How You Get and Actually Keep a Job at a Multi-Strat Hedge Fund

25:30They're always looking to optimize their portfolio of risk takers. As far as the other firm, they could be thinking this person does fit what we need and we really like their risk profile. Even a really great PM is going to have a significant drawdown every two to five years. And there aren't too many who've gone 10 plus years with no losing years. You know, you just don't want to be that person who experiences that 5 % of the time drawdown in your first few months in a new fund. I used to know a credit guy who always said like, you're not a proper credit trader until you've had at least one major blow up.

26:08Maybe that's true. But on this note, okay, if I get a big drawdown, I understand maybe it depends on where I am with my career. And if I get it in the first six months of working at a shop, that would be very bad. But if it's in, you know, year six or something, maybe it doesn't matter so much. But how embarrassed am I when that happens. And am I like publicly shamed within the organization for this happening? Or how does it work exactly? You know, it's sort of funny because obviously we had a period just a few months back where there were a lot of headlines about large losses. As the marketplace views it, it's going to feel awful to the PM, right?

26:51You never want to be on the screen for a loss. But whenever you see somebody up there with a$100 million loss, that means they had$100 million to lose, which means that they were managing a large book and they were taking a lot of risk. And if you'll notice, some of those PMs from a few months ago are still exactly where they were. You are really generally better off getting bounced for a large loss than you are a small one. This goes, Fitz, with something, one of my beliefs that a billionaire is someone who either has positive$1 billion in net worth or negative$1 billion in debt. Because you have to be really rich to have lost that much money.

27:32And anytime you hear about a former billionaire and they lost everything, they're almost always still somehow living large. So being deeply, deeply in debt is almost as good as having tons of money. So I'm glad to hear this. How does that constrain your actual trading? Okay, you know that drawdown number, you know at the point where you're going to get stopped out of the seat. How does that actually translate into thinking about the trades that you put on? I hate to do it. It depends. But it sort of depends on where you're at. Because even though common drawdown for, you know, limits are usually somewhere between 7 % and 10 % for what's called a stopout, you might end up getting your capital reduced well before that, three and a half or five.

28:15And that makes it really, really hard to come back. The key is, do you have a process? Do you have risk management and portfolio construction where you are still applying your risk management? I'm only going to risk this much of my risk capital. What is between me and a capital reduction or drawdown? I'm going to be pickier. I'm going to trade smaller. There are a lot of funds that have internal coaches, psychologists, like that's Wendy Rhodes is It's based on real people who do real things. And, you know, certain firms will sit you down and talk to you or they'll make you take a time out. Other firms will just say, that's it, you're out.

28:54But psychologically, it makes you want to get it back, which is not a great feeling because even when you get there, you're just at flat. And it really impacts your risk-taking tolerance. I think one of the best things that I ever heard was if you're kind of in a losing streak, just get flat and go away. Don't keep any marginal things. You can always buy it back later. You can always sell it later, but get your mind right. But it does negatively affect you. And you kind of skew your thinking either to, I'm going to take more bets to get it back faster, or I'm not going to do anything because I'm going to be so picky.

29:34Overtrading is really common. I'll give you, for example, people coming from the sell side almost always overtrade when they first get to the buy side. The reason is trading has a positive expected value for them. They are in the bid ask. Not only that, but facilitation desk on the sell side, they lose money if vol explodes. But they generally make a lot of more money after it subsides. The bid ask widens out and they could collect a lot of client flow in the back end of that. One of the questions that I always ask people is, you know, tell me about your biggest drawdown. When was it? What was going on?

30:10What happened? What'd you do? And the sell side traders always have very quick times to recovery and they expect it to get it back. But that's not the positive expected value you have on the buy side. It costs you money to trade.

30:38How many vendors does it take to meet all your organization's food needs? Just one. EasyCater, the workplace food platform that lets teams order from a huge variety of restaurants, over 100 ,000 nationwide, all through a single vendor. In addition to all that variety, EasyCater also gives you full visibility of your organization's food spend with invoicing, centralized reporting, and seamless integration with expense management systems, all on one platform. EasyCater, your business tool for food. To learn more, visit easycater.com slash podcast. You're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys, maybe even a few strategic options plays on the side.

31:24The point is you're engaged with your investments and public gets that. That's why they built an investing platform for those who take it seriously. On Public, you can put together a multi-asset portfolio for the long haul. Stocks, bonds, options, crypto, it's all there. Plus an industry-leading 3.8 % APY high-yield cash account. Switch to the platform built for those who take investing seriously. Go to Public.com and earn an uncapped 1 % bonus when you transfer your portfolio.

