Hedge Funds入门级圣经 “Inside the House of Money"Notes Share(附英文版PDF)

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INSIDE THE HOUSE
OF MONEY
Top Hedge Fund Traders on Profiting in the Global Markets
Inside the House of Money
Top Hedge Fund Traders on Profiting in Global Markets
Notes


The social objective of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future.
—John Maynard Keynes
Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.
—George Soros
After a certain high level of technical skill is achieved, science and art tend to coalesce in esthetics, plasticity, and form. The greatest scientists are al- ways artists as well.
—Albert Einstein


Preface:The term hedge fund used to conjure images of speculators hunting for absolute returns in any market in the world, using any instrument or style to capture their prey.
Amidst this evolution and change in the hedge fund business, one strat- egy has remained true to its original mandate of absolute return investing, seeking outsized returns from investments anywhere in the world, in any asset class and in any instrument: global macro.Global macro investing is still a relatively unknown and misunderstood area of money management but increasingly of interest.Global macro has no mandate, is not easily broken down into numbers or formulas, and style drift is built into the strategy as managers often move in and out of various investing disciplines depending on market conditions. Even professional hedge fund investors struggle at times to decipher what global macro man- agers actually do.




CHAPTER 1
Introduction to Global Macro Hedge Funds
The Global Market Approach to investing is to use the macroeconomics principles to identify dislocations in asset prices and generates positive returns by making leveraged bets on price movements of such assets,whether it be currency,interest rates or commodity markets.Then managers look to take positions that have limited downside risks and potentially large rewards,opting for either a concentrated risk-taking approach or a more diversified portfolio.
Hedge Fund managers usually speculate either on discrete price movements such as U.S. dollar index or short japanese bonds(outright directional) or on relative value where two paired on the long and short sides to exploit a perceived relative mispricing,such as long emerging European equities versus short U.S. equities.


Notes:进入Global Macro关键是要学好宏观经济学，国际金融。并对国际政治环境有清晰的认识，对汇率变动保持敏感。对由于市场分割和制度等因素引起的货币、资产、汇率、商品等价格差异和可能的变动有清晰的认识和预测。


Generally, macro traders look for unusual price fluctuations that can be referred to as far-from-equilibrium conditions。
从长期而言宏观数据会趋于长期趋势，任何短期的浮动最终都回回归到长期趋势上，所以任何事件或内在因素引起的短期波动都是arbitrage的好机会。
Traditionally, timing is everything for macro traders. Be- cause macro traders can produce significantly large gains or losses due to their use of leverage, they are often portrayed in the media as pure speculators.
利用Global Macro做Arbitrage存在两种获利可能，1）发现其他投资者没有发现的短期变动，2）大多数情况下发现机会并不难，此时重要的是Timing，同一时间不同的Timing决定着输赢。然而如何Timing呢？？


Many macro traders would argue that global macroeconomic issues and variables influence all investing strategies. In that sense, macro traders can utilize their wide mandate to their advantage by moving from market to market and opportunity to opportunity in order to generate the outsized returns expected from their investor base.
macro managers can take advantage of these occasional opportunities by seam- lessly moving capital into a variety of different investment styles when warranted。George Soros once said,“I don’t play the game by a particular set of rules; I look for changes in the rules of the game.”
任何一个市场的获利机会都是短暂的，存在着一个类似产品生命周期的“市场生命周期”，同样任何投资策略也存在着同样的生命周期。一个新的市场的发现和一个新的投资策略的创立总是只能给最先发现的那部分人带来较大利润，在这之后随着投资者的追捧和市场逐渐变边的理性，所谓的利润就会在大部分投资者中分配从而超额利润消失，也就是资本市场不断想有效市场进化，这就是为什么现在Emerging Markets吸引较多境外投资者的原因，因为市场非有效，所以存在价格扭曲，因而有获利机会，想比较而言在美国，大部分投资者和大部分市场已经经过高估进化，资本市场高度有效，所以整个资本市场的超额利润就相对减少了。真正厉害的投资者永远是那些不断尝试新的投资手法和新的市场的人，所以以后研究生阶段的学习也不能局限，因为即使现在看很热的东西两年之后很可能已经成熟了。重要的是大好基础，增强整体实力，培养投资思维，所以以不变应万变就是这个道理。
Global macro traders are not limited to particular markets or products but are instead free of certain constraints that limit other hedge fund strategies.This allows for efficient allocation of risk capital globally to opportunities where the risk versus reward trade-off is particularly com- pelling.





