Institutional Investor's Alpha Magazine - June 2008 - (Page 66)

ALPHA HALL OF FAME lege who have a tremendous work ethic, but they get lost trying to understand the logic behind a whole variety of market moves. While I’m a staunch advocate of higher education, there is no training — classroom or otherwise — that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. There’s typically no logic to it; irrationality reigns supreme, and no class can teach what to do during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of a move is to do it, or, more precisely, live it — a sort of baptism by ﬁre. One has to experience both the elation and fear as markets move ﬁve and six standard deviations from conventional definitions of value. How will macro investing fare over the next ﬁve years? was the largest cotton speculator in the world when I went to work for him, and he was a magniﬁcent trader. In my early 20s, I got to watch his ﬁ nancial ups and downs and how he dealt with them. His fortitude and temperament in the face of great adversity were great examples of how to remain cool under ﬁ re. I’ll never forget the day the New Orleans Junior League board came to visit him during lunch. He was getting absolutely massacred in the cotton market that day, but he charmed those little old ladies like he was a movie star. It put everything in perspective for me. What was your single best trade or investment? The macro space will be great. I think we’re going into one of those slow or zero-growth periods in the U.S., which will give us a lot of volatility. Will hedge funds do as well as they have done in the past? Probably buying March put options on the Japanese stock market in early February of 1990. The volatility was an absurd 5 percent, owing to the newness of the options market, with which many Japanese had little experience. Much like the U.S. stock market just before the 1929 crash, the Japanese stock market in early 1990 was following the same price pattern with remarkably similar fundamentals and valuations that provided enormous proﬁt opportunities in a truncated period of time. I actually felt sorry for the people who were on the other side of that trade when I was buying those puts. Your biggest missed chance? I missed the subprime opportunity of 2007, and it rankles me every time I hear the term. We have studiously avoided mortgages at Tudor speciﬁcally because it is a big-carry game that does not adequately compensate for the inherent tail risk. That unfamiliarity, though, came with a huge opportunity cost. Is the price of oil high for fundamental reasons, or are hedge fund managers and Wall Street driving it up? Average returns will drop. The amount of money that was made by hedge funds in the past two decades was so outsize relative to anything in civilization in the past couple of centuries that it naturally attracted the best intellectual capital in the world. As a result, the inefﬁciencies that existed in the ’70s and ’80s and even the ’90s are not as readily seen. But in this business there will also always be that upper tier — that top 10 or 20 percent of managers who will outperform everyone else. What experience had the biggest impact on your career? Trading commodity markets back in the late ’70s — when they were still extraordinarily volatile — allowed me to experience repeated bull and bear markets across a variety of different instruments. Remember, in agricultural markets the cycle can be just 12 months. I lost my stakes a couple of times, which taught me risk control and risk management. Losing those stakes in my early 20s gave me a healthy dose of fear and respect for Mr. Market and hardwired me for some great money management tools. Oh, incidentally and by necessity, I became a pretty good fundraiser, which has helped me in the not-for-proﬁt world. Who’s had the biggest inﬂuence on your career? It’s a very bullish supply-and-demand situation, and the peak oil theory is probably correct. But the run-up in prices is now bringing in an enormous amount of speculative, nontraditional capital such as pension funds and university endowments — principally through index products. Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket. I am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it’s going to end badly. We’ve seen it play out hundreds of times over the centuries, and this is no different. It’s just the nature of a riproaring bull market. Fundamentals might be good for the ﬁrst third or ﬁrst 50 or 60 percent of a move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic. Should hedge funds be more closely regulated? My first boss and mentor, Eli Tullis, of New Orleans. He 66 • INSTITUTIONAL INVESTOR’S ALPHA • JUNE 2008 I selﬁshly do not want to be regulated, but I understand the necessity of it. — Interview by Stephen Taub

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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