32:26That's public.com. Do that with Acrobat. Need templates for a sales proposal that'll close that deal? Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time? Do that with the all-new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. Brian, tell me about your biggest drawdown and what it was and what you did. Well, my biggest drawdown was losing my job. I can't name numbers, but essentially I violated my own risk. I usually never speculated on outright vol, and I had a long vol position, and I normally would have structured that as a spread, and I didn't.

33:09And though I was directionally right, I bought really expensive vol, and therefore didn't make much money, got hit on volatility in a much larger fashion than I thought I would. And I was in that camp of not a big drawdown, and it was almost unreal to people that I knew, like, why would they let you go? Because there's not a lot of verifiable information out there that always sounds very suspect to people. I wish I could be more colorful for that. No, no, no. That's really helpful. But on this note, I'm also curious, do PMs ever go to like risk managers or the people above them and beg for like either more money or more risk tolerance?

33:53Oh, absolutely. And a lot of firms actually have programs where if you have something that's really scalable that you think is very functional, they may give you sort of a side account and you get paid on that, but it's not part of your regular book. Once you work in BD, a lot of the people who you bring in sort of ask you questions like, hey, I want to do this. Who should I ask? When should I ask? I generally tell PMs, unless it's an actual trade idea, don't just ask for more capital. Unless it's one of two situations. Number one, you just got there because they love you. You haven't done anything wrong and they just probably paid up to get you.

34:30Number two, you've just made a hundred million bucks. Other than those two situations, don't ask for things. Wait, let's talk more about violating your own risk book. There's a famous story from Stan Druckenmiller where he apparently bought the very top of the internet bubble. And he says, you asked me what I learned. I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basket case and couldn't help myself. So maybe I learned not to do it again, but I already knew that. When a fund manager is sort of like violate or a PM is violating some of their own things, do they know it?

35:05Do they feel differently? Do they get like some sort of acidic taste in their mouth? When I like go on tilt, when I play poker, I always sort of know it, but I can't help myself anyway. Like I just do it and I go all in and I know I haven't done it. I have to embarrassingly walk out of the table. But like, what does that feel like? Talk about like what's going on in someone's brain when they're like taking these risks that on paper they shouldn't be. Well, usually you only recognize it in the rear view. If you slow down and think through the trade, you know, you sort of realize that, hey, you probably shouldn't do this.

35:35But I think you're parallel with being on tilt at a poker table. It's that knowledge, you know, after you call somebody or after you raise that instant feeling that, man, I just leaped up. It's that feeling, only you're going to feel it for a few days, and you're going to get a little email or call from your risk manager. And then you're not going to know what that sit-down is going to be like. It might be, hey, no big deal. Get back out there. Don't worry about it. It may be an entirely different conversation. You may be told to go to HR. Don't take your jacket. Or take your jacket, I should say.

36:11But it is a bad feeling. And I think some of the better mentors that I've had through the years have kind of taught me like that mental health thing and where you're at is very important. And I think it's even worse when you're at a multi-strat or a situation where you have a single client. That's it. If that one client isn't happy, you are probably out for at least six months and potentially much longer. The BD process to bring a new PM on board is somewhere around three months on its own. Do you do postmortems on winning and losing trades? Kind of, you know, like after talking about poker, you go back and you run the poker hand through a solver and you see if you played it correctly, often whether you made money or lose money.

36:57Is there an equivalent process that's done in the trading world? A hundred percent. As a matter of fact, if you guys have never had Brent Donnelly on, he wrote a book called Alpha Trader. I've probably never seen that information written down in one place before. We should have him back on or something to talk about just that. But tell us more about it from your perspective. Yes. And that is part of the other process. Like we mentioned Edge, like the other parts of the BD process is I want to know the process by which somebody selects trades. I want to know about their portfolio construction and I want to know their approach to risk.

37:32Especially on risk, you'll find that very good PMs and especially these firms, the firms themselves, even though the PM may not see it, they know exactly how many bets you've taken. They know about your hit rate. They understand your skew. They can sort of tell when you're deviating from your risk mandate. They have a lot of analytics. But it's been my experience that the best PMs look at it themselves. They're almost religious with it. You know, how did I do today? It's very similar to an athlete watching tape or a dancer. My daughter loves dance. You know, she'll watch tape of herself. This is what I missed.

38:07This is what I didn't do. And the great benefit of doing it in a statistical fashion is you can remove, oh, I won't count that because it was a Tuesday and a full moon. Any excuse you have goes out the window. Those are the numbers. On this note, and since Joe brought up poker earlier, are there like popular ways to become a better, better, better? Does that work for audio? Yeah, better, better. A better, better. A better, better. And I'm thinking, you know, I'm thinking back to Liars Poker. That's a famous example. And then wasn't there something at Jane Street that Sam Bankman Freed was doing?

