How to (not) get rich managing a hedge fund

Topic: the economics of running a hedge fund

How much money do you need to manage in a hedge fund?

Let’s say you manage to raise 100 million dollars from friends and family. How far would that get you?

Revenues

Fixed fee: 1% of 100m = 1 million dollars a year

Performance fee: 20% of whatever your “outperformance” is, which depends on what you’ve promised, and if you have some catching up to do relative your high water mark or other promises.

We’ll leave that part for later, since you can’t really count on reliably amassing performance fees. On average fund managers don’t add any value relative their benchmarks, so on average fund managers can’t expect to get any performance fees.

Costs

Staff: 3 people (you, a partner, and one more for research and administrative work) at 150k$ each a year, which would be considered the bare minimum for running a 100m$ fund and attracting decent talent. 3*150=450k$.

In Sweden the cost of 150k$/yr amounts to less than 10k$/month (95k SEK) per employee before taxes but after social services fees. The take home pay for the employee after personal taxes will be around 5.5k$/month (55k SEK)

Travel expenses (eight trips per employee/yr to attend conferences, visit important companies, clients etc. NB just two trips per quarter, and at a cost of just 2k$ per trip for a few hotel nights, airplane tickets and expenses): 8*2k$*3 = 50k$

Premises: 50k$ per year for an average office in the CBD district

Equipment, computers, mobile phones: 2k$/yr per employee = 2*3=6k$ (could just as well be rounded to zero)

Information and trading systems, 3rd party research: 50k$ per employee = 3*50 = 150k$ (NB: the cost could easily run to twice that)

Regulatory fees, expenses, insurance, securities custody etc.: 0.1% of AUM = 0.1%*100m$ = 100k$ (could easily be twice as much)

Total costs: 450+50+50+6 (rounded to zero)+150+100 => 800k$ (or up to 1m$ depending on information costs nd regulatory expenses)

Income

Income before performance fees and taxes: 1 000k – 800k =200k$ (or as little as zero)

Income after taxes (25%) per employee (3): 200 * (1-25%) /3 =50k$ (or zero)

Bonuses and dividends

The above example leaves just about no room for bonuses, and thus little chance of retaining high quality employees (including yourself). In addition if you can’t perform good enough for a performance fee, even your friends and family will jump ship before long.

Let’s say you outperform your threshold by 5-10 percentage points, how far would that get us?

Performance fees for 5-10pp outperformance: 20%*5%*100m = 1m$, and 20%*10%*100m = 2m$.  That would leave 750k – 1.5m$ after taxes for distribution to the owners, or a decent 250-500k$ each in dividends that year. Now, I wouldn’t get my hopes up too much for repeating such a performance year after year.

In addition you’d run the risk of falling behind during difficult years. While struggling to catch up there could be periods of no performance fees in sight for years at a time. What if your fund lost just half of what the market lost in the crashes of 2002 and 2008? Even with such stellar performance, you’d still need 3-5 years per crash to catch up before earning variable fees again. Most actually give up altogether, after losing more than 20% from their high watermark.

Conclusion

Even a 100m$ hedge fund is more or less a break even operation, where its founders or employees get a basic annual compensation but no frills. The upside consists mostly of soft factors, like independence and freedom, plus the potential for landing a few lucky big years before enduring a crash. If, however, the order is reversed they get nothing extra.

Please note that if you simply had 5m$ of your own and made a 10% return, without the hassle of running a hedge fund (clients, authorities, regulations…), you’d net a clean half million dollars for yourself. In Sweden that would be after taxes, since personal capital gains are tax free here.

Running a billion dollar hedge fund or bigger is a whole different game. We, e.g.,  managed our +1B$ fund with more or less the same crew as when it was a tenth that size.

At fixed fees of +10m$ a year and performance fees of typically at least as much, and total costs before bonuses, taxes and dividends, of around 2m$, there was plenty to go around for us four principal owners. Now, try a 10B$ fund on for size in terms of its economics!

How to ace a hedge fund job interview

How to get through a hedge fund interview with flying colors

Reading time: 2120 words

Warning, this post is a bit unusual. It’s a run-through of a job interview case I used at my hedge fund Futuris.

It takes about five to ten minutes to read, and will teach you a lot about what I was looking for when hiring analysts (PMs to be), and what you probably should keep in mind during an interview.

Executive summary

Don’t crack under pressure was probably the most important part of the test – the ability to pick oneself up and continue, to try new ways and ideas, after failing one route. Functioning under pressure, keeping communication up, and being able to make decisions, ask questions and try, despite having made a few mistakes.

That…

…and keeping neat notes, following a logical order, formulating a plan, communicating, demonstrating an ability to do quick sanity checks on the fly, to combine a bird’s eye view with at least a quantum of sense for details and plausibility in the micro perspective.

 

How long is a string?

(“piece of string” – I know, but I want it to sound a little retarded)

Well, a quantum string is around 10-35 meters long, so they’re pretty well defined in terms of length, if that’s what you’re asking.

string

Huh?

Unfortunately, you never know what kind of string the question is about, so the answer is usually completely arbitrary. What it means is simply “there is no (known) answer to your question”.

I love using it as my turn-around to a lot of questions I get about valuation, timing, subjective judgement calls etc. 

-It works for most truly important questions regarding life, the universe and everything:

  • How far will the stock market bounce go? What multiple is warranted for this and that biometrics company?
  • Is micro or macro most important for valuing this stock?
  • Is it different this time or not?

The answer is typically “both” or some variation of that.

 

On required skills (measuring strings) for getting a job at a hedge fund

When I hired people at my* hedge fund, I wanted to know the person could manage switching perspectives back and forth, while being organized and keeping calm enough to keep track of the task at hand. Not least I wanted to see how they handled pressure and (rectifying) mistakes.

I asked them one simple question:

“Does all the physical legal currency (bills and coins) in Sweden fit in the Stockholm Globe arena?”

The question is similar to asking if all the physical money in New York would fit in the Madison Square Garden arena.

globen case

The math is quite easy, and the assumptions needed are hardly rocket science either. Without pressure, a person of average intelligence and math skills should manage to do it within 5-1o minutes using just a pen and paper.

  • First you need to calculate the size of the arena.
  • Then the amount of physical currency.
  • Third, how many bills and coins that amount is, and how much space that many bills and coins would occupy
  • Fourth and final, you have to remember to compare the volumes of one and four, and answer if the bills and coins fit.

You get a pen and a stack of papers and about an hour, during which you’re allowed to ask questions, and supposed to explain what you’re doing and thinking.

Globen

The Globe arena

(*my = I was one of three partners, as well portfolio manager and the managing director)

 

Size of the arena

Is it 10 meters, 100 meters or 1000 meters? If you don’t know, just try to imagine a hockey rink or a soccer field.

Let’s go with 100 meters. It’s obviously larger than 10 meters across, and less than 1000 meters…

The globe arena building is (almost) spherical, but never mind that. Think of it as a cube instead. The volume thus can be estimated at around 100 x 100 x 100=1 million cubic meters.

globen

A few guys tried using the formula for a sphere but got it wrong. Once they got the correct formula from me they couldn’t handle the (very simple) calculations due to stress and inability to use rounding. Worst of all, they didn’t verify the answer against the volume of a cube of the same size. Those mistakes are not what you want to see an analyst or portfolio manager make.

You can always go back and refine if needed. FYI: the real answer is 0.6m cubic meters. Close enough. At least it’s not just 1 000 cubic meters or as much as 1 billion cubic meters…

 

Money

Triangulate the amount of currency in SEK:

  1. a certain percentage (2%? 1%? 10%?) of GDP (4 000bn SEK) is physical money
  2. assume how much cash all physical people (1000 SEK each?), stores (twice as much as the people? Four times?) and banks (as much as the stores?) are holding
  3. make alternative calculations based on total national wages or something similar, followed by circulation and accumulation in stores before being shipped to banks daily or weekly.
  4. make an assumption of the proportion of bills vs. coins… how much do you typically carry of each?

