Hall of Fame

Louis Bacon
Steven Cohen
Kenneth Griffin
Paul Tudor Jones
Alfred Winslow Jones
Bruce Kovner
Seth Klarman
Leon Levy
Jack Nash
Julian Robertson
James Simons
George Soros
Michael Steinhardt
David Swensen
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Paul Tudor Jones II
June 30, 2008
"I selfishly do not want to be regulated, but I understand the necessity of it."
Whats so special about macro hedge fund
managers?
I love trading macro. If trading is like chess, then
macro is like three-dimensional chess. It is just hard
to find a great macro trader. When trading macro,
you never have a complete information set or
information edge the way analysts can have when
trading individual securities. Its a hell of a lot easier
to get an information edge on one stock than it is on
the S&P 500. When it comes to trading macro, you
cannot rely solely on fundamentals; you have to be a
tape reader, which is something of a lost art form.
The inability to read a tape and spot trends is also why so many in the relative-value space who rely
solely on fundamentals have been annihilated in the past decade. Markets have consistently
experienced 100-year events every five years. While I spend a significant amount of my time on
analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and
proud of it.
Is it possible to teach someone to be a tape reader what some
might call a trend follower or technical analyst?
Certain people have a greater proclivity for it because they dont have the
need to feel intellectually superior to the crowd. Its a personality thing. But
a lot of it is environmental. Many of the successful macro guys today,
theyre all kind of in my age range. They came from that period of crazy
volatility of the late 7 0s and early 80s, when the amount of fundamental
information available on assets was so limited and the volatility so extreme
that one had to be a technician. Its very hard to find a pure fundamentalist
whos also a very successful macro trader because it is so hard to have a hit
rate north of 50 percent. The exceptions are in trading the very front end of
interest rate curves or in specializing in just a few commodities or assets.
Whats your take on the next generation of managers?
I see the younger generation hampered by the need to understand and
rationalize why something should go up or down. Usually, by the time that becomes self-evident, the
move is already over. When I got into the business, there was so little information on fundamentals,
and what little information one could get was largely imperfect. We learned just to go with the chart.
Why work when Mr. Market can do it for you? These days, there are many more deep intellectuals in
the business, and that, coupled with the explosion of information on the Internet, creates the illusion
that there is an explanation for everything and that the primary task is simply to find that explanation.
As a result, technical analysis is at the bottom of the study list for many of the younger generation,
particularly since the skill often requires them to close their eyes and trust the price action. The pain
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of gain is just too overwhelming for all of us to bear!
Youre not necessarily a fan of hiring people straight out of business school.
Today there are young men and women graduating from college who have a tremendous work ethic,
but they get lost trying to understand the logic behind a whole variety of market moves. While Im a
staunch advocate of higher education, there is no training classroom or otherwise that can
prepare for trading the last third of a move, whether its the end of a bull market or the end of a bear
market. Theres typically no logic to it; irrationality reigns supreme, and no class can teach what to do
during that brief, volatile reign. The only way to learn how to trade during that last, exquisite third of
a move is to do it, or, more precisely, live it a sort of baptism by fire. One has to experience both the
elation and fear as markets move five and six standard deviations from conventional definitions of
value.
How will macro investing fare over the next five years?
The macro space will be great. I think were going into one of those slow or zero-growth periods in the
U.S., which will give us a lot of volatility.
Will hedge funds do as well as they have done in the past?
Average returns will drop. The amount of money that was made by hedge funds in the past two
decades was so outsize relative to anything in civilization in the past couple of centuries that it
naturally attracted the best intellectual capital in the world. As a result, the inefficiencies that existed
in the 7 0s and 80s and even the 90s are not as readily seen. But in this business there will also
always be that upper tier that top 10 or 20 percent of managers who will outperform everyone else.
What experience had the biggest impact on your career?
Trading commodity markets back in the late 7 0s when they were still extraordinarily volatile
allowed me to experience repeated bull and bear markets across a variety of different instruments.
Remember, in agricultural markets the cycle can be just 12 months. I lost my stakes a couple of times,
which taught me risk control and risk management. Losing those stakes in my early 20s gave me a
healthy dose of fear and respect for Mr. Market and hardwired me for some great money management
tools. Oh, incidentally and by necessity, I became a pretty good fundraiser, which has helped me in
the not-for-profit world.
Whos had the biggest influence on your career?
My first boss and mentor, Eli Tullis, of New Orleans. He was the largest cotton speculator in the world
when I went to work for him, and he was a magnificent trader. In my early 20s, I got to watch his
financial ups and downs and how he dealt with them. His fortitude and temperament in the face of
great adversity were great examples of how to remain cool under fire. Ill never forget the day the New
Orleans Junior League board came to visit him during lunch. He was getting absolutely massacred in
the cotton market that day, but he charmed those little old ladies like he was a movie star. It put
everything in perspective for me.
What was your single best trade or investment?
Probably buying March put options on the Japanese stock market in early February of 1990. The
volatility was an absurd 5 percent, owing to the newness of the options market, with which many
Japanese had little experience. Much like the U.S. stock market just before the 1929 crash, the
Japanese stock market in early 1990 was following the same price pattern with remarkably similar
fundamentals and valuations that provided enormous profit opportunities in a truncated period of
time. I actually felt sorry for the people who were on the other side of that trade when I was buying
those puts.
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Your biggest missed chance?
I missed the subprime opportunity of 2007 , and it rankles me every time I hear the term. We have
studiously avoided mortgages at Tudor specifically because it is a big-carry game that does not
adequately compensate for the inherent tail risk. That unfamiliarity, though, came with a huge
opportunity cost.
Is the price of oil high for fundamental reasons, or are hedge fund managers and Wall
Street driving it up?
Its a very bullish supply-and-demand situation, and the peak oil theory is probably correct. But the
run-up in prices is now bringing in an enormous amount of speculative, nontraditional capital such as
pension funds and university endowments principally through index products. Commodities have
been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but
Wall Street doesnt highlight that long history when selling commodity index instruments today.
Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner
should be long cattle futures in the derivatives markets as part of a basket. I am sure they were using
similar logic about tulips three centuries ago. Oil is a huge mania, and its going to end badly. Weve
seen it play out hundreds of times over the centuries, and this is no different. Its just the nature of a
rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a
move, but the last third of a great bull market is typically a blow-off, whereas the mania runs wild and
prices go parabolic.
Should hedge funds be more closely regulated?
I selfishly do not want to be regulated, but I understand the necessity of it.
Interview by Stephen Taub
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EUROMONEY INSTITUTIONAL INVESTOR PLC.
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