Hedge Fund Market Wizards
Includes a long Dalio interview predating the Principles publicity machine.
Summary
Schwager interviews fifteen hedge fund managers with strong long-term records, following the format of his earlier Market Wizards books. The subjects include Ray Dalio, Colm O'Shea, Ed Thorp, Jamie Mai, Michael Platt, Steve Clark, Martin Taylor, Tom Claugus, Joe Vidich, Kevin Daly, Jimmy Balodimas, Joel Greenblatt and Scott Ramsey. The interviews cover trading approaches that are mutually incompatible, including global macro, statistical arbitrage, deep value, tail risk and short selling, which is the format's principal analytical value: comparable records produced by incompatible methods.
What Schwager identifies as common across the subjects concerns risk rather than method. Every one of them had a defined process for limiting losses, most had experienced a serious loss early that shaped their approach permanently, and all of them treated position sizing as a more consequential decision than position selection. Several stated explicitly that they were wrong more often than right and that the asymmetry between the size of their gains and losses produced the record.
The Thorp interview covers the mathematical origins of quantitative investing, the Dalio interview covers the framework he later published in Principles, and the Mai interview covers the tail risk approach Cornwall Capital used in the subprime trade. Schwager's concluding chapter draws forty observations across the interviews.
The format is transcription with light editing, so the quality varies with the subject. The interviews are with successful managers, which is a survivorship problem Schwager acknowledges. The consistent emphasis on loss limitation and position sizing over selection is the finding that emerges across incompatible methods.
Key takeaways 8
- Managers using mutually incompatible methods produced comparable long-term records, which argues against any single approach being necessary.
- Every subject had a defined process for limiting losses, which is what they shared rather than any analytical technique.
- Position sizing is a more consequential decision than position selection, and several subjects stated this explicitly.
- Most of these managers were wrong more often than right, and the asymmetry between gain and loss size produced the record.
- A serious early loss shaped the risk approach of most subjects permanently, which suggests the discipline is learned rather than adopted.
- Being flexible about changing a position when the evidence changes was described as more important than the original analysis.
- Personal fit between a method and a manager's temperament determines whether they can execute it under pressure.
- The subjects are selected for success, which Schwager acknowledges and which limits what the common features establish.
Who should read it
Investors who want first-person accounts of incompatible successful methods and the risk practices that recur across all of them.
About Jack D. Schwager
Futures research director and author; co-founder of FundSeeder; creator of the Market Wizards series
The Market Wizards interviews are a primary record of how top traders actually operate, cited across the field.
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