Given you are a "reformed poker player", I have a title to suggest for your book. Hedging My Bets.

Can you give some examples of "near theft" that you've seen in management and boards? I assume you're referring to smaller things that never make it to the press? No need to be specific obviously.

Good analogy on the fee structure. What's your estimate on the % of hedge funds that can justify their fees?

Can you expand on this? I am looking to invest some money and was leaning towards going with a hedge fund with the plans to leave it there for ~10 years. My other option would be to index.

Why is taxation an issue for me? As long as I buy and hold I wouldn't incur any taxes right? I understand the funds would be subject to tax when they sell, but the funds I'm looking at have a history of outperforming the S&P after fees and expenses.

Why do you say that GLRE and TPRE would make sense for individual investors?

Hedge fund investments are typically taxed at ordinary income each year even if you stay in the fund--contrary to your logical assumption. By investing in GLRE or TPRE, those investment profits would be deferred until sale and gains taxed at cap gains rate.

Boards that reject a takeover offer at a huge premium to the current share price to preserve their board seat (and more importantly) the jobs of their friends in management who would otherwise be fired and replaced.

It is a highly Darwinian industry. For those who have been around and successful a decade or more, over half for sure. For younger funds, likely less than half--but that does not mean that I would never invest in a new fund. I believe that one can add value through hedge fund selection.

I would ask you (and others) the same question for poker staking!

One argument in favor of hedge funds vs poker staking is that our returns our audited each year to ensure we are 100% accurate--undoubtedly a concern in any stake arrangement.

Thanks for doing this. I have several questions and comments but for now:

How does your firm view high frequency trading? Cost reducer or increaser?

Have you found that your firm's edge has decreased over time?

Thoughts on the recent growth of liquid alts- are these gimmicks that retail should avoid?

Edit: removed last question, probably best to keep this anonymous

What do you think about the financial reforms implemented since 2007? Have they had a negative or positive impact on the economy?

likely small cost increaser, but we are not high turnover so effect on us is small.

edge goes through cycles..usually greatest after a crisis as people act the most irrational. Not at its highest, to be sure, currently.

Too late on the edit, hapa as a lot of people saw the post.

I'm a strategist in HFT.

What are your thoughts on what I do? I feel like some of the myths you think others have about hedge funds may be present in hedge funds about HFT.

Who are you? I don't understand why you aren't revealing your identity if you're going to write a book anyway. It should be obvious when published. Moreover, you haven't revealed anything newsworthy, so I don't see downside unless you just have an uber-paranoid compliance department.

What size was the fund when you joined? Did you use any 3rd party marketers? How much trouble did you have with institutions saying "come back when you've got $XXmillion under management?" Do you have any criteria that you use for selecting young/small funds or is it just record/strategy/pedigree of the manager?

How good were/are you at poker?

What was your career track? top undergrad to bank to CFA to fund?

What can be done to make boards better? Limit the size? Mandate independent directors? More LBO funds? Does your fund do any activist investing?

If you have an opinion, do you think Taleb's basic strategy of being long downside vol is +EV?

Why do you think managed accounts have been relatively slow to catch on?

And to repeat Ahnuld's question: what's the investment process at your fund?

Blame me. He had planned to identify himself but first wanted to run it by the proper people. But I was physically in his presence in front of a computer in NY and was about to leave town. Impatient to see this thread happen I asked him if we could set it up at that very moment if he was temporarily anonymous, and he agreed.

You don't need a hedge fund manager to answer this question.

If you need to take other peoples' money then you aren't a winning trader.

Is not the hedge fund industry basically a big scam? Yes there is a lot of teacher union money that they don't know what to do with. The fees are so high to do basically what Peter Lynch or Ken Heebner do and if they wanted to they could "hedge" their portfolios. The reinsurance stocks are not really hedge funds the same way Berkshire is just a conglomerate.

What value does a hedge fund offer consumers over just a mutual fund or even a managed etf or closed-end fund?

Yay, stats!

Phil expects to win $350 * 1600 = $560k
with an SD of 4000 * sqrt(1600) = $160k

His hourly after paying his backer is roughly $20 + 0.6*$350 = $230.

