publication

iNSiGhTS
www.tradersonline-mag.com 04.2014
If you don’t have or can’t define a process,
then you have an uncertain edge.
famous investors, you can simplify your process into a few
simple points on a checklist. You have documented it.
If you can’t document the process, then it means one
thing – you are not sure what your edge is. Maybe you
haven’t thought hard enough about it to define it properly.
Maybe you haven’t tested adequately or looked enough
at your records to make a real judgment. Or maybe it’s
become intuitive and you’re not really sure. Nonetheless,
if you don’t have or can’t define a process, then you
have an uncertain edge. When market conditions are
favourable, then you may do okay; when they are against
you, then you don’t have anything clearly defined to fall
back on.
Now think about if you had a lot of money to manage.
More capital, from more people. These people have to
know what the game plan is and where they fit into it.
This is where having a process is absolutely key. Having
one guy sit in front of the Bloomberg and punting can
be a lot of fun. It can even be profitable. But it’s not a
business. Besides, what would those other people do
What are their responsibilities How do they support
the senior investment professional And what happens
if, God forbid, he goes on vacation – let alone gets hit
by a bus! What game plan is everyone else to going
follow then Having one guy doing everything by the seat
of his pants can potentially be profitable, but it is most
assuredly not a business. And people are only going to
invest in a real business.
Another way of looking at it is to compare with a real
business. Imagine something basic like a dry cleaner.
Bruce Bower
Bruce Bower manages a portfolio of emerging
market equities at a hedge fund. He has
a keen interest in markets, psychology
and self-development, having trained as a
hypnotherapist.
www.howoftrading.com
If you go to drop off clothes, things get taken care of
with responsibilities clearly defined and divided up. One
person receives your clothes, discusses any potential
problems and issues you a pick-up slip. A second
person in the back takes all of the clothes in the space
and cleans them. A third takes them out of the cleaning
machine, shrink wraps them and gets them ready for
pickup. A fourth person mans the desk when you pick
it up. At every stage, it’s pretty clear who is doing
what and the overall plan is for rendering service and
generating profits. Why should a fund be any different
It’s a business after all.
As an investor or trader, you also need to get your
process in order. You need to figure out what your edge is
and try to write it down. If you’re not sure how to verbalise
it, then just the act of writing it down a few times will
help you to get closer to the mark. Even if a checklist
sounds simplistic, you will nevertheless want to reduce it
a simple list of bullets points to understand what matters
most and what you need to be doing.
Just understanding this has helped me in evaluating
investments and preparing my own strategies. If I am
thinking about a new strategy or approach and can’t
reduce it to a few bullet points or define a process,
then it’s a no go. This has also helped me to work with
analysts. I can tell them how to come up with ideas, what
the criteria are, how they should think about investments
– and then what I do on top of their work to figure out if
it’s a portfolio position or not.
Conclusion
While the inner working of hedge funds can seem
shrouded in mystery, they turn out to be mundane.
Surprisingly for outsiders, there is a real emphasis on
the business aspects. While there is so much more
than just this, hopefully this list gives the best of what I
learned at a hedge fund that can help you to be a better
trader.
Next month, it’s all about career advice from a Hedge
Fund Pro. Stay tuned! «
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