple positions carefully balanced–and rebalanced–in portfolios. As one manager explained to me, he was spending as much time adjusting his positions for changes in volatility and correlation as in generating fresh investment ideas. Quantification not only fueled the development of winning suggestions, but helped him find the best ways of expressing and blending those ideas for superior risk-adjusted returns.

Success Keys#3: Outperforming money managers and traders are working in teams.

If you think about it, this really comes after from the first two success elements. Few individual professionals have enough bandwidth to monitor and manage multiple strategies, research mathematical models, and continuously monitor portfolio structure. With the demand for diversification and the need for specialized programming and quantitative expertise, trading has become a team sport. It is not uncommon to see a senior trader use junior traders, each of whom contribute to aspects of producing ideas and managing positions. This has become a dominant way of training talent across monetary firms.

What this means in practice is that successful money managers are increasingly challenged to serve as effective people managers. They may be running businesses within a business, and their success hinges in part on their ability to ensure constant, productive collaboration. A very interesting recent book highlights The Captain Class, those group leaders who are especially effective in producing winning sports activities clubs. Among the traits of elite captains noted by the book are doggedness and focused competition, a determination to engage in thankless jobs, a low-key and democratic communication style, and strong emotional self-control. Interestingly, these characteristics are the same as all those I find among effective team leaders in financing.

We have described the successful generation of traders with an ABCD acronym. Those professionals Adapt to changing markets; Build on strengths; Cultivate creativity; and Develop best practices and procedures. Most of all, they manage creative processes that allow them to discover winning strategies in different market environments. The captains of trading teams act as part models, creating synergies among team members that make each individual participator better.

It is perhaps not surprising that even daytrading companies, long the bastion of the individual discretionary market participant, possess turned to team-based trading of multiple strategies informed by quantification. It is not enough to find an edge in financial markets and trade that strategy with flawless discipline. Only in an unchanging world is regularity king. In ever-changing monetary markets, it takes multiple strategies, rigorously tested and put in place by teams, to ensure continual success.

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