CHAPTER 2
The History of Global Macro Hedge Funds


前三章介绍的都是Global Macro Hedge Funds，可见Global Macro Hedge Funds在整个Hedge Funds中的重要程度。


The path to today’s style of global macro investing was paved by John Maynard Keynes a century ago. For an economist, Keynes was a renais- sance man. Not only was he the father of modern macroeconomic theory but he also advised world governments, was involved in the Bloomsbury intellectual circle, and helped design the architecture of today’s global macroeconomic infrastructure by way of the World Bank and Interna- tional Monetary Fund.At the same time, he was also a successful investor, using his own macroeconomic principles as an edge to extract profit from the markets. Some say he was the first of the modern global macro money managers.


之前从未想过Keynes竟然是Global Macro的Pope


Major Events:有兴趣的同学可细看。

The Stock Market Crash of 1987
Black Wednesday 1992
Bond Market Rout of 1994
Asia Crisis 1997
Russia Crisis 1998
Long Term Capital Management 1998
Dot-Com Bust 2000

CHAPTER 3
The Future of Global Macro Hedge Funds


The restructuring of Soros Fund Management and the winding down of Tiger Management marked the end of the global macro giant era. Gone are the days when a few strong personalities dominate a small, concentrated number of funds and markets.The increase in information flow, competition, influx of assets, and development of new markets has added tremendous complexity and scope to the global macro landscape today.The strategy that started with Keynes and made famous by Soros has become a broadly diversified collection of many different managers and styles.


的确Global Macro 也在逐渐成熟。
FROM GLOBAL MACRO TO GLOBAL MICRO


Some argue that the outsized returns available to global macro funds over the past few decades were solely the result of central bank and policy errors, such as trying to fix nominal exchange rates (sterling crisis,Asia cri- sis) and micromanaging economies (politically driven interest rate policy, bubble management).Yet it seems as though policy makers have come up the curve and learned from past mistakes.The introduction of financial mar- ket professionals, such as Robert Rubin, to government policy decision- making positions seems to have calmed markets and smoothed volatility, limiting the glaring anomalies for funds to exploit.


Many of today’s global macro managers have investment styles that are more aptly described as global micro.
Global Micro 新趋势，但Global Macro仍然作为投资者Portfolio中的首选。
Soros Fund Management and Tiger Management were the pioneers of the global micro investing style. As Scott Bessent explains, George Soros and his chief investment officer (CIO) Stanley Druckenmiller have long held the belief that deciphering what is happening at the micro level pro- vides valuable insights for the macro pictureBut although Soros and Tiger may have sown the seeds for today’s global micro style, their largest moves (on both the upside and downside) often came from big sweeping bets on currencies, equity indexes, interest rates, and other classic macro instruments. In actual prac- tice, they operated in what Dr. Sushil Wadhwani (Wadhwani Asset Man- agement), in his interview, calls “the narrow end of global macro.”


Jim Leitner (Falcon Management), in his interview, describes his vision for global macro as:
. . . the willingness to opportunistically look at every idea that comes along, from micro situations to country-specific situations, across every asset category and every country in the world. It’s the combination of a broad top-down country analysis with a bottom-up micro analysis of companies. In many cases, after we make our country decisions, we then drill down and analyze the companies in the sectors that should do well in light of our macro view. . . . Macro themes ex- pressed in a micro style. Global macro only means that you start at the top and work your way down.


现今大多数情况是从Global Macro出发选定特定区域或国家，然后做深入细致分析，找出在Macro大势影响下某一行业或公司的变动趋势。也就是先分析基本面，再分析行业，进而分析具体的公司。 It’s the combination of a broad top-down country analysis with a bottom-up micro analysis of companies。


CHAPTER 4
The Family Office Manager
Jim Leitner Falcon Management Wyckoff, New Jersey


Get Started：
牛校Graduate School，international finance--->Money Broker Trainee（Monkey）-->Broker--->Trainee in JP Morgan on the Morgan Nassau Desk--->Trainee in JP Morgan on foreign exchange--->Currency Forward Trader


The guy interviewed me said“What I need is a monkey to run this big board with all the information that’s go- ing on around the world.”They had a little amphitheater where all the brokers looked down at a big board that had to be up-to-date at all times with customer orders that came blaring in from loudspeakers connected to offices in Lausanne, Sin- gapore, and London.


