Slower is Faster, and other related Seeds by Stephen Duneier First published May 13, 2013
Uncorrelated Correlation Among the many examples of cognitive dissonance currently wreaking havoc on the hedge fund community is the desire to maintain a low correlation to the equity markets while simultaneously generating positive results in the midst of a four year bull run in equities. It can't be done. Now this may be like Christopher Columbus crediting himself with discovering an inhabited land mass, but I propose we create a new analytical tool for the investment community. For simplicity's sake, let's call it the Bija Correlation Ratio, which does for correlation, what Sortino did for the Sharpe Ratio.
Since the start of my portfolio management track record in August 2002, my correlation to the S&P 500 has been 19.7%, while the HFRX GlobalMacro Index’s correlation has been 16.5%. Although it would appear that someone who is looking for diversification from equities would prefer the index, however slight that advantage might be, I would argue otherwise. You see, over the same period the Index has had a positive correlation during down months in the S&P and a negative correlation during the up months. My portfolio, on the other hand, has a positive correlation (17.2%) during the up months and a negative correlation (-30.0%) during the down months in the S&P. Wouldn’t that be a more valuable measure to consider when seeking true alpha and total returns?
Take My Partner, Please "'I am' is reportedly the shortest sentence in the English language. Could it be that 'I do' is the longest sentence?” - George Carlin
It's often said that a business partