OLD SCHOOL MACRO
2016-03-31 4pm EDT | #stocks
A while back I read an interview with Alex Turner from the rock band Arctic Monkeys. He was lamenting the fact modern rock stars have to keep themselves in shape and go to the gym all the time. Alex said he wished he was popular during the 1970s when he could let himself go and not worry.
Sometimes I think modern day hedge fund managers have the same sort of thoughts as Alex Turner. The hedge fund industry has become a boring institutionalized sector of asset management. Managers run billion dollar businesses that don’t reward swashbuckling behaviour. Gone are the good ‘ole days where Soros, Robertson or Steinhardt would endure wild swings in an attempt to hit it out of the park. Nowadays slow and steady attracts assets, and hedge fund managers have adapted their styles to reflect this reality.
Except there are a few hedge fund managers who still engage in heroin-addicted-era-Eric Clapton style risk taking. And I must admit, just like rock desperately needs bands who refuse to listen to the suits in corporate, hedge funds need old school managers who toss around risk trying to make more than 400 basis points over the risk free rate with low draw downs. There is nothing wrong with low volatility returns, but hedge funds can’t all be boring.
The King of volatility
No one would dare describe Crispin Odey as boring. Cripsin’s volatility is very much in keeping with the style of previous generation macro traders.
Over the past twenty years the Odey European fund was up as much 1900% versus the 377% best point return for the European Stoxx Index.
But with that massive out performance comes equally massive swings. Over the past month and a half, Crispin has lost 32%.
The other day I stumbled on a twitter conversation amongst a group of traders basically crapping all over Crispin. The overwhelming consensus was Odey’s Sharp Ratio sucks and he would lose all his money. Although I understand their argument, I am not so willing to jump on the bandwagon.
Remember Michael Bury from the Big Short? To get big returns, you need to be able to stomach losses. Bury ended up making a fortune, but he had to sit through a fair amount of pain first.
Investors in Crispin’s funds have been conditioned to accept his volatility. I don’t think his swings are a surprise to any of them.
The idea you can have massive out sized returns without equally massive volatility is naive. The two go hand in hand. And too many hedge fund managers (and investors) somehow think the returns come without the risk.
I have no idea if Crispin will be able to rebound from this recent loss. I don’t always agree with his positions (Don’t be afraid to fade the hedgies), but I have a profound respect for Crispin.
I guess my new found admiration is rooted in the fact Crispin’s portfolio currently looks suspiciously close to mine. From Crispin’s latest report:
So as my daughter’s favourite rock star sings, “the haters going to hate, hate, hate…”
Wait, that’s exactly the sort of corporate pop that is ruining music. Instead let me leave you with a lyric that many Odey supporters are probably singing:
Do you ever get that fear that you can’t shift? The type that sticks around like something in your teeth? (Do I wanna know?) If this feeling flows both ways? (Sad to see you go) Was sort of hoping that you’d stay
There is no doubt in my mind that if I was a young fellow looking for a job in the hedge fund industry, Odey Management would be my first call. It would be like touring with Led Zeppelin in their heyday. Heck, I hope I haven’t ruined my chances at Crispin’s firm. I might be closer to a 1970’s rock star who has completely let himself go than most of these young guys. I might fit in perfectly at Odey…
Thanks for reading,