After working there for a short while, I said to the guy,“This is easy and so much fun. I want to be a broker and I can do it at the same time I am the monkey filling out the board.”They gave me a phone and I started calling small banks in the Midwest.
I did this full-time for two years after graduating when I decided I wanted to be on the other end of the phone. I called JP Morgan and said, “Next time you guys want to hire a trainee on the Morgan Nassau desk, please consider me.”Two weeks later I was working there and took a huge pay cut to do it. My salary went from $70,000 down to $17,000 but I fig- ured it was worth it to keep learning. I also went to law school at night.
The Eurodollar market that I was trading was growing, but what really started taking off then were the euro currency markets.Any domestic cur- rency that was being handled offshore became a euro currency, and I be- came somewhat of an expert in euroswiss francs, eurodeutsche marks, and europesetas.
After a while, I figured I’d learned everything I could on the Morgan Nassau desk, so I walked over to the head of foreign exchange and said, “I’ll write all your tickets and bring you coffee if I can sit next to you, be your trainee,and learn currency trading.”He said,“Done,”so I became his foreign exchange trainee.


Next I became the currency forward trader, which was a little bit re- lated to the deposit market because it had to do with interest rates. It was slightly more complex than just buying and selling spot currency.Then they started throwing the esoteric currencies at me to trade. In those days, a Spanish peseta trade was esoteric because no one knew how to price it, what relationship to use, what cross to look at to value it, and so on.


A few years later, I was hired by Bank of America to run forwards, ex- otics, and all currency trading outside of the four major currencies (deutsche mark, sterling, yen and Swiss franc). For me, it was a great job because I was trading all of these things and making a lot more money than the guys trading spot and the major currencies.


Back then, you could make a lot of money on market imperfections if you had better information and a lot of friends.


I was able to dominate trading in two markets, the Venezuelan bolivar and Mexican peso, in terms of being the largest market maker and knowing exactly what the bid/offer spreads could be. I could shut other market makers out. Because we dealt with all the corporates and funds that traded in these two currency mar- kets, I knew more people and had more information than anybody else. It was a great time and a great learning experience. However, in other cur- rencies the profits were totally driven by the desks’ ability to take risk, to understand the liquidity of different currency markets, and to analyze cur- rency moves directionally.


I left there to join Shearson Lehman as a pure proprietary trader, but quickly realized that they didn’t like taking risk.When Bankers Trust called saying they were stepping up risk taking, I jumped at the chance.The next five years, from 1986 to 1991, at Bankers were just phenomenal, blow-away years. Bankers became the most domi- nant trading firm in currency markets during that time.




Bankers had a management culture that was willing to take risks and had a sense of how to measure it. They had a system called “RAROC,” risk- adjusted return on capital, which was really the first version of value at risk (VAR). Management was good at encouraging people who did well to continue to do well—the thought was, if you’re doing well and it’s not random, then here’s more rope.
When I started, they set an annual budget of $12 million for the for- wards and exotics desk. I asked how they set that budget and they said, “You have six people working for you and no one’s ever made more than a million. If they each make two million, that’ll be a phenomenal success.” We made $12 million by February 20.
They quickly realized that I was good at making money and that I re- ally enjoyed finding fantastic risk/reward trades, thinking about the rela- tionships between currencies and finding things that were mispriced, so they gave me a lot more rope.


Do you think you have an innate skill where you can “just tell” when prices are out of line?
I don’t have an innate skill. It comes from being extremely interested in markets and looking at everything all the time.After doing it for years,I’ve developed a mental database of where things should be, such that when something makes an irregular move, it shows up on my radar screen. I used to have so much fun playing around in the market and knowing that I knew my markets better than other people.


Also, the central banks were so much more active back then, especially in Europe. It was a no-brainer because they were keeping everything in ranges and leaving orders at fixings.The central banks would all set the value of their currencies every day and each one wanted to have their own daily fixing. There was one in the Netherlands, one in Paris, one in Ger- many, and so on.