Answer: There is 68bn SEK in bills (8bn USD) and 5bn SEK in coins in Sweden.

When I first did this, 10 years ago, there were 100bn SEK in bills and 5bn in coins. Let’s go with the current number 68+5bn SEK.

By this time, many had already forgotten why they were trying to calculate the amount of money in Sweden, or estimating GDP etc.

Some were so confused they started comparing GDP in SEK to the cubic meter volume of the globe arena.

What?! Comparing GDP to a volume?! What were they thinking? What if an investment decision was made using a similar approach? 

They had to be nudged into calculating the physical amount of money needed to drive GDP, people’s wallets, cash registers etc., i.e. how many coins and bills there were and their physical volume requirements.

 

How many bills and coins?

Well, assume an average value per bill or guess the amounts per each type of bill. The answer is the average value per bill is 200 SEK and consequently there are around 68bn/200 => 340 million bills (317m actually). Let’s go with 300 million typical bills.

Do the same for coins. The average coin is worth 2-3 SEK and there are thus 5bn/2.50 => 2bn coins.

100 SEK

How much space does a bill or a coin occupy

So, how much space do these slippery little buggers occupy?

Could the amount of money in New York occupy Wall Street? Madison Square Garden?

How big is a bill?

How long is a piece of string, some applicants seemed to think and just froze. And, yet, they had a stack of papers in front of them – just like a stack of bills…

applicants freezing up

Anyway, a typical Swedish bill is around 70 mm x 140 mm x 0.1 mm.

At least it’s not 200 x 100 mm.

Nor is it 1 mm thick (I seem to remember somebody going for 2 mm (1/10 inch) thick for a while. That guy did not know the length of a piece of string).

Sure, you’re free to think out loud, but you should always do a quick “in and out” (of micro and macro perspective, to make a sanity check: What would a stack of 2 mm thick bills look like. Just ten of them would be an inch thick! Is that plausible? What if you folded it 5 times, making the equivalent of a stack of 32 bills?)

Bill x32

Anyway, a reasonable assumption, given the time and task was to say a bill had the dimensions 100 x 100 x 0.1 = 1000 mm3, or 1 cm3. However, any assumption within half or twice those dimensions in all directions would have been more than OK.

Some stopped right there.

Some just forgot about the coins (sloppy notes) and went on to do all kinds of crazy things.

Some tried comparing the volume of one single bill to the arena. Some compared the volume of a bill to the volume of a coin. Some tried stacking the bills on top of each other in one single stack 30 km high (300 kilometers in one case) and draw conclusions from that.

OK, a few just took the volume of the notes and compared it to the arena. Pretty good, albeit a bit sloppy. They were asked to repeat the original question (in order to remember the coins), which they should have written down neatly on top of the first page. I repeatedly throughout the case urged the applicants to keep neat and clear notes. None of them did.

P1010650

OK, back to the coins:

A typical coin is about half that size (20mm diameter and 2mm thick), but assuming it occupies the same space as a bill is perfectly ok.

Those lucky enough to get this far, often went right ahead and made a stack of coins 4bn mms high = 4 000 kilometers, and then went through all sorts of trouble trying to fit it inside the arena in various ways (rarely succeeding)

Total volume then comes to: 300 million bills x 1000 mm3 each + 2 billion coins x 1000 mm3 each = 2.3tn mm3. Scaling it to cubic meters means dividing by 1bn (1000 x 1000 x 1000), or 2300 cubic meters.

 

Comparing volumes

Here and now, you should have a couple of neat notes saying

  1. “Arena volume=1 000 000 cubic meters” and
  2. “Money volume=2 300 cubic meters”

Some did (very few – actually not a single one of all applicants had such neat notes. However, four of them were at least able to eventually find the numbers, with some barely legible notes attached).

