The Invisible Hands

The Invisible Hands- Top Hedge Fund Traders on Bubbles, Crashes, and Real Money PDF

The Invisible Hands- Top Hedge Fund Traders on Bubbles, Crashes, and Real Money PDF provides investors and traders with the latest thinking from some of the best and the most successful players in money management, highlighting the specific risk and return objectives of each, and discussing the evolution of certain styles and beliefs in money management.

Category: Hedge Fund

Author: Steven Drobny 

Language: English

Free Download link: At the end of the post

Introduction

Hedge fund managers who survived and profited through the 2008 financial crisis share their secrets

In light of the colossal losses and amidst the resulting confusion that still lingers, it is time to rethink money management in the broadest of terms. Drastic changes need to be made, and managers who actually made money during 2008 make for a logical starting place.

The Invisible Hands provides investors and traders with the latest thinking from some of the best and the most successful players in money management, highlighting the specific risk and return objectives of each, and discussing the evolution of certain styles and beliefs in money management.

  • Contains revealing interviews with top hedge fund managers who survived and prospered through the 2008 financial crisis
  • Outlines investments and strategies for the rocky road ahead
  • Reveals how hedge fund managers are seeking a new paradigm of risk management and profit making opportunities in the post-crisis world
  • Gives guidance on how traditional investors such as pensions, endowments, foundations and family offices should rethink how they approach asset allocation and portfolio construction

Page by page, the top macro thinkers found in this book reveal their own approaches to markets, risk, and the broader world in which we live, as well as their advice on how investors should be approaching money management in today’s uncertain world.

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Preface

2008 was an unmitigated disaster for most investors, including unlevered “real money” investors—the focus of this book. Markets around the world, from real estate to equities to commodities to credit, posted huge declines, taking down with them some of the world’s most venerable financial institutions, a wide variety of alternative asset managers (hedge funds, private equity, venture capital, and real asset managers), and a host of real money accounts (pension funds, insurance companies, endowments, foundations, family offices, and sovereign wealth funds). Almost everyone lost money in 2008, and in many cases more than anyone imagined possible.

Anger and confusion linger in the aftermath of the crisis, but are by no means limited to market players. Main Street is reeling as homes and jobs have been lost, savings have evaporated, and many assumptions governing the stability of modern society have been challenged. Governments around the world have responded with all sorts of innovative monetary and fiscal stimulus, generating even more uncertainty about the future. At the same time, the social contracts between governments and their citizens are being called into question as Social Security, health care, and pensions loom as potential financial crises for the taxpayer.

Meanwhile, a full year after the crash of ‘08, nearly everyone in the markets—from savvy hedge fund managers to small private investors with retirement accounts to policy makers—still struggle to understand what went wrong. While the debate over who or what deserves blame will likely rage for decades, the world has not ended and investors must now adapt and adjust to the new reality. The crisis of 2008 has called many investment mantras into question—notably the Endowment Model (diversifying into illiquid equity and equity-like investments) and others including stocks for the long
term, buy the dip, buy and hold, and dollar cost averaging—yet no new model has taken root. The crisis of 2008 did, however, supply the financial community with an abundance of new information with regards to portfolio construction, in particular around risk, liquidity, and time horizons.

After such an extreme year in the markets, reactions in the real money world have been polarized: some have learned valuable lessons and are incorporating them in their approach, whereas others are operating as if it is business as usual, completely dismissing 2008 as a one-in-a-hundred-year storm that has passed. Although this latter camp may well prove correct in the near-term, history has taught us that extreme events happen more frequently than predicted, both on the downside and the upside. What if 2010 or 2011 offers an environment similar to or worse than 2008? Ignoring or discounting the lessons of 2008 is quite simply poor risk management.

One of the more significant questions facing all investors is whether a three-decade tail wind for risk assets—due to falling inflation and declining interest rates—could be over, now that the main economic blocks (United States, Europe, Japan) have no inflation and near-zero interest rates. Fiscal deficits, increasing public sector debts, private sector deleveraging, and populist and protectionist politics around the globe all point to increased volatility and a move away from “price stability.” Still, real money accounts have an overwhelming proportion of their portfolio in equity and equity-like investments.

The status quo for real money management is no longer tenable. It is not acceptable to obscure losses and volatility behind benchmarks, long-term time horizons, or relative performance numbers. Losing less than peers or benchmarks does not provide the annual cash flow needs of pensioners, universities, and charities. Poor portfolio construction by these funds creates a potential cost to society and the taxpayer that is too great to ignore.

“The most powerful force in the world is compound interest,” Albert Einstein is said to have declared. However, he neglected to mention that avoiding large drawdowns— which can wipe out years of performance—is an important implicit part of this phenomenon. Building better portfolios and properly managing risk are the first lines of defense against large drawdowns, which should be the primary concern of anyone managing capital against annual cash needs.

