Burgers with multi-billion-dollar investment fund insider

Last week I had lunch with ‘SM’.  SM is a senior manager with a large investment fund that has several billion dollars of assets under management.  He was relaying some information from the fund’s quarterly board meeting, during which the fund’s recent performance was reviewed.


SM worked as a trader for a number of banks but stopped several years ago.

The following is a simplified recap of our conversation – the gist of it being that the fund’s performance is flat and all of its traders are having a difficult time trading the present market conditions – and that this should serve as stark warning to a retail trader like myself.

SM:  Are you doing much trading at the moment? What is your exposure in the markets?

Me: Not a lot.  Basically some intraday trades in crude oil futures.  How come?

SM: That’s good.  The markets are crazy right now.  Nobody knows what is going on.

Me:  What do you mean?

SM: Nobody at our fund is making profits from trading at this moment.  We have numerous trading teams – consisting of traders and analysts.  All of them are finding it difficult to turn a profit.  Their strategies are not working.

Me:  Can you elaborate?

SM: Well, you are talking 100+ really experienced professional investors and traders who have access to extreme low transaction costs, top-end research and technology, testing and execution facilities.  Their performance has essentially been flat for the past two quarters.  They are not making any money.

Me: That reminds me of the performance of a bunch of trend-following hedge funds that I keep an eye on. In aggregate managing around $70 billion – they are also not turning a profit albeit losing a little bit.

SM:  All the models seem to be breaking down.  What has worked previously is not working in the current market conditions.  It’s this continued low (near zero) interest rate environment.  Investors are being pushed into riskier and riskier assets in order to generate a yield.

Me:  Right.

SM:  Right now the capital flows are going almost exclusively into Index funds and out of actively managed funds. This means that when there is a new investment, it is immediately invested into all the stocks in the index, regardless of whether they are good or not. This is a self reinforcing spiral, so more and more money flows into these funds, pushing all the stocks up, regardless of their merits. All the stocks in the index rise. The problem with this is that the money can flow out as quickly as it went in. The most important piece of information is the ‘Risk Free Rate’ and right now, it is being held down by the major central banks, so it is distorting all rational economic decisions.

Me:  What about currencies and commodities?

SM: Well, those too.  Our traders cover all markets between themselves.  Everyone is finding it difficult.  Interest rates are far below what they should be at the moment.  Interest rates in the US should be at 3-4% not close to 0%.  Eventually all this is going to result in another major financial crisis and a massive stock market crash.  It reminds of the Oct’87 crash which I witnessed first hand as a trainee.

Me: So what impacts should this have on my trading?

SM: I’d suggest to continue working on your strategy development, and continue trading oil.  But keep your exposure small – don’t risk too much.  You have to realize that if my fund’s traders are finding it near impossible to turn a profit, then you as a retail trader have basically got no chance whatsoever.

Me: All right – here come the burgers.  Bonne appetite!

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9 Responses to Burgers with multi-billion-dollar investment fund insider

  1. David says:

    The character of the market changes- recently there have been 4 excellent options trades on FTSE-I took the first two and did not think the second two would do anything-they did. There are always opportunities -in fact I missed another 2 last week as I was not focussed. It seems to me it takes 2-3 weeks to adjust to the new paradigm, but as this piece states- it is getting absolutely insane- with options prices that make little sense, and a market that has been broken since QE. The banksters should be in prison then we’d all be better off-but I have to say I have made serious coin this year-compared to stepping back in 2016 with Brexit and Trump. I just don’t gamble and who knew how the markets would react? There is a real danger of the ‘boredom trade’ – so my reasons for the trade have to be sound-unless there is at least a 66% chance of winning, I don’t waste my time. I saw no reason today to trade.

    Liked by 1 person

    • David, thanks for sharing your input and your recent experiences from the FTSE options market – great to hear!


    • “so my reasons for the trade have to be sound-unless there is at least a 66% chance of winning”

      66% that is quite close to 50%. So almost random and too close to gambling for my liking.
      I always wait for at least an 80% chance of winning before i enter any trade.

      Im just joking. More seriously anyone who talks about high win rate is most probably going down the wrong path when it comes to trading.
      In trading you have to focus on running winners hoping they will be huge and cutting losers quickly so they are small. The win rate isn’t that important.

      Liked by 1 person

  2. Diane Haversham says:

    A very insightful post!

    Liked by 1 person

  3. “You have to realize that if my fund’s traders are finding it near impossible to turn a profit, then you as a retail trader have basically got no chance whatsoever.”

    I think it was Buffet who said he could easily make 50% a year on a $1 million account.
    Retail traders should be able to make money in more market conditions than big funds are able to do.
    As a day trader there has been decent intra day volatility to capture over the last six months.
    It has not been the worst six months for me.

    Liked by 1 person

  4. Bloomberg just published another article on macro funds finding it very difficult to make decent returns in these market conditions: https://www.bloomberg.com/news/articles/2017-07-10/for-macro-managers-micro-returns-cast-pall-over-one-time-stars


  5. David says:

    Made just under 10% so far- my trading year starts 1st Feb.

    Liked by 1 person

  6. Pingback: Two Traders Talk – Part III – the rarity of profitable traders | Trick or Trade

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