Most had to go back and redo a lot of their calculations, while trying to keep their notes in better order (often stressing and failing again, this time freezing up on simple calculations like 2+3 or 4/2)

And, yet, even those with the two appropriate numbers at the ready still found it somewhat difficult to answer if the money would fit. Mostly because they weren’t entirely sure which number was the volume of the arena and which was the money volume, due to… sloppy notes… and inability to make a simple quick verification of the easiest volume to calculate (1003=1m).

Four finally did answer, trembling and sweaty (they claim to still get shivers down their spines, just hearing about the “Globen Case”), that yes, the money fits.

 

Fingerspitzengefühl

Then I asked them to draw the arena and the money in it (remember it would only would occupy some 0.2-0.4% of the volume), and invariably got way, way, way too big piles on the drawings. By then, however, we couldn’t exclude more people or we would never be able to hire anybody.

I’m sure you are feeling smug by now, thinking the above case was super easy.

Actually, you’re right. It is. The case in itself is easy.

It’s just that when sitting down at a job interview for a hedge fund, with me in your face, and not really knowing how long you have and not wanting to look stupid, can give anybody stage fright and freeze up.

And that was probably the most important part of the test – the ability to pick oneself up and continue, to try new ways and ideas, after failing one route. Functioning under pressure, keeping communication up, and being able to make decisions, ask questions and try, despite having made a few mistakes.

That…

…and keeping neat notes, following a logical order, formulating a plan, communicating, demonstrating an ability to do quick sanity checks on the fly, to combine a bird’s eye view with at least a quantum of sense for details and plausibility in the micro perspective.

Actually, the real lesson here probably is that hedge fund managers can be quirky.

 

Bonus: How to write a CV

If you want to help a friend prepare for a job interview, share this article with him or her. Even if it’s not for a job in finance, they might find it useful anyway. If, nothing else, you could always talk them into subscribing to my newsletter and reading my book about investing.

Read more about applying for a job in finance here (how to write a CV), and why you shouldn’t here (please don’t waste your life in finance), and what you should do instead (robotics).

How to join the 4% that can successfully manage money, before it’s too late

You know nothing* Jon Snow

I have friends and acquaintances opening new funds all the time, it seems. This post is an open letter to them. This is my advice to you, P/S, who are thinking about going live managing money right now.

To be perfectly clear though, everybody who recently started investing or is thinking about it should read this article carefully. Not only because of the negative start to the year for most, but because the bigger picture is so much…bigger than a January loss.

*about managing money

cv interview job finance application

Well, ehm, first we bought GoPro…

If you haven’t managed money before, you really know nothing about the craft (luckily, both of you actually have)

That’s okay, it’s not that hard, really, it’s “just” multifaceted and complex (and actually inherently non-understandable… -or was it just me?). On the other hand, most things worth pursuing are.

 

A watch is complicated,

the three body problem is complex


 

Quite understandably though, I constantly have to field questions about investing. The main problem is that I typically don’t adhere to the same underlying basic strategy, thus rendering most detailed tactical inquiries moot.

So, grab a container of your favorite hot beverage and make yourself comfortable. Turn off all notifications, e-mail etc. and get ready to concentrate for a good 25 minutes (shamelessly plugging my podcast in Swedish: “25 minuter”)


This article is in a way part of a series of articles about managing your own money (or possibly client money). Check out my archives for all my articles on finance in one place.

 

Hence, you should refer back to the linked material, whenever you feel anything is unclear.


 

This particular post outlines a few general points you need to consider before commencing managing your or clients’ money. I don’t provide any answers per se, only suggestions and a smorgasbord of choices.

Beware. After all, this is treacherous ground. Managing money is both difficult, complex and dangerous, albeit not very complicated (i.e. not too many moving parts, but as Newton knew, three is plenty).

That said, it isn’t for everybody, maybe not for you. How would you feel, e.g., about losing 50%?


 

Suggested reading

Among the relevant articles in this context, my post about books and other reading material for budding investors stands out.

At the very least you should be familiar with the free pdf outlining 30 big ideas from Seth Klarman’s book “Margin Of Safety”.

I also think you should browse through at least one weekly comment from John Hussman. Just one single weekly, free, comment from Dr Hussman contains more market wisdom than most people acquire in a lifetime.