38:43A bunch of different like gambling games. Yeah, they love that stuff. Yeah. Like, what is popular in terms of, I guess, building up your risk return muscle? Yeah. Well, I think anything where you have some element of strategy. And I think one of the reasons that poker is so popular is that it combines not only strict strategy like you might see in chess, but also a fair degree of complete randomness. And you're going to take some bad beats and that's going to happen in trading. It's easy to forget, but a really good p.m. might have a 52, 53 % hit rate on their trades. It becomes what their skew is, how much they make on their winners versus how much they lose on their losers.

39:26So anything where you're actually becoming more in tune to your own risk-taking, your ability to think in what most people call probabilistic terms or thinking in bets after the Eddie Duke book, any exercise like that. And I think poker is probably just the most popular. It's also a great fun, I don't know whether I'd say team building game, but it's a fun social game that people play often around hedge funds. And it fits with the gambling mentality. So we hear about it a lot, but there are a lot of different internal games that people engage in. I just have one last question and it goes back to the role of the analyst.

40:03And you mentioned, oh, maybe an analyst could be valuable if they really know the history of what happens if they're X or Y. I can just look that up on In 03 on ChadGPT or perplexity these days, like how realistic is it in your view that firms could meaningfully reduce analyst headcount by using artificial intelligence? Or if they save money on by using artificial intelligence, would that just create new roles for more sort of advanced research? Like where are we at with this? You must talk to people about what they're doing with this. I think there's lots of things they can do. And obviously, you're talking about pretty secretive organizations.

40:42So there's an enterprise sharing issue there to deal with. But yeah, a lot of things could be really computerized. But you're also looking for people who are going to be able to tie the story and the narrative in with what was going on with the instruments. And it's probably not something so simple as, you know, what did the dollar yen do the last time the Fed hiked? It might be something more like what was a Reds-Greens puts-puts steepener doing the last time the Fed hiked, which you're going to require a lot of modifications to those AI models. I'm always hesitant to talk about this because I can remember when we were told that all the paper companies were going to go out of business because everybody was going to read everything online.

41:25And what happened? We just all printed it. Oh, yeah, that's true. And a lot of them also sell cardboard boxes. And so they benefited from e-commerce. Those same companies, actually. Absolutely. Georgia Pacific is probably huge in Amazon's warehouse. But I think that there will always be people who, because this industry thrives on, you know, I can do this even though the odds are very much against me. And they will definitely use any edge they can get informationally as far as analytics or anything like that. but usually there's something that you're going to have to ask that maybe not everybody understands or knows i think everybody who's in this business got into it in one way or another and somebody handed them what i just generically call you know street porn which is the market wizards books or any of those types of things and they're fantastic because what i got out of reading those types of books is there's a lot of different ways to make money you just have to find out what you're good at and how you can apply your particular set of skills and attributes to doing it.

42:31And I think that there's going to be somebody who gets really good at asking, you know, one of these AI models market questions, and that person is going to get built up. We're already seeing inquiries for heads of AI at several different funds. And I think that that's going to continue as they explore more and more, you know, what they can actually do with it. They have no problem spending money on either the AI or the human being. it will ultimately come up to who can perform. So how do you avoid, I guess, groupthink among your PMs? Because the whole point of multistrats is those uncorrelated returns, and you don't want everyone just putting on the same trades, either literally or maybe through another angle.

43:15And I'm thinking specifically about journalism. So some newspapers used to You always move reporters from a certain beat after they'd been there for like 10 years or something. And the idea was just to shake it up a little bit and make sure that they're not getting like too cozy or too comfortable with that particular industry. The downside of doing that, of course, is that you lose expertise. But I'm just wondering, like, how do people, yeah, how do people avoid that groupthink aspect and make sure that everyone's doing, you know, new stuff kind of independently? Well, one way is limiting the communication between the pods.

43:53Some places do not really allow their pods to communicate. Another way is basically, structurally, you don't want to see people hang on to each other's trades. You're going to be looking at this from a macro view within the firm. You're going to see this type of trade that this person had on is increasing in size in the firm. But by and large, if you've hired right, you're going to hire independent thinkers. And a seasoned PM will tell you, I might like somebody else's idea, but I can't really trade it properly unless it's my idea, too. I kind of have to adopt that as my own. So groupthink is not as prevalent as you would think because it's structurally prohibited in some places.

44:36And the places where it's not, a seasoned PM is like, hey, I may love that trade that you pitched me, Joe, but that's yours. And I can't, I'm not doing my job if I say, Joe, when are we getting out of this? That's not what I'm paid to do. So part of it is on the part of the PM internally. And the other part of it is on the fact that they don't want to be seen as copying the next guy's trades. All right. But just real quickly, maybe you don't want to do groupthink or copy the next guy's trades. But if there's a hot beta, right, you're always looking for alpha. But if there's a hot beta like AI beta or whatever, or falling inflation beta, like some of these long term trends.