中央银行的调控是Mispricing的重要根源，在欧元形成的过程中Mispricing比比皆是，那么如果未来构建亚元或在人民币国际化与中国维持人民币稳定的过程中是否也会出现相似的机遇呢？？值得深入思考。


Hedge Funds内的成长不像政治，没有空降，只有从最底层做起，随着你不断积累经验，不断学习，能力的逐渐显现，你也会不断被委以重任。
At Bankers, I came to realize that I was absolutely unemotional about numbers. Losses did not have an effect on me because I viewed them as purely probability-driven, which meant sometimes you came up with a loss. Bad days, bad weeks, bad months never impacted the way I ap- proached markets the next day.To this day, my wife never knows if I’ve had a bad day or a good day in the markets.


就像在“Godfather”中看到的，大人物永远不会被任何起伏所影响。相反小人物总是跌跌宕宕。如果你要有所成就，必须学会控制情绪，因为任何情绪都会影响我们的判断能力，使我们过于乐观或者过于悲观，而这都是Businessman的大忌。


What advice would you give to a young trader who would like to be in your shoes in 20 years’ time?
They should be open to the entire spectrum of market experiences. I never locked myself down to investing in one style or in one country be- cause the greatest trade in the world could be happening somewhere else. My advice would be to make sure that you do not become too much of an expert in one area. Even if you see an area that is inefficient today, it’s likely that it won’t be inefficient tomorrow. Expertise is overrated.


Never be an expert in investing.Classic，
There’s a book called The Wisdom of Crowds (by James Suroweicki) that contains a lot of examples where the average results of a group were much better estimators than expert opinions.We wrongly tend to look at other people as experts. If you ask currency experts where an exchange rate is going, they are just as likely to be wrong as some aver- age guy on the street




One also needs to learn to fight certain human biases such as buying into stories.The thing that gets fundamental discretionary traders involved in trades is stories because we can grasp onto them. But, in general, it’s good to step away from the story and take it back to the numbers.Trading off a story is too amorphous.We need to quantify things and understand why things are cheap or expensive by using some hard measure of what cheap or expensive means.Then there has to be a combination of story and value.A story is still required because a story will appeal to other peo- ple and appeal is what drives markets. If there’s no story and something’s cheap, it might just stay cheap forever. But if there’s a story involved, make sure that you first look at the numbers before you get involved to be sure there is some quantitative backing to the idea.


Where do you source your stories?
I read a tremendous amount of books and papers, I subscribe to research services, and I read The Economist religiously. If somebody asked me how to get involved in global macro investing, I would say start with a subscrip- tion to The Economist, read it every week, and think about what you learned this week that you didn’t know the week before.


Subscribe to The Economist .
If you read about an oil discovery, start thinking about how to develop it into a trade.The idea is to do as much research as you can just reading and thinking about anything in the world before reaching out to your net- work. Developing a network by going out and meeting groups of intelligent people is also very important.
Another thing that’s important is not to be afraid to be ignorant or ask questions. Learn to love to listen to people and when you hear something interesting, follow up on it. Don’t just think, “Well that’s an interesting idea,” only to find out a year later that the company you could have bought shares in is now up five hundredfold. You never want to say coulda, woulda, shoulda.When I find a really compelling idea that I don’t know much about, I put a tiny amount of money into it and treat it like a cheap option.


Could you do what you do if all you had was The Economist?
I think I could. If I only read The Economist, my portfolio right now would be long Asian equities for the next 10 years.
The world has become divided into a producer center, which is Asia, and a consumer center, which is the United States. Asia has better demo- graphics and people there are willing to work 60-hour weeks at much cheaper rates. Americans, on the other hand, are only willing to work 40 to 45 hours a week but are willing to leverage themselves to the hilt to buy more things.There’s also an amorphous area in the middle called Europe, which is neither an aggressive consumer nor an aggressive producer, and demographically it’s all screwed up.
As an investor, I want to be invested in the producer as opposed to the consumer. I also want to be focused on buying value stocks instead of growth stocks, so I would go through and pick all of the value stocks in Asia that I could find.
I’d be buying Thai property developers because Thailand has a twin surplus and is expanding nicely. I’d be long Indian stocks out the wazoo. I’d be long Korea. I’d be long Hong Kong. I would not be buying Chi- nese stocks because I’m not comfortable with the rule of law there, but I really believe China’s doing something special so I’m investing in the people that supply China.