If you have the time (which you should), try reading a “memo from the chairman” (Howard Marks) or a quarterly letter from Jeremy Grantham at GMO.

There are many more useful (and timeless) links in this post from July 2015.

Last, I’d like to refer to my own eBook, The Retarded Hedge Fund Manager. Subscribe, download the book and at least take a look at the summary (10 bullet points) on pages 3 and 4:

Retarded advice summary


How to manage a fund

It’s pretty straight forward. Anybody could do it.

Just open an account and start buying things (stocks, bonds, commodities, derivatives, whatever you fancy). Once your cash runs out, you simply sell something whenever you want to buy something else, or borrow and use leverage.

There.

You’re managing

ape face

(probably poorly though)

However, if you want some (professional) structure to it, listed below are the basic building blocks. Most of all they help you avoid common mistakes, as well as keep losses to a minimum (given your chosen strategy).

 

Avoiding mistakes is much more important than hitting homeruns when it comes to serious long-term professional investing

 

Decide on a strategy

This is probably the most common mistake of all. Investing is like air to us or water to fish. Most take it for granted and never take a closer look at what it really entails. Thus…,

Decide explicitly what your overall investment strategy will be:

  • International or domestic (hint: international)
  • Which asset classes (stocks, bonds, commodities, currencies, derivatives, precious metals, etc. – yup, investing is not about stocks only)
  • Long only (remember I thanked the “long-only herd” when receiving the 2008 Hedge Fund Of The Year award)
    • index independent
    • index hugging 
      • which index (Whaddya mean, which index; are there other than S&P500? It’s never easy, is it?)
  • Market neutral (Good luck Chuck! Sounds good, but alpha is often elusive and you end up doing an involuntary epic split between two different trucks)
  • Market timer (if there ever were a losing strategy…)

The fund I managed, Futuris (Brummer) – the European Hedge Fund Of The Decade (Nota Bene), invested in stocks only and we were to some extent market timers, in as much as we deliberately controlled the overall net exposure of the fund. We invested internationally, albeit with a focus on northern Europe. We were completely index independent and non-biased in every way.

 

Tactical considerations

-How will you decide what individual positions to take?

  • Fundamental analysis (FA, valuation)
    • Key ratios (I don’t like P/E:s, but this cash flow yield approach is a nice shortcut sometimes)
      • Btw, do you think of fair multiples in terms of what others (“the market”) is likely to pay, or in terms of true intrinsic value from your own point of view – i.e., a kind of yield calculation shortcut?
    • DCF analysis (“true” valuation, but rather impractical and deceptive sometimes. Numbers in a spreadsheet are no truer than lines in a chart)
    • Operations momentum (are fundamentals accelerating or surprising?)
    • Should you heed broker recommendations?
    • How do you plan to use analysts?
      • In-house
      • broker firms
        • For information only
        • Implement their alpha recommendations
  • Technical analysis (TA)
    • Momentum
      • Manual (intuitive, ocular)
      • Computer driven, data mining
      • Simple regressions (work until they don’t)
      • Complex (e.g., Lorenz’ strange attractor analysis for style gliding and trend change detection/prediction)
    • Patterns
      • General, commonly acknowledged, patterns (see “Reminiscences of a stock operator” for some background on the psychological underpinnings)
      • Stock specific patterns with statistical backtracking
  • Combination of FA and TA
  • Cross asset signals
    • What do commodities, bonds, precious metals, high-yield fixed income instruments etc. say about risk tolerance and growth, and consequently about the potential for stocks?
  • Macroeconomics
    • Investments, productivity, inventories, sales, employment, policy rates and economic growth, and their effects on profits and valuations

Futuris was mainly based on fundamental, bottom-up,  analysis, with a focus on unrecognized operations momentum and DCF analysis. Key ratios did play an important part as well.

FA often is based on triangulation of several valuation methods, which is exactly what we did. We did apply some experience-based intuitive hedging as well; whether that should be considered FA or TA isn’t clear. On top of it all, we kept track of coross-asset signals as well as the macroeconomic trajectory and its potential impact on specific industries and stock markets.

