4/1/2026 - What I've seen among the best performing traders at hedge funds is that they study market history, not just current charts. They use historical studies to identify whether there may be a directional edge going forward. So, for instance, if an inflation report comes out hot, they'll look for all occasions in the past 20 years or so when we've had such a report and they'll track which assets performed best and worst; which stock market sectors benefited most and least; etc. Many times, there won't be a dramatic edge, but sometimes a pattern stands out that becomes a hypothesis going forward. *Then* they'll look at charts to identify favorable entry points to manage risk/reward.
So, for instance, yesterday we had a nearly 3% jump in SPY. That is unusual; there have only been 49 occasions out of around 4000 since 2010 when a similar rise has occurred. The average return over the next five days has been negative, but quite positive over the next 30 trading days. Perhaps more important, the next five day volatility has been over twice as high following the big jump compared with the rest of the market sample. This little study then invites further investigation of price paths for the most bullish and bearish outcomes, so that the trader can update the odds of directional movement day by day and trade accordingly.
What I've learned by working with these traders is that they don't spout their views. They let history give them ideas and they're quick to turn those ideas into opportunities.
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3/31/2026 - Years of working with top hedge funds and hedge fund managers have taught me how important it is to know--and accept--when you're wrong. The great traders know that they'll be wrong close to half the time on each directional trade and they accept that in advance. They plan for being wrong with stop loss points that become automatic exits. For them, a losing trade is information. What they expected didn't materialize. That says something about the market.
But the really great traders? They are quick to recognize the moment when the market tells them they're right. In other words, they see in real time that their ideas are playing out and they are quick to get big in those trades. They know when and how to pounce on opportunity. They're like the poker player who is willing to muck one hand after another, losing small money, but who will not be afraid to bet big when the odds are on their side.
The market is always dealing us cards. The great traders know in advance what they need to see to really go after a clear opportunity. They plan, not only for stop loss, but for go win. They blend caution and aggressiveness, like a lion waiting in the brush ready to strike at the right moment.
It's not at all that the best traders win all the time. They go through drawdowns and periods of flat performance. It's those few times each year when everything lines up for them that they make their money. Being prudent and limiting losses is necessary for success; being aggressive and maximizing opportunity is necessary for great success.
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3/30/2026 - Once upon a time, the big innovation at hedge funds was trading as teams rather than as solo portfolio managers. Teams could manage more money and indeed were self-managing. The best of the teams, powered by leadership, helped junior members (who typically were analysts) become risk takers/traders/investors. But now things have changed.
The new teams are much larger and consist of members with a variety of strategies and market specializations. They act like a trading firm within a trading firm. Within the team are "pods", where a more senior member is assisted by juniors and helps those juniors develop. The larger team structure enables the members to keep each other abreast of developments around the world and across markets. Everyone shares research and insights gained from interactions and observations. It is an enriched environment.
But now the teams are different still. They are decentralized, where the pods operate in different parts of the world. Some team members might be in the U.S., some in London and Europe, and some in Asia. This enables the big team to stay abreast of global news, data releases, and markets in real time. Everyone communicates with everyone and--every so often--everyone gets together in one location for bonding and team building. These teams are quite successful in recruiting talent, because they don't necessarily need traders to relocate.
Smart individual traders can learn from this. They can team up with other traders with complementary skills and experience, so that each one is learning from every other one. The team can link with a community and create teams of teams, tracking different stocks/markets/regions of the world and quickly identifying shifts in market themes. The lesson I've learned from years of work at hedge funds is that the business is always changing and we have to be ahead of the curve with our own evolution. Spending our time making better horses and buggies will be of limited value when others are developing automobiles.
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3/29/2026 - As I move toward retirement, I look back on my work at multiple large ("multistrat") hedge funds and all the lessons I've learned during that time. This series of posts will capture some of those lessons. The first lesson is that of professionalism. Once in a great while I've seen portfolio managers puff themselves up, point the finger at themselves, and make it clear to everyone that they're at the top of the world. I've never seen those managers last. Rather, the successful managers always feel as though they don't know enough. They scour for more news, they talk with more colleagues, they perform more analytical studies. If they feel confidence and conviction, they double down and look for what they might be missing before acting on how they feel. They invest in themselves, learning new skills, strategies, and markets, because they know that markets are ever-changing. I see it now in terms of the applications of AI to trading and in new forms of teamwork in trading. I see it in terms of new and different market research.
As I write this, the overall stock market is in a downturn and has failed to bounce from short-term oversold conditions. A few traders I've spoken with have been buying, convinced that this is a time to pick up bargains. Others, fearful of the situation in the Middle East and the debt overhanging the economy--as well as the deterioration of high-yield markets--have taken a very defensive posture. One successful manager I've spoken with has gathered decades of market data and investigated markets in history that have behaved similarly to the current one.
That manager is not bearish. That manager is not bullish. That manager is curious. Because he learns, he earns.
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