Jarret Christie · @jarretchristie
21st Jul 2015 from TwitLonger
alpha givers
the most poignant observation i can offer from my 10 years covering hedge funds in various sales and trading roles is the shocking number of deeply experienced and smarter-than-i'll-ever-be professional risk managers who become wedded to investment theses for ideological reasons. to be certain, most truly elite speculators simply express bullish views on things they think will appreciate within a reasonable timeframe and with an attractive risk/reward profile, and bearish views on those they think will decline in price with desirable risk/reward. but, perplexing to me, is the consequential number of professional investors who do not operate this way.
they behave like hometown fans, digging in on their losers, sparring with opposing "fans", and continuously shouting the equivalent of "just wait 'til next season". but this isn't professional sports. it's fiduciary asset management. you don't need to pledge allegiance to a team (view), or avoid reversing that view for fear of being labelled "fair-weather". call me fickle or disloyal, but i fully reserve the right to reverse my view on, say, gold at any time and turn "bullish" if i think the outlook for inflows merits it, or if i see asymmetry in betting on the upside component of the distribution. as a strategist and trader, i view this optionality as a competitive advantage relative to peers who've earned a static label of "bull" or "bear" and wear that sign of ingrained bias with pride.
now, i'm very sympathetic to the fine line between the irrational zealot and the unwavering hero who is ultimately proven right (this UCLA economics commencement speech by michael burry illuminates this differentiation perfectly: http://youtu.be/1CLhqjOzoyE). but the point is that the PnL difference between the two isn't fine. it's extremely fat.
back to the sports fan analogy, i'm not advocating bandwagon jumping. the notion that more than a handful of extraordinary managers exhibit sustainable edge in momentum trading and market timing is tenuous at best. i have deep respect for sticking to one's thesis, particularly in the face of price adversity, so long as the fundamentals continue to support that thesis and the manager isn't exclusively seeking confirming evidence. if i were an allocator to hedge funds, however, i would rank "willingness to abandon a once-conviction thesis" very high on my list of desired characteristics.
perhaps i have too high expectations of the people i generally view as the brightest minds in risk management. i find myself consistently baffled by the frequency with which cognitive bias impacts the investment process of those who are paid handsome fees supposedly to exploit the irrational behaviors of others. i guess the answer lies in the returns data, though: some are alpha takers and some are alpha givers.