45:13But that's not your thing. Do PMs find ways to backdoor their asset class into the hot trade in a way that like may de facto become trade crowding? Yeah. A former boss of mine used to say there's never been a risk management framework that a smart trader couldn't outwit. That's what I'm wondering. That's like, is it this cat and mouse game where you're in part trying to outwit the person who could tap you on the shoulder by trading something that looks like something else? Yeah, there's a lot of downside to doing that, you know, if you don't have a trade kind of properly thought out. But, you know, in general, if I hire one of you to trade credit and the other one to trade the front end of the yield curve, and, you know, all of a sudden Brazil is very hot, the real, and you're both asking me for limits on the real, like you won't have limits in something that you don't already trade.

46:07So you can't really deviate from your mandate too much. It's kind of a - I'll just find a credit spread that's correlated with the rail. Seriously. Yeah, or there are a lot of ETFs that basically contain macro trades, if you will. And I have often wondered, are those there so that mutual fund managers can, and investing in equities can speculate on the yield curve? But there are always ways to do it. You just have to kind of hire the right people who aren't necessarily going to do that. And if you get in trouble for something like that, I sort of like to say that this is the second most voyeuristic industry in America.

46:45Word gets out. As large of an industry it is, it's not that big in individual areas. And if somebody has really done something untoward, then people are going to hear about it. Brian Yelvington, thank you for coming on Odd Lots and talking about getting and keeping multi-stretch jobs. Our journey continues. Thank you so much. Really appreciate chatting with you. Thank you. Thank you for having me. It's great to get to talk to you guys.

47:23Tracy if I were like young I think or if I were in college or something I think I would have taken that trading job now I mean I like the way my direction life direction went but if I like wanted to do over I'm curious what that fork in the road looks like there'd be no all thoughts Yeah, I know. That's so sad. It'd be a different part. You know, like, I feel like I would trade. You know what would happen? There would still be an odd lot. I would trade for a while. I would blow up. I would get a job in journalism. And then I would be one of those journalists who reminds all of their colleagues all of the times that they used to work in finance.

47:56You know what's funny? I would be like the person on the call. They're like, I just love the, you know, it's like, oh, I used to work at a multi-strategy hedge fund. Yeah, yeah, yeah. Yeah, well, I used to be a trader. Anyway, sorry, keep going. Joe, how many times have you brought up that interview with the trading company on this note? OK, that was really interesting. One thing that kind of jumps out at me is the last discussion about, you know, how do you avoid everyone just taking on the same risk? It really seems to me like it's correlation built on correlation built on correlation. Right.

48:30And I often think correlation is one of the hardest things to actually nail down on Wall Street. So, you know, you got to wonder, so far, so far, you know, a bunch of multi-strats survived April pretty well. So I guess we'll see. I think if I were a risk manager and I had one person trading credit and the other person trading the short end of the yield curve, and suddenly their month-to-month return started looking identical and it happened to be identical with the person who traded Brazilian Real, that would set off a red flag for me. You know? I feel like the return profile itself is probably part of the hint, right?

49:11That even if you can't really articulate why this person's trade is secretly this person's trade in disguise, if their return profile looks too similar, that probably sets off some red flags. We got to talk to a risk manager, don't we? Yeah. We should do that. Okay. If you're a risk manager, you want to talk about what that job is like. Or if you know one, shoot us a message. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Jill Weisenthal. You can follow me at The Stalwart.

49:44Follow our producers, Carmen Rodriguez at CarmenArmin, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more Odd Lots content, go to bloomberg.com slash oddlots where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24-7 in our Discord, discord.gg slash oddlots. And if you enjoy Odd Lots, if you like our ongoing exploration of multi-strat funds, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there.

50:22Thanks for listening.

50:41Music

50:46Music Music Music Music Music Music Music For enterprise organizations, managing all your food needs is a tall order. But with Easy Cater, you get a single workplace food vendor with the tools and resources to make it easy, giving teams across your organization an easy way to order from a huge variety of restaurants, all on one platform, all while consolidating your corporate food spend so you can control costs, streamline billing and payment, and simplify reporting. Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. Hiscox Small Business Insurance knows there is no business like your business.

51:31Across America, over 600 ,000 small businesses, from accountants and architects to photographers and yoga instructors, look to Hiscox Insurance for protection. Find flexible coverage that adapts to the needs of your small business with a fast, easy online quote at Hiscox.com. That's H-I-S-C-O-X dot com. There's no business like small business. Hiscox Small Business Insurance. How can you grow your business from idea to industry leader? Bring your vision to life with smart business buying tools and technology from Amazon Business. From fast, free shipping to in-depth buying insights and automated purchase approvals, they deliver everything you need to achieve your goals.

52:14It's not easy to stand out from the crowd. Simplify how you stock up to get ahead. Go to AmazonBusiness.com for support.