I think I may have stumbled on a hell of a trade. It's obscure, and it involves a fairly diverse set of skills and market knowledge which, coincidentally, I happen to possess or have access to. It was just one of those moments that happens so infrequently, but you know it when you see it. I was looking at a trade that our portfolio currently has on, considering taking profits. It's a derivative, so I had to set up a quick little calculator on my Bloomberg to price it out. Just as I was about to start making some calls to the sell-side to get rid of the trade, I decided to stop for a second and check the price of a related security, just for the hell of it.
I jumped out of my chair.
Can there really be a mis-pricing so blatant and so obvious? I checked my numbers 6 times to be sure. Each time, it was the same as before. Staring me in the face was the thing every trader hopes for - the sure thing.
After sleeping on it, I went back to check my numbers again. There must be something I'm missing. It can't really be that easy, can it? So far, everything I've seen confirms what I'm looking at. I checked out some similar situations, and about half of them were also mis-priced. That's actually good - the fact that half of them are trading properly indicates that the relationship does exist, and that if I trade these mis-pricings, they'll hopefully come back into line eventually, creating profits.
The boss is on vacation next week, so I'll have time to do some serious research and make sure this thing is viable. If it works, I'm hoping to be testing the strategy on paper by the middle of September, with a relatively short period, maybe 2-3 months, before commitment of capital.
Saturday, August 26, 2006
Saturday, August 19, 2006
Sometimes you have to explain things to other people before you truly understand them yourself. I was talking on the phone to a friend just now, telling him about the new job. He asked me why the former trader quit before I started, rather than stay on a few months to train me, as we had originally planned.
My initial explanation was that he had just become fed up with the fund manager, and decided that he couldn't take it anymore and wanted out. Certainly plausible, given what I've had to deal with over the past 2 weeks, but not likely. The trader had been there for 15 months - if you don't quit on this place after 6 weeks, you're probably in for the long haul.
My second thought was that he felt he got too small of a bonus relative to his returns. The trader had mentioned to me that I would have to fight for my bonus, so this seemed pretty plausible. However, a bit of sleuthing on my part turned up a significant withdrawal of cash from the main trading account right around when the trader left. The figure, at around 10% of the fund's profits for the year, was hefty, to say the least.
Other speculation on my part included an unwillingness of the fund manager to seek additional capital, desire for more stability, or any number of other things which, while theoretically possible, didn't seem like quite a good enough explanation on their own. Even the combination of all these factors just didn't seem like quite enough of a reason, especially since the trader is now starting a new job as a sell-side analyst. Not a likely career move for a successful buy-side trader.
Then, while on the phone just now, it hit me. The fund manager isn't making the effort to find a new PM!
Now, I've said in passing to other people that the Portfolio Manager quit a few months ago, and that I'd be trying to fill in for that role as well as trading until a new PM could be found. Howver, it's pretty tough to do both those jobs at once, even if you have a lot of experience. The old trader, while very smart, still never worked as a true researcher, and probably didn't have time to manage both jobs at once. In fact, trying to be head trader and PM at the same probably was cutting into his returns! I've seen the numbers for the past few months, and there definitely was a drop-off over the past few months. I attributed that mainly to shut-down costs and a decaying market conditions, but what if it's simply the lack of a PM that's causing the problems?
This also explains another thing - why did the trader decide to become an analyst instead of pursue opening his own shop, like he had mentioned to me in the past? Again - the answer becomes apparent. To open your own fund, you need to be able to manage the portfolio as well as trade. By doing research for a year or so, he'll get the experience he needs on someone else's payroll, and keep his performance numbers from the old shop intact! It's such a simple plan, yet it should work remarkably well.
So, now that the reasons for the old trader leaving so soon have become apparent, so too does my dilemma. Without a PM, will I have the ability to both be head trader and generate ideas? It's daunting, to say the least. However, it also provides me with a backdoor out of the firm earlier than I may have planned. Leaving a firm after 6 months or less doesn't look particularly good on a resume. However, leaving a hedge fund because the manager isn't serious about finding a PM is the logical thing to do. Not to mention, poor returns at a fund that has no PM are quite easily explained. While I may not be thrilled about resorting to a quick exit, I feel it's a lot less damaging than it could otherwise be.
And if we get a PM after all, most of my problems will rapidly disappear...
My initial explanation was that he had just become fed up with the fund manager, and decided that he couldn't take it anymore and wanted out. Certainly plausible, given what I've had to deal with over the past 2 weeks, but not likely. The trader had been there for 15 months - if you don't quit on this place after 6 weeks, you're probably in for the long haul.
My second thought was that he felt he got too small of a bonus relative to his returns. The trader had mentioned to me that I would have to fight for my bonus, so this seemed pretty plausible. However, a bit of sleuthing on my part turned up a significant withdrawal of cash from the main trading account right around when the trader left. The figure, at around 10% of the fund's profits for the year, was hefty, to say the least.