Considering we won the “European Hedge Fund Of The Decade” award from HFR for the period 2000-2009, I’d say Futuris’ overall approach worked, even if it could have been refined and optimized further. Sometimes hubris got the better of us.

futuris awards

Futuris’ Awards, ominously quiet 2003-2007

 

What do you do when things go south?

-Plan B

You will lose money.

Yeah, yeah, I know…

No, you will lose money, more than you anticipate, and you need a plan for that (Hedgehogging by Barton Biggs, or my own eBook both tell you a lot about the particularities of finding oneself deep in the red):

  • Stop loss levels and procedures
    • How much and for how long are you (and your clients) ready to lose for something you believe in
  • Length of pause between a stop loss and restarting
  • Procedure for restarting
    • All at once, or gradually
    • Are the same (losing) positions acceptable alternatives? Under which circumstances?
  • Stop profit?
    • a somewhat unorthodox principle of investing, where “enough is enough” and you cut your cash cows when they’ve run far enough, or rather too far. That way you avoid sudden mean reversions.

Futuris had an informal, soft stop loss level of 5% losses at the portfolio level. Individual positions, however, were allowed much more leeway. There were instances of doubling up at a 50% loss, and at least one (albeit marginal) instance of going 10-fold on a -90% loser. We had no specified pause length before restarting, but we almost always eased back into the market gradually over a few weeks. I personally did apply a kind of stop-profit methodology, trimming winners on surges.

 

Implementation

Alright, so you have your strategy and some tactics in place. What about where the rubber meets the road? How do you perform the actual deals?

  • How frequent trading?
    • minutes and seconds
    • days
    • months
    • years
  • Number of instruments
    • Some advocate a maximum of 5-10 positions – to make every investment matter and count, as well as increase the depth of knowledge
    • Some take hundreds of small market neutral “spreads”, reducing single stock and market risk to a minimum
    • Perhaps, you plan to just buy and sell here and there and see how many you’ll get to over time?
  • Overall exposure range (+/-10%, 50-80%, 97-100%, 70-130%, +/- 100%)
  • Liquidity management
    • Do you plan to have any cash at all?
    • If so, where will you keep it?
  • Level of aggressivity
    • Marginal opportunistic changes within a strategic position
    • Catching both up swings and down swings, no matter the trend direction (aggressive)
  • Commission and research expenses
    • How much are you prepared to pay per trade, or per year
    • Are you buying execution services (placing power) or will you rely mainly on DMA (Direct Market Access, self-help)?
    • Will you pay for research? How much? What is an acceptable ROI on that investment? How do you plan to measure the effectiveness of third party research? 

For a fund of 1-1.5bn USD, Futuris was unusually agile. Sometimes we bought or sold the entire portfolio (100% of assets under management, AUM) in a single day. Most days, however, we typically executed less than 5 minor trades (less than 1% of AUM each). The extreme measures outlined above were reserved for stop-losses or profit taking in extreme market situations, such as 9/11 (2001), Hedge Fund Hell (August 2007), the Kerviel debacle (2008) and the Fukushima disaster (2011 tsunami and nuclear meltdown).

Futuris usually held around 40 different instruments (38 stocks, one long or short future and perhaps an index sell option), albeit more (60) the last few years.

Our overall exposure range was approximately -50% to +100% of AUM. We managed our liquidity conservatively (cash at bank or in short dated treasury notes). We were minimally aggressive regarding trading – once we had decided an instrument was going up or down we held the basic position steady with only minor trading on the margin (10-25% of the position), rather than actively calling temporary counter trends. Going both ways we left to more free-thinking spirits.

 

So, how should you manage your money?

I can’t tell you that, and I can’t recommend you follow my example either. I only want to make sure you understand the universe you’re about to enter.

Anyway, I think most investors should apply some sort of passive Buy and Hold stock strategy or a semi-passive Quattro Staggione strategy (stocks, gov bonds, gold, corp bonds). Going deeper is just a waste of time and a source of frustration for most.

