Some fun interviews in here including Dalio, O’Shea, Woodriff, and Thorp. For instance I had no idea Thorp ran a trendfollowing fund from 2007-2010…or that Woodriff formed 3 CTAs, worked as a prop trader, traded his own account all before founding QIM and raising over $5billion. There are some amazing differing viewpoints from these macro managers (I’m only about halfway done)….such as:
O’Shea (COMAC): “People get all excited about the price movements, but they completely misunderstand that there is a bigger picture in which those price movements happen. Price movements only have meaning in the context of the fundamental landscape. To use a sailing analogy, the wind matters, but the tide matters, too. If you don’t know what the tide is, and you plan everything just based on the wind, you are going to end up crashing into the rocks. That is how I see fundamentals and technicals. You need to pay attention to both to make sense of the picture.”
Dalio (Bridgewater): “I believe that anyone who has made money in trading has had to experience horrendous pain at some point. Trading is like working with electricity; you can get an electric shock. With that pork belly trade and other trades, I felt the electric shock and the fear that comes with it. That led to my attitude: Let me show you what I think, and please knock the hell out of it. I learned about the math of investing.”
[Dalio walks over to the board and draws a diagram where the horizontal axis represents the number of investments and the vertical axis the standard deviation.] This is a chart that I teach people in the firm, which I call the Holy Grail of investing. [He then draws a curve that slopes down from left to right—that is, the greater the number of assets, the lower the standard deviation.] This chart shows how the volatility of the portfolio changes as you add assets. If you add assets that have a 0.60 correlation to the other assets, the risk will go down by about 15 percent as you add more assets, but that’s about it, even if you add a thousand assets. If you run a long-only equity portfolio, you can diversify to a thousand stocks and it will only reduce the risk by about 15 percent, since the average stock has about a 0.60 correlation to another stock. If, however, you’re combining assets that have an average of zero correlation, then by the time you diversify to only 15 assets, you can cut the volatility by 80 percent. Therefore, by holding uncorrelated assets, I can improve my return/risk ratio by a factor of five through diversification….I strive for approximately 100 different return streams that are roughly uncorrelated to each other. There are cross-correlations that enter into it, so the number works out to be less than 100, but it is well over 15.
…There are no technical inputs.”
Then on the other hand you have Woodriff, a fellow Wahoo, who only uses technical inputs:
Q: All your secondary variables derived just from daily open, high, low, and close price data?
A: Absolutely. That is all I am using.
Q: You don’t throw in any other statistics, such as GNP or any other economic variables?
A: If I could, I would. I actually tried that, but I couldn’t get it to work.
Well worth a read!
Hedge Fund Market Wizards – Schwager