Long Asian Equities for the next 10 years.while you should take caution of certain risks.
What’s the biggest threat to your Asia 10-year view?
One risk is that oil prices remain high and lead to another Asia crisis.They would have to stay high for a considerable period of time, which would give ample time to get out. If oil gets to 80 dollars a barrel and stays there for a while such that inflation starts picking up, I’ll get out.
Another risk is that the global financial system becomes less global. If trade flows suddenly start shrinking and protectionism starts gaining mo- mentum, I’ll get out. Protectionism is a beggar-thy-neighbor policy that doesn’t work because global wealth declines.
Nuclear war between India and Pakistan would also be a problem for my Asia view although, in the long run, you should be buying things when they get destroyed. As terrible as nuclear war sounds, demographics will win out over the next 30 years.


Disaster and tragedy are always a buying opportunity. Yeah, look at Russia or Botswana or Turkey. For example, when Turkey had a massive earthquake in 1999, we bought shares of glass manufacturers because we knew everybody was going to have to replace their windows. It was a no-brainer.Turkish stocks were going down across the board but we bought all the shares of glass manufacturers we could.
The opportunity is a result of people panicking based on news. News is random and it might not look good but it’s not exactly easy to analyze how it’s all going to work out at that moment. Changing your position be- cause of news is usually not a great idea.
That’s one of the reasons why I love options. Options take away that whole aspect of having to worry about precise risk management. It’s like paying for someone else to be your risk manager. Meanwhile, I know I am long XYZ for the next six months. Even if the option goes down a lot in the beginning to the point that the option is worth nothing, I will still own it and you never know what can happen.
I once owned a one-year option on the euro swap rate that became worthless soon after I bought it. Then, with two weeks to go to expiry, the swap rate came back my way and blew through my strike.After being worthless for 11 months, I ended up selling it for five times what I paid for it.


任何重大事件都会造就一个buying opportunity.关键是作为一个intelligent investor，你要善于从投资的角度发现买进的机会。这让我想起在”The Lord of the War”中那个经典片段，当家人们为他的孩子学会走路而兴奋时，尼古拉斯凯奇饰演的军火商尤里却毫不在意，而是去热烈亲吻电视中宣布苏联解体冷战结束的戈尔巴乔夫。因为在大多数人眼里宣布和平时代正式到来的政治事件，在尤里严重却是一个新的军火的巨大市场。大量冷战时间赶制的优良武器价格必然大幅下降，所以存在一个Buying opportunity，要做的就是一个简单的空间Arbitrage。即设法把军火运到价格较高的市场。


On average, when there is a bad event, volatility goes up because everybody gets nervous and pays up for insurance.One thing the September 11 attacks did for me was reconfirm that tail risk should not be allowed in your portfolio because things happen that you can’t imagine.
Implied volatility is based on historical volatility, but who cares about historicals? They’re irrelevant.The point is, things can happen for the first time that aren’t in your distribution so they can’t be priced. If it’s never happened before, how can you hedge yourself? The only way to hedge the unknown is to cut off tail risk completely.


FORWARD RATE BIAS
The empirical tendency of forward exchange rates is to overesti- mate changes in spot exchange rates. According to the theory of uncovered interest arbitrage, forward exchange rates are unbiased predictors of future spot exchange rates, implying that a forward contract’s expected return equals 0 percent. It is an empirical fact, however, that during the modern floating rate era, the forward ex- change rates of the major currencies have predicted larger subse- quent changes in the spot rates than have occurred. Forward contracts that have sold at discounts have produced positive returns on average, while forward contracts that have sold at premia have produced negative returns on average.
Source: www.riskinstitute.ch.