Of the expected winnings, the backer's share is 0.4*$560k - 20*1600 = $192k with an SD 0.4 * 4000 * sqrt(1600) = $64k.

So for the backer to lose, Phil has to be exactly 3 standard deviations below his expectation, which happens 1 in 741 times.

(Yes, I've ignored that the split is different when Phil loses since it almost never happens and barely changes the numbers.)


So where do I invest in this hedge fund that basically never loses?

What are the top 5 hedge funds in the world IYO?

Which concepts of the Hedge Fund world need to find their way to the poker staking market in your opinion? On the flip side, which concepts in poker staking would never be allowed in a professional financial setting?

Well done Pete! Spot on.

If Phil G would offer you this deal, you wouldn't (if you were smart) argue about the fee arrangement but quickly agree before someone else does!

The ratio of win rate to standard deviation is known as the "information ratio" or "Sharpe ratio"--in this case, 3. The fund I manage has had a realized information ratio of over 3 for over 6 years now. For that to be from luck, the odds would be 741^6. Although as Taleb says, that alone can never be proof that we aren't just good coin flippers, it starts to seem less likely

Also, the track record of Millennium Management (not where I work) is even more impressive and unique. More on this in some future post. It is close to the "hedge fund that basically never loses", and how it does so is incredibly revealing about markets.

It is possible that the market was beatable for a time (like a poker table being beatable) and it is no longer so. Perhaps the bad players all left the game. Therefore, our realized results may not be the best predictor (in fact, they likely are not) of our expected future information ratio.

As I said before our turnover is low so the impact of HFT, positive or negative, on us is limited. Given that, I haven't dived as deeply into this issue as I could.

My base view is that HFT is a small tax and is not a "real" provider of liquidity. Not the most positive view, but not the most thoroughly researched either. Perhaps you could present an alternative view and evidence.

All very good and probing questions...will try to tackle later today.

Appreciate it, one more in that case. Same caveat as ahnuld: might seem confrontational, but just curious.

Your stated goal of why you stay in the game seems inconsistent unless there's something I don't understand. You want to be "one of the greatest investors of all time." Is that possible while working in a firm that you didn't found? It's not clear from your posts if you're in charge of the firm, the CIO, head the equities group, etc

I'm curious of your opinion on the case against Steve Cohen. It seems like writing a chapter on him could be something that a PR guy can use to drum up controversy for your book.

Given how few funds are $10bb+ AUM, with a little bit of legwork I could probably peg who you are.

You probably could peg me indeed, but I would prefer to keep the conversation about concepts and not about me--and fear it will degrade to that. That is the main reason I prefer anonymity, for now at least.

Ok...lot's of stuff here

Identity already discussed

was 1bb when I joined...no third party marketers (not violently opposed to them though). When I joined the firm was already over the institutional size threshhold.

Choosing young funds...pedigree yes (previous track record even in smaller size fund best evidence)...but more importantly coherence of the investment strategy and credibility that the manager has edge.

Was slight loser in online 25/50 NLHE a few years back. My skills have declined and the average skills (online and off) of competing players seems much higher now then the era I played in, so would likely be a fairly large loser at similar stakes today. My poker theory and game theory is at a high level, but my practical skills of analyzing and assessing hand ranges etc not good enough anymore!

career...top undergrad yes, but more eclectic after that--including some years of teaching and traveling. Not a straight line to this job.

boards...no staggered boards, no poison pills, outside directors who care, and more investor attention. Sunshine would be the best disinfectant.

We are not an activist fund per se, but we have discussions with managements at times on our views of what's best.

Taleb...I think even he would say it is hard to tell in any time frame less than a millennium whether that is EV+ or not because it is only a few events (or lack thereof) that determine who is right...I am sympathetic to his argument and his books are a part of my thinking.

Managed accounts have positives for investors for sure, but also impose significant admin costs on both the manager and the investor that weigh against them. Deep subject.

Not sure how to give a short answer to the investment process question and haven't had the energy (yet) to tackle a long answer. Not trying to dodge.