Other speculation on my part included an unwillingness of the fund manager to seek additional capital, desire for more stability, or any number of other things which, while theoretically possible, didn't seem like quite a good enough explanation on their own. Even the combination of all these factors just didn't seem like quite enough of a reason, especially since the trader is now starting a new job as a sell-side analyst. Not a likely career move for a successful buy-side trader.
Then, while on the phone just now, it hit me. The fund manager isn't making the effort to find a new PM!
Now, I've said in passing to other people that the Portfolio Manager quit a few months ago, and that I'd be trying to fill in for that role as well as trading until a new PM could be found. Howver, it's pretty tough to do both those jobs at once, even if you have a lot of experience. The old trader, while very smart, still never worked as a true researcher, and probably didn't have time to manage both jobs at once. In fact, trying to be head trader and PM at the same probably was cutting into his returns! I've seen the numbers for the past few months, and there definitely was a drop-off over the past few months. I attributed that mainly to shut-down costs and a decaying market conditions, but what if it's simply the lack of a PM that's causing the problems?
This also explains another thing - why did the trader decide to become an analyst instead of pursue opening his own shop, like he had mentioned to me in the past? Again - the answer becomes apparent. To open your own fund, you need to be able to manage the portfolio as well as trade. By doing research for a year or so, he'll get the experience he needs on someone else's payroll, and keep his performance numbers from the old shop intact! It's such a simple plan, yet it should work remarkably well.
So, now that the reasons for the old trader leaving so soon have become apparent, so too does my dilemma. Without a PM, will I have the ability to both be head trader and generate ideas? It's daunting, to say the least. However, it also provides me with a backdoor out of the firm earlier than I may have planned. Leaving a firm after 6 months or less doesn't look particularly good on a resume. However, leaving a hedge fund because the manager isn't serious about finding a PM is the logical thing to do. Not to mention, poor returns at a fund that has no PM are quite easily explained. While I may not be thrilled about resorting to a quick exit, I feel it's a lot less damaging than it could otherwise be.
And if we get a PM after all, most of my problems will rapidly disappear...
Thursday, August 17, 2006
Big Changes
As I hinted at in my most recent post, (God has it really been that long?) there have been some big changes around here. It's been a hell of a time the past few weeks.
July 28th I skipped out of work a little early, hopped the subway to JFK International, and dug in for 22 hours of flight time which deposited me, completely jet-lagged, in beautiful Sydney, Australia. And, yes, in case you were wondering, I did take about 3 dozen pictures of the Opera House beacuse, quite honestly, it really is that spectacular. While 1 week really isn't enough time to spend in a place like Australia, I managed to get in a lot. I'm still trying to put together a whole travel-essay page, replete with photos and all, but until then, I'll just mention a few highlights:
July 28th I skipped out of work a little early, hopped the subway to JFK International, and dug in for 22 hours of flight time which deposited me, completely jet-lagged, in beautiful Sydney, Australia. And, yes, in case you were wondering, I did take about 3 dozen pictures of the Opera House beacuse, quite honestly, it really is that spectacular. While 1 week really isn't enough time to spend in a place like Australia, I managed to get in a lot. I'm still trying to put together a whole travel-essay page, replete with photos and all, but until then, I'll just mention a few highlights:
- Seeing an opera at the Opera House was very interesting, and culturally edifying. Australians pronounce Turandot as if it's not a French word, and really stress the "t" in the "dot."
- Dinner at Tetsuya's, possibly the finest restaurant on the continent. Worth every penny, especially with the wine pairings.
Bondi Beach. Too bad August is winter in Australia. (Winter in Sydney, by the way, means it's 55 degrees and sunny.)- Hiking through the eucalyptus forests of the Blue Mountains. Totally amazing.
Before I knew it, the week was over, and it was time to return home.
Tuesday, August 8th, at 8:30 AM, I walked into the president's office at work and quit my job. By 9:00 I'd shaken hands with all my coworkers, walked out of the building, headed across town, and installed myself at my new desk, as head trader of a small NY hedge fund.
Yes, that's right. Hedge fund. Head trader.
While it's not exactly as glamorous as it may sound - I'm the only trader there. Hell, I'm the only employee there besides the secretary, I am referred to as the head trader by both my employer and our various sell-side accounts. And, while we're managing a pretty insignificant amount of money, it is a buy-side gig.
I have to admit I'm a little wary of this move. It's a big change, and a lot of work. Further, I'm potentially walking away from a lot of money, given the speculation of my former coworkers regarding what my bonus should have been had I stayed out the year at the old shop. But, like I said to my old boss when I left, this job is about opportunity, not money. And while mid-six-figures is always nice, even in NYC, I don't need to tell you what real hedge funds pay, and that's where I hope to be in a year or two. I'd been spending the past year or so trying to figure out how to get over to the buy-side, and now my opportunity has been handed to me. Granted, it comes with a cantankerous old man who's chewed through 2 traders, a PM, 2 accountants, and at least 3 secretaries in the past year or so, but nobody said this was easy. If I wanted easy, I'd have stayed at the sell-side shop, surfed the web all day, collected my $200k, and probably made VP at the end of this year.
What the hell have I done???
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