It is time to rethink real money management, and a good place to start is with portfolio managers who fared well in 2008, either by posting strong performance or by preserving capital. Risk management was the key differentiator and global macro hedge fund managers were, in aggregate, one of the few investment categories that managed risk effectively through the crisis. Although there is always a wide disparity in performance among global macro managers due to its broad mandate, there was a clear delineation in 2008: funds that focused on risk made money or at least preserved capital, whereas most funds that remained entrenched in long-held views suffered
debilitating losses. Because my professional network includes many of the world’s leading global macro hedge fund managers, I decided to reach out to those who performed in 2008 to see if any lessons were transferable to real money and other investors.

My last book, Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets (John Wiley & Sons), published in 2006, captured the process behind global macro investing through a series of interviews with some of the top global macro hedge fund traders at the time. Many of these managers foresaw the coming credit crunch, and elements of this foresight were captured through the animated discussions in the book. This book seeks to ignite a discussion about portfolio management in light of the lessons learned in 2008. Through another series of interviews, this time with top global hedge fund traders who managed risk well through 2008 and into 2009, the book highlights certain valuable elements of the global macro approach that could be applied to other mandates within money management.

The Invisible Hands begins by defining and discussing the importance of real money management. It then discusses the evolution of real money management and raises some important questions about how real money portfolios are constructed. Next, the experts speak for themselves. First, my business partner Dr. Andres Drobny, “The Researcher,” discusses where the global economy is headed. Then, “The Family Office Manager,” Jim Leitner, addresses the lessons he learned in 2008 and offers his own thoughts on rethinking real money. Next, the “Invisible Hands”—10 anonymous global macro hedge fund managers, the Philosopher, the House, the Professor, et al—discuss
how they approach money management, how they managed to make money or avoid large losses in the crisis, and how they would address some of the challenges faced by real money managers.

Finally, “The Pensioner” gives a view from the inside of the real money world and offers prescriptions for his peers.
I chose the anonymous route to increase candor as well as keep the focus on the ideas as opposed to the personalities. Many of the managers featured in this book actively shun publicity and have little to gain from revealing their money-making process. Few are seeking new investors and most have seen their assets under management grow dramatically as a result of strong 2008 performance. Nevertheless, they agreed to take part in this project because they recognize the important societal implications of real money performance.

To give some context amidst the anonymity, the hedge funds represented by the 10 anonymous managers herein manage over $100 billion of capital. The interviewees represent half a dozen different nationalities, and are based in various financial centers around the world. All have strong historical track records and all but two of the managers made money in 2008, with the exceptions still having preserved capital, finishing the year roughly flat (i.e., percentage losses in the single digits). None of the managers had a good year in 2008 that stood out against their historical performance due to either one significant bet or a longstanding bearish bias. This is a collection of
discussions with outstanding risk managers.

This book is meant to serve as a catalyst for a deeper discussion on the future of real money management. It does not presume to possess a silver bullet, as no such thing exists. The goal is to provide an understanding of how successful global macro hedge fund managers navigated the most significant financial crisis of our lifetimes and to offer suggestions for how real money managers and all investors can incorporate certain elements of the macro approach into their own investment process. For all of our benefit, I hope this book makes progress toward that end.

Steven Drobny
Manhattan Beach, California
December 2009

Table of contents- The Invisible Hands PDF

Praise
Foreword
Preface
Part One – REAL MONEY AND THE CRASH OF ‘08
Chapter 1 – Rethinking Real Money
I. Why Real Money?
II. The Evolution of Real Money
III. RETHINKING REAL MONEY—MACRO PRINCIPLES
Chapter 2 – The Researcher
Chapter 3 – The Family Office Manager

Part Two – The Invisible Hands
Chapter 4 – The House
Chapter 5 – The Philosopher
Chapter 6 – The Bond Trader
Chapter 7 – The Professor
Chapter 8 – The Commodity Trader
Chapter 9 – The Commodity Investor
Chapter 10 – The Commodity Hedger
Chapter 11 – The Equity Trader
Chapter 12 – The Predator
Chapter 13 – The Plasticine Macro Trader

Part Three – FINAL WORD
Chapter 14 – The Pensioner
Conclusion
Acknowledgements
Bibliography
About the Author
Index

Reviews

About the author

Steven Drobny is the cofounder of Drobny Global, an international macroeconomic research and advisory firm that counts many of the leading global hedge funds and money managers as clients. Prior to Drobny Global, Steven worked for Deutsche Bank’s Hedge Fund Group in London, Singapore, and Zurich. He holds a master’s degree from the London School of Economics and a bachelor’s degree from Bucknell University. He is the author of Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Market. Please visit www.drobny.com for more information on Drobny Global and this book.

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