LTCM: The Zero Sum Game
Yesterday I picked up the phone and called a top trend follower. His firm no longer reports their performance data, but they continue to trade billions making as much money as any one.
I had never talked with this man before and he was not in my first book Trend Following. Once his firm stopped reporting their performance data I forgot all about them — until yesterday.
This trader was at first uneasy talking with me. “How did you find me?” “Why are you calling?” But he had a good sense of humor, even though he quickly said that he did not want to be quoted on the record. We talked for 45 minutes.
His insights:
1.) He backed up the idea that many more Long Term Capital Management’s are ready to implode today. He said to look at the numbers of the arbitrage guys. He pointed out that for the last 4 years the arbitrage (”stat arb, convertible arb”) guys are using more and more leverage to generate less and less return (”too much gearing”). He added, “They think they have found the Key to Rebecca and they have not found anything.”
2.) He acknowledged that his billion dollar plus fund was on the other side of LTCM’s (Long Term Capital Management) losses in the zero sum game: “We were the other side…they were an accident waiting to happen…now 7 years later the risks for these types of traders are just as great.”
3.) Wall Street investment banks only want 35 year old traders. You get to be 50 and they don’t want you. What’s his point here? Wall Street ignores experience like Richard Donchian trading into his nineties. I know great trend followers ranging in age from 30 to 70. That’s his point.
4.) “When people’s emotions drive their decision making, systems traders have the luxury of being able to stick with it.”
