Institutional Investor's Alpha Magazine - June 2008 - (Page 29)

BRUCE KOVNER ALPHA HALL OF FAME most. I was registered as a CTA, a commodities trading advisor, and I remember the totally blank looks I would get on the faces of people when I would explain what I did. I’d explain it for ﬁve minutes and you could see them drifting off. And then they’d say, “So you’re like a stockbroker, right?” And I’d say, “Yeah, sure, like a stockbroker.” Did you ever work in the futures pits? he curious young Bruce Kovner didn’t set out for Wall Street, choosing instead a nomadic life, ﬁrst as a political science student then as a consultant to Congress and the National Science Foundation. He taught at Harvard University on a fellowship for a while, drove a cab in New York City, took night classes at the Julliard School and in 1977 — on a wing and a prayer — discovered the joys of commodities trading (he used a $3,000 credit card advance to do his ﬁrst trade, a soybean futures contract). Six years later Kovner started Caxton Corp. with $13 million, which included a stake from the Rothschild family. Along the way he made commodities trading respectable for hedge fund managers. Today he runs $12 billion at New York–based Caxton Associates, known for its global macro strategy and its average annual returns of 25 percent. Kovner, 63, donates heavily to the charter schools movement in New York City and is chairman of the conservative American Enterprise Institute. He also dabbles in publishing, as an investor in the New York Sun, which Hall of Famer Michael Steinhardt also backs. How did you wind up as a trader? For a short period of time, I went down to the ﬂoor of Comex. I got a seat on all the exchanges — I had a wonderful little gold badge that let me trade on all of the New York commodities exchanges. I wanted to understand what happened on the ﬂoor. I thought it was an essential factor in understanding the behavior of markets — the daily behavior, the way risk works and how stops were placed. I was totally unsuited for it. I wasn’t aggressive enough to push my way into the front of the pit. You know, it’s a bit like being under the hoop in basketball. You don’t get to stay there very long. People push you out. It’s quite a physical thing. Did you get the understanding you sought? In all things you get only partial understanding. But did I get some? Sure. And it was fun. I think part of it was just the pleasure of exploring a new world. But my skill set had more to do with analytics — what we call upstairs trading. What market lessons have you learned over the years? Some markets have very long, quiet periods. Some markets and some instruments become obsolete. Some markets become arbitraged out. The excess return in them goes away. One of the most important skills you need is to constantly reinvent where you put resources. Commodities markets were quiet for years. Now they’re very strong. I was looking around, and this work seemed very interesting because the structure of the world ﬁnancial markets was changing, which meant opportunities would arise. So I started trading for my own account. What changes have you seen? First, the collapse of the Bretton Woods agreement, which freed up currencies to move. Second, ending the prohibition on gold sales. But probably the single most important factor was the development of the futures markets in currencies and interest rates. I remember one of my ﬁrst trades involved calculating implicit yields in Ginnie Mae spreads. I was just an unemployed ex-professor doing fairly rudimentary work. But a number of us felt these were going to be very important new markets. Were many hedge funds doing this? Not many. The term “hedge fund” didn’t start being used until the late ’80s or early ’90s. I was a commodities trader for a very long time, even though it was not literally what I did Photographed by Mike McGregor for Alpha on May 20, 2008, in New York. “The crowded nature of the hedge fund community has changed the character of trading, so that you can see BRUCE waves of riskKOVNER taking and derisking.” JUNE 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 29

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - June 2008

Investor's Alpha Magazine - June 2008 Contents Letter From the Editor Longs & Shorts Cover Story: Alpha Hall of Fame Bruce Kovner Michael Steinhardt Kenneth Griffin Louis Bacon Steven Cohen George Soros James Simons Seth Klarman Julian Robertson Jr. Jack Nash Leon Levy Paul Tudor Jones II Alfred Winslow Jones David Swensen Looking Ahead: Back to the Future Research Center: Europe Hedge Fund 50 Unhedged: Let the Sunshine In

Institutional Investor's Alpha Magazine - June 2008

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