Dear Financial Voice Reader,
I often get people asking me how to become a hedge fund manager and managing other people’s money.
When I wrote my first book, there was a very good reason I called it ‘The Mind of a Trader’. Every one of the 10 leading traders I interviewed for the book told me that psychology was key to success.
Bill Lipschutz was Global Head of Currency Trading at Salomon Brothers at the end of the 1980s. If ever there was a right time and a right place for a trader, that was it - then and there.
I interviewed Bill Lipschutz twice, on both occasions in London. The first interview was conducted by the side of the open air roof swimming pool of the Berkeley Hotel, overlooking Green Park and Knightsbridge. The second interview took place in Surrey at the home of Mark Slater, one time Head Currency Trader at Salomon Brothers’ in London.
It is often not realized that the source of trading funds can affect one’s trading style and performance. As Bill Lipschutz explains, this fact is something even the most experienced traders do not appreciate until they experience it.
“I was unaware that there were these differences. Seven years ago, I had a naive view that you get the money from here, or from Salomon Brothers’ proprietary capital, whether it is ten high net worth individuals or a fund of funds I felt it was all the same; let me see how much I can extract from the market. The big issue in leaving a major firm is that I did not foresee that that is something that is learnt, that it is a series of experiences. It’s all very well for me to sit here and attempt to articulate it, but it is something you have to experience.”
“At Rowayton, we had three different products, if you will. As a side, my experience is that managing people’s money and trading for a company, while on the surface one might think they are the same, and I certainly did at one time, they are so vastly different, particularly the motivations. It is not simply a questions of saying, ‘oh, I have some capital. It doesn’t matter what the source is. I will go out and I do my best and at the end of the day try to make some money.’ It is not like that. There are many, many different strengths that come from being a corporate entity. Whereas dealing for high net worth individuals, you do live and die by your monthly numbers. It is much, much different from being a money manager.”
“The whole money-management game is a difficult game. It has not only to do with how well you perform, but what kinds of results people are looking for in their portfolios. Absolute performance is a real misleading thing. I can say to you, ‘we were up 600 percent’ over five years in our most aggressive program, and you might say, ‘wow 600 percent’. But that does not necessarily mean that much in and of itself, without knowing how well other currency-only managers performed. For example, say a guy is managing $200 million, and $120 million of it is a fund that he runs with a very specific mandate. If he made 600 percent over four years in that particular fund, he may have people pulling money out from that particular fund, because they are nervous, because that really was not the kind of variance they were looking for. So, it is very complicated.”
“Look at the very different approach of George Soros, when he used to trade, and Peter Lynch. Soros is out there on the margin, trying to make a lot of money. Peter Lynch in managing the Magellan Fund, was about the preservation of capital. He was in a big bull market, he was a big stock-picker, he made a lot of money, but believe me, if the Magellan Fund is ever starting to be down at all you would have massive redemptions and you would ultimately have no fund. So the people with George Soros understand they may be down 20-30 percent in that part of their portfolio. I mean I don’t think you have any people whose whole investment portfolio is in the Quantum Fund, they are going to be diversified. The motivation of the investors is very different. Of course, part of that is that George Soros’s style is different to that of Peter Lynch, but that is due to the algebra of the source of money.”
Alpesh B Patel
For a free online trading course visit www.alpeshpatel.com/apprentice