I, however, am not most people (so I’ve heard).

I am currently heavily net short the stock market. Yes, that’s right; I haven’t just reduced my quattro stock slice from 25% to 20% or 15% or 0% for that matter. I’m way down at -100%!

It’s served me well recently, and even if I’m still basically 100% short, it’s less short than just a week ago. Hence, I’m actually ready for a temporary market bounce right now.

I know it sounds strange to some, but I have decided on a negative stock market exposure for the mid term, and will thus only trade around that position marginally – for fun and to stay tuned to the market.

I will not go tactically long on a gut feeling and risk being caught in an air pocket. It’s a bear market and they famously make everybody look stupid before they’re over.

Apart from (negative) stocks, I own quite a bit of gold (GLD) and gold mines (GDX), and I keep buying oil (Brent, and the oil exploration stocks DNO and Shamaran, which are both highly speculative punts on the KRG actually paying for the oil. That in turn probably means the oil price must rise above a certain threshold within a certain time lest they all go bankrupt, including the Kurdistan Regional Government).

portfolio Syding Current 22 jan 2016

This is not responsible. Do not follow my lead.

NB that I don’t really manage my money in the true sense of the word. I’m betting on a downturn, after which I will start managing again. I’m doing it in part for fun, in part because I think I’m right.

Usually, and for most, it’s not a good idea to try to time the market. It only brings unnecessary frustration and consumes a lot of time.

Once it’s time to get professional again, I need to buy a much more diverse set of international companies. Depending on how far down the market goes, I just might go 100% long stocks, or more, for some time, while possibly using leverage in order to hold some gold as well. My oil investments are not for the long run, but how can you resist the world’s most important commodity when it’s down by 80%?

Yes, I know all about the Saudis needing the money, Iran coming online again, the promise of Shale, not to mention the expansion of solar power, carbon taxes etc. Please note that most oil people knew all about that already 2 years ago, with oil 300% higher than today (i.e. at 4x today’s price). This is not the place to discuss peak oil or its inversion, today the topic is overarching principles for managing a fund.

 

Summary

OK… so what’s in it for me, you think. I don’t get it, should I invest or not? What stocks should I buy? Or should I sell the ones I own?

No, no, no!

What you should do is just think through the following before starting to manage a fund or your own money:

  • Should you at all manage your own money? Check out the pitfalls here. Is it worth it? Read the pitfall article and then decide whether active investing is something for you. It really isn’t for everybody.
    • Is there some other alternative you could pursue, that would be more predictable, worthwhile (and fulfilling)
  • What asset classes and regions?
    • Doing everything and everybody is seldom a good strategy unless you have plenty of experience or a large staff ;)
    • Jumping haphazardly from one thing to another just means more time spent learning and losing. You could trade just one single stock or currency profitably for your entire life.
  • What overarching strategy in terms of net exposure (long only or market neutral, e.g.)
  • Fundamental or Technical – on what basis will you select, rotate and replace your investments? How will you know if your M.O. is sound and workable? Are you a trader or an investor?
  • How frequently should you trade? How much time (and money) are you going to spend on investing and monitoring?
  • Plan B?
  • Most of all, do you think it will make you a happier person, experiencing a fuller life, considering not least the loss of time, and the gain (sic.) in frustration?

Check out my eBook for more useful information on investing, not least my ten most important lessons for any investor, private or professional, including the most important one:

Wait

There is never any hurry to invest

Opportunities always cycle back

 

And if you are at all toying with the idea of going fundamental, first check out this article about the only two steps you need as a fundamental analyst or investor. Warning, it’s actually 50…

Final note: This post doesn’t tell you anything about how to choose your actual investments, the actual stocks or instruments. That’s up to you. I’m ‘just’ telling you to be explicit about the framework within which to operate, and under which circumstances to abort.

Please share this article with your social network in order to help at least one person avoid financial ruin due to some simple error of omission.

The headline? Sorry about that… Pure clickbait