One thing that I’m really good at is cribbing ideas. I actually didn’t spot this forward rate bias first.There was a guy at Bankers Trust who spotted it from a portfolio standpoint and wrote a little piece on it. I noticed that it worked in individual currency pairs but I never really thought of it in a portfolio context. Anyway, this guy wanted to build it into a trade but was just too nervous to actually do it.
Cribbing ideas.成功的banker不必是一个理论家思想家，但一定是一个善于发现理论，并且具有实践能力，判断能力的实践者。


Looking for disconfirming evidences
I’m very risk-neutral and focus on both sides.What I was saying is that hu- mans in general are biased to look for confirmatory evidence. When someone is bullish oil, they tend to pick out the pro-oil arguments in whatever they read.Very few people train themselves to look for discon- firming evidence. Psychologists have done tests about how humans ap- proach problem solving and found that we are somehow preprogrammed to look for confirmation and not for disconfirmation.
What I try to do in my trades is look for disconfirming evidence. It’s a very difficult practice and I have to continually train myself to ask why I believe something is going to go down, not why it should go up




You’re moving away from the old global macro style of gut feel, market timing, and trend following.
Exactly. We’re trying to move away from that. We think the future is a combination of the best from the real money world and the best from the hedge fund world to create a new paradigm.


Future is a combination of the best from the real money world and the best from the hedge fund world to create a new paradigm.
The big thing that distinguishes the real money world from the hedge fund world is redemptions. Universities don’t have redemptions, nor do fam- ily offices for that matter. Both are going to be around for years so they invest for the long term. Meanwhile, the hedge fund industry invests for the one- to three-month time horizon, which subjects managers to taking inefficiency risk and missing out on opportunities that are longer term in nature.


Real money represents the long-term investment.or value investing.以后应该多学value investing，并且随着个人资本的增加和年龄的上升应该增加real money在portfolio中的比重。
Take value versus growth, for example. Over the long term, value stocks appear to have outperformed growth stocks, but over some three-month periods, boy have they gotten crushed. Over the long term, value stocks will outperform because growth stocks by definition are priced too expen- sively.The public, in general, invests in stocks that have done well in the ex- pectation that they will continue to do well.That works in the odd case like Microsoft, but most growth stocks will outperform for two or three years before reverting to the mean. Mean reversion works in the medium term.
If you have a real long-term view, number one, you want to be invested in some equities around the world because you want to earn risk premia, and number two, you want to choose those equities that on average will go up more than others, so you should be looking around the world for value stocks in valuable markets.
As a family office, we can take the requisite long-term view. I’m doing this with a 30- or 40-year time frame in mind, so I am free to go out and do things like buy Ghanaian value stocks because I think Ghana is an in- teresting country. I bought them three years ago and guess what—since then the Ghanaian stock market has outperformed almost every other market I know of and is up several hundred percent


