I Spent A Year at a Hedge Fund
To help them do some stuff, and it’s a job like no other.
To do a ‘good job’ at a hedge fund, it’s not about creating something outside yourself, like a physical work product. To do a ‘good job’ at a hedge fund, it’s about shaping yourself psychologically.
Having devoured More Money than God, The Big Short, videos of Bill Ackman and Seth Klarman and Ray Dalio’s manifesto, my impression was that to succeed in a hedge fund, you just had to be the smartest.
You just had to figure things out — through dogged research and analysis, to discover an investment insight that no one else in the world knew, as a scientist would, like you were solving a puzzle.
This is the effect of narrative fallacy in books and magazine articles. They suffer from the fact that people want to read stories, and stories are teleological, that there’s starting point A and it ends in Z, that the greatest trades ever made were almost like brilliant scientific discoveries in that they have a beginning, middle, and climax.
As an MBA I used to meet with a fund manager in San Francisco. I remember every afternoon I came home from a discussion with him, I had to just lay down, to decompress from what I can only term as extreme cognitive load of trying to understand what he was talking about, as he started discussions on a random topic, like say the Chinese energy market, and draw a series of successive related links that had him discussing the caloric intake needs of sub-Saharan Africans five minutes later.
I admired this level of intelligence, one that rivaled the highest level of thinking on the planet, and one that was so eminently practical.
And as it turns out, that impression is partly correct. It is of course a skill you need, the ability to think well. But it’s like, just the first layer.
Making money as a fund manager is not just about being among the world’s greatest systems thinkers. This is part I, or maybe even the preface.
Parts II through IV, which are equally if not even more important, are about being a) a good gambler, b) having the self-containment of a Stoic, and c) the clarity of a yogi-monk-enlightened person.
For, even if you are right on your grand idea, you can still be wrong and thereby punished, in so many ways.
a) If you didn’t size your winning position correctly, if you didn’t get in at the right time or got out at the wrong time, if you got the macro wrong, if you missed the central bank policy, if the rest of your positions don’t go the right way, you can win but still lose overall.
Getting the research right is difficult, then sizing everything so that your portfolio actually beats the market is like an exponential compounding of that difficulty. This is what I mean about having good gambling instincts.
Then, say you fulfill parts I and II. Now, you also need the capacity to absorb pain.
b) It’s physically wrenching when the markets head south and all your well-reasoned theses are dragged down with it.
Can you withstand that pain, of watching as your screens are bathed in a sea of red, and then not doubt yourself? The pain comes in the form of anxiety, which snowballs into tenseness, then cascades into insomnia, soreness, back pain.
Then, some of your investors will ask for updates every week or every month.
Humans are wired for pain avoidance, and looking at the positions cause you pain. Thinking about how much money you’re losing causes you pain. Having to write it in an update or newsletter causes even more. You can avoid the pain by denying it. You can avoid it also by excising it, like dumping your positions. If you know you’re right, though, you should actually be increasing your position.
Do you have the temperament to do that?
To use an athletic analogy, this is like championship athletes having to watch tape of their mistakes — and instead of being able to go out and practice and ‘get ’em next time’, having to sit still instead.
Like I said, extraordinarily difficult, and yet another exponential compounding of the skill required.
c) Finally, here comes the most wrenching part, which is that you have to constantly be reassessing your own mental process.
This is the most profound thing ever.
Your mind, the very tool which you use to think, has to use its own abilities, to judge its own quality of thinking. It seems self-referential, reflexive, paradoxical. Even in the physical world, hasn’t it been proven that the very act of observing a particle makes it change its characteristics? How do you have a mind observe itself objectively, without distorting the objectivity itself? ?? ???
You ask yourself: are you being compelled to act…out of fear? Are you following the herd? Are you being stubbornly contrarian (in which case it’s just as bad as following the herd)? Are you acting out of…a bias towards action? Are you recommending this name…out of recency or availability bias? How much are you relying on the chatter of the Street that envelops and bombards you in four-dimensions, through your email and chat and Bloomberg, through every luncheon or meeting? Ask yourself: why do you think what you think, and how much conviction do you have in this position? Is it real? Do I know it will make money? Or am I hoping? And also, if you make money, was it luck?
Why do I think what I actually think?
At times it can seem in this business, that you’re drowning in a sea of possibilities, where it’s unclear what’s real and what’s not.
My conclusion: which is wholly unoriginal, by the way, and merely an echo of every other good investor’s advice, is that the only way to succeed in this business, as in all games of extreme uncertainty, is to construct a process.
A process is like building a crutch outside of your own mind, so your own biases don’t get in the way. Then you follow that process, letting it guide you out of the darkness, fumbling here and there, and using that feedback when you hit a wall or fall off a cliff to revise or add on to your process, your construct. This takes decades.
So, paradoxically, you can’t want to do it just for the money. You might get lucky for a market cycle then blow up in the next one. You have to just love this stuff and think about it all the time. The competition is just too great, the stakes are just too high.
I have the utmost respect for people who play the game, but I decided to leave to manage my own assets, on my own terms.