Why is this man laughing?

I share the floor of my office building with two other hedge funds.  It is an open office lay-out, partners in glass offices along the walls and the executors (traders and assistants) in the middle.  We are distinct companies but the layout makes us seem a seamless one organization.

We see each other every day but other than the traders and assistants of my own group I could not even hazard a guess as to most of the names of the other 30-odd people that work within my view.  All very nice people.  No matter…. a smile, a grunt or an empathetic nod to current market conditions is sufficient to signal camaraderie.

Interestingly we all have a different reaction to the markets on any particular day.  Each of the three fund groups here concentrates on a particular aspect of the market.  I run a Long/Short equity strategy and a Global Opportunity strategy (both doing well, detailed in a previous post as a Tale of Two Cities).

The other two groups are each fixed income shops focused on distressed commercial debt and distressed residential mortgage portfolios.  One buys up the distressed debt of the very failed institutions that have made the headlines, and the other buys residential mortgages.  They have raised a lot of money for their strategies in a relatively short period of time.

On market days when most would be crying, those arbiters of distressed securities are audibly giddy.  They sure do laugh a lot.  Lots of smiles. One cannot help but conclude that distressed debt funds are doing OK these days.

-Wayne Weddington

I got married….

“People have married for many reasons — to gain a fortune, accumulate land, forge an international alliance, secure a dynasty, raise children — and even on the account of affection, a marital motive that became widespread rather late in human history with the rise of bourgeois society.”

- Randy Cohen, The Ethicist

Yes, it is true. I just got married…. but it is not what you think.  I have not had any formal nuptials.

My “wife” is the alternative strategy we have employed in order to navigate the current global market conditions.  It feels like I am on “call” 24/7… and I certainly talk to the traders more than I speak to my significant other (which has caused some chafing).  My voice is hoarse at the end of each trading day. It is decidely counter-culture to traders’ increasing use of IM and email, obviating the need to talk.  These days we talk all the time, all day.

In the last year I launched a global futures trading strategy, Global Opportunity….  out of necessity.  The strategies of which I was once an avid purveyor — stat arb and long short equity — are still viable but today’s fat opportunities are availed to current-condition-specific strategies such as distressed debt and global macro.

The interest in distressed debt reflects investors’ sentiments:  why buy equity products when you can buy debt, which is further up the food chain, at cents on the dollar?  Global macro has also been a favored destination because it enables fast and tactical movements of capital across the globe in a fast changing environment.  Given the market rumblings which started in the 4Q 2007, Global Opportunity seemed a prudent thing to do.

I was skeptical at first.  I admit I was a little hard on futures traders in Do it Yourself Hedge Funds (“DIYHF”).  I referred to managed futures trading as little more than gambling and as proof of the point I showed that the comparative reward to risk was scarcely greater than buying a good SP500 index fund.

The truth — and I redeem myself in DIYHF by pointing this out — is that volatility-loving strategies have their place and time.  And now is one of them.  In fact global macro is one of the few bright spots in performance this year for some managers.

In my case, in Global Opportunity, we began trading the US equity markets intra-day using the mini-futures contracts in the SP500 and the NASDAQ.  We go home at the end of every day flat, that means with no account positions overnight.  Everything is in cash at the market’s end.  It ensures that I sleep at night.  Potential government interventions as they are, coupled with an increasingly unstable geo-political environment, are not contributive to a deep sleep.

We trade the intra-day volatility that has be-deviled so many managers this year.  But the thing to which I have had to get accustomed is the nearly continuous interaction with the traders even though we employ  a systematic trading strategy.  Systematic trading strategies are supposed to be, well, systematic and automated.  The reality is that even the best models require an even greater model — the human mind — to look over the shoulder and be alert.  If anything ever does burp, you can be there with a napkin.

The result has been that my ear is practically glued to the phone.  I would be better off with walkie-talkies: it would save the finger cramp from hitting the speed dial.  Every day, really every hour, is a drama:  watching Congress, the Fed, Obama, economic “numbers”, foreign markets, the TED spread, etc.  The intent is that vigilance will enable us to trade against the other market participants, taking capital from their ledger and putting it in ours.  It is after all a zero-sum result.  Profits only come because you took them from someone else’s trading account by being on the profitable side of a trade.  It is somewhat brutal… but I assuage myself by concluding that I have taken profits only from people I would not like.  Because, after all, when I lose money I certainly do not like the miscreant who ‘took’ my capital either.

-Wayne Weddington