Case Study：
In equities, we start by looking at various valuation measurements like price to book, price to earnings, and price to cash flow. As I have said ear- lier, it’s very important to not be too story-driven. A way to avoid that is by using quantitive screens to determine what is cheap. Once you find things that are cheap, then look for stories that argue why it shouldn’t be cheap. Maybe a stock is cheap but it’ll stay cheap forever because there’s no good story attached to the cheapness.
From a global perspective, we look for countries that we believe are cheap.Then we ask,“Do we like the politics? Do we like the economics? What do we like about it and why? What is changing?”
The next step is to look for big-picture stories. One big-picture coun- try story that we like right now is India.We love India for the long-term story and think its role in the global service sector can really lead to serious outperformance.Where China has done something incredible to manufac- turing, we think the same could be happening to services in India over the next 10 to 20 years.
Behind the Indian outsourcing story is the fact that technology and transportation costs have dropped, increasingly allowing for the transfer of services. For example, the National Health Service in the United King- dom will pay for medical tourism in nonemergency situations.They will pay an English person covered by their health system to go to India to have an operation because there’s a long waiting list in the United King- dom and it’s so much cheaper in India. Who would have thought that medical services could be outsourced? It just gets you thinking about what else could be outsourced that we’ve never considered. Here’s another one: Last year, 200,000 Americans filed their taxes electronically through ac- counting firms where the accounting work was done in India.This year it’s expected to be five times that number.These are epochal changes which have all kinds of implications for markets, inflation, and other things.
So we want an Indian allocation in our equity bucket because we think there might be something special happening there. Next we’d look for what’s valuable in India and ask why it’s going to become more valuable. We also look for what else India has going for it besides services, such as raw materials, and who else in India might benefit from this expected growth, such as the infrastructure companies.
Another big-picture equity theme we’ve been onto is rising energy costs. Out of the 20 percent Falcon has allocated to equities, we have 10 to 15 percent of that in energy-related equities.And so on and so on.
Our job in our equity category is to find investments around the world that will make money on an absolute basis as well as outperform any global equity index.We use classic hedge fund risk management and cut the position if things start going against us.We’ll recognize that if we’re wrong, we’re wrong, and get out. Bid/offer spreads are not that big, so transactions costs are minimal.
The next big asset category where we can be systematic, earn risk pre- mia, and control our downside is fixed income. In Triumph of the Optimist (by Elroy Dimson, Paul Marsh, and Mike Staunton), a book about risk premia around the world, there is a whole section on bonds. Because bonds, on average, have paid a positive risk premium over time, you are supposed to be long fixed income. They don’t pay the same as equities, but they shouldn’t because they aren’t as risky as equities. But that’s the beauty of being able to take on leverage.When we allocate 20 percent of our risk to fixed income, it doesn’t mean we only put 20 percent of our assets into fixed income.There are all kinds of interesting things you can do in fixed income with leverage and still only utilize 20 percent of your capital.
For example, you could put 40 percent of your capital into shorter- duration bonds.When using leverage, you want the highest Sharpe ratio be- cause you’re borrowing money against your investment, and the best Sharpe ratios are found in the two years and under the sector of fixed income.
On an absolute return basis, two years and under bonds are not going to pay as much as a 10-year bond because the yields are usually lower. But the risk-to-return ratio is also very different.You could be five times levered in the two-year and get a higher payout with the same risk as a 10-year bond because of duration.
Just from that, a hedge fund can outperform a real money fund with the same risk because the real money guys will not leverage.We spend a lot of time thinking about how we can leverage each individual asset cat- egory because each one can be leveraged, although it’s very different per category.
Our next big asset category is foreign exchange, which we discussed ear- lier. It’s a whole area of risk premia that none of the real money funds are earning.
The fourth asset category is commodities.We have a commodity basket where we roll commodity futures contracts, which pays us a risk premium effectively for insuring the commodity producer. Over time, there is a risk premium inherent in commodity futures that is extracted by systematically buying the second contract out, riding it up the curve, and selling it. On average, that pays 6 percent real returns per annum. We’ve implemented this strategy just recently after reading a study by aYale professor published by the National Bureau of Economic Research (NBER).
The last major category where we extract risk premia is real estate.As a small hedge fund, we cannot go out and buy office buildings but we can buy real estate-linked equities. Real estate-linked equity performance, on average, is not too dissimilar from buying real estate. The equity compo- nent is more volatile than the real asset but historically returns have been slightly higher.
The way real money funds generally play real estate is they find a man- ager to go out and buy real estate and office buildings, rent them out, and manage them. In this way, returns are highly dependent on finding man-agerial talent.We look for cheap real estate equities around the world. If we find a cheap real estate company, we’re happy to buy the stock.We cur- rently have exposure to real estate stocks in Poland, Finland, Sweden, Spain, Hong Kong, Indonesia, Singapore, and Taiwan, yet we don’t own a single building or piece of land.We also own stocks of real estate bankers, builders, developers, land banks, real estate investment trusts (REITs), and so on.


After these five main asset categories, we have a last category which we call absolute return.This is where we stick those great, out-of-the-box ideas we come across about twice a year. Sometimes we’re lucky and find major mispricings once or twice a year, and sometimes we’re unlucky and it takes 18 months before the next one comes along.When we find these fantastic ideas, we’re willing to bet up to 10 percent of our fund on one idea. One that we think will double or triple, earning an extra 10 or 20 percent re- turn for the entire portfolio. Over the last eight years, we’ve found about six or seven ideas like that.




The absolute return category is there in order to leave us open to making this unsystematic money. The whole idea of being the hedge fund of the future is the ability to combine systematic and unsystematic money making strategies.We start off by acknowledging that we are ig- norant, so we need to be systematic, clip some coupons, and earn some risk premia. It doesn’t matter if it is in currencies, bonds, commodities, real estate, or equities. Of course we have to be smart about it by read- ing a lot, talking to smart people, and being on top of it all, while ac- knowledging that we’re not that much smarter than the rest of the world.Then, every once in a while, we’re going to stumble upon an ex- citing idea that’s going to give us some extra alpha and the ability to outperform.Truly significant outperformance is going to come from combining the systematic with the nonsystematic ideas. This occurs when something just clicks due to experience and always being involved.You’re reading, you’re thinking, you’re talking to a lot of people, and then you stumble upon something like Icelandic inflation- linked housing bonds and notice that it’s a great bet, so you put a lot of money into it.


We systematically look across the world’s markets every day in order to find the unsystematic opportunities.The world is so big that there are tens of thousands of things we can trade and we end up missing 99.9 per- cent of all opportunities. Unsystematic opportunities by definition are hard to discover because they are unsystematic. It takes a systematic ap- proach of looking at lots and lots of things to develop an implicit database in your head to let you know when something is not priced correctly ver- sus other things in the world.


One thing you have to do with these 10 percent bets is go to the coun- try and try to unearth what they’re thinking, what could go wrong, and identify the macroeconomic impulses that maybe you don’t understand or can’t observe from looking at your screens. Often there is a reason why something like this is out of line.You discover this when you get on the ground and talk to the locals and the experts there. In many cases, there’s no other reason except that historically it has been the case and no one has ever come along to say,“This isn’t right.”


The relative value opportunities are being arbitraged out because there are too many people looking for the same kind of stuff.There is a very limited amount of money that can be directed toward these types of opportuni- ties. Real arbitrage, in the old sense of the word, meant that there was no risk at all.Arbitrage today means a huge amount of risk is required to take advantage of small perceived mispricings.
当很多人去追捧同一件事的时候，机会就消失了，你要另寻它法，开辟一个新的领域。这使我想起了Bible中Jesus的布道“Choose the narrow way”
I want to go with the tide and take advantage of some of the larger, long-standing market biases like value versus growth stocks, or high yield versus low yield.The competitiveness of the world economy is such that mean reversion reigns, so you should buy the guys who are underperform- ing. Some of them will go bankrupt but many of them will come back up to the mean. Many of the growth stocks will also pull back to the mean as those who are great will become mediocre and those who are mediocre will become better.


市场总是低估或高估某些资产，但是从长期而言，他们的价格都会回归到长期趋势，趋于市场平均水平上，你要做的是放眼于为大家所忽视的蓝海。仔细判断，持有它，耐心的等待。等待市场回归理性的时候，你就卖给他们。


It’s just a truism that, over time, mean reversion works。To take advantage of it, a one-year-plus time horizon is required at minimum, but a five-year-plus time horizon is ideal.


If all investors allocate money to a one-month time frame, by defini- tion there are going to be fewer opportunities there. Randomly se- lected, some hedge funds will blow up and some will have great runs but there’s just too much competition over short-term trading, which is a timing-driven business. With timing, sometimes you’re going to be right and sometimes you’re going to be wrong, but it’s not going to be consistent over time, nor are the returns going to be good quality on a risk-adjusted basis.
Meanwhile, the longer-term opportunities still exist because there hasn’t been that much money allocated with multiyear lockups. If a trillion dol- lars got allocated to managers with five-year-plus lockups, then we’d see long-standing biases like value versus growth slowly disappear.That’s not happening yet and probably won’t because investors are way too nervous and shortsighted.


To continuously make money in the big picture, you’ve got to overlay the earning of risk premia over a wide variety of time frames, instruments,continents, and countries with the sourcing of the occasional home-run type of investment opportunity.

想了好久是不是贴出来，因为有觉得笔记中会有很多错误的概念，仅供大家参考，也算是对CD的一点回报吧。

Fbaobao

很好，受教了^^

kokulyou

能对大家有所帮助就好，

lhn8848

顶一个.

这种长度的东西,我倾向于看书.

kokulyou

摘出的一些自己觉得重要的，作了简单的笔记。
不过还是看原书更受用啊，呵呵，强烈推荐

kokulyou

添加了英文原版PDF

yangfan0307

thx for sharing

yangyang901

take a look. thank u !

kokulyou

hope it can help

kokulyou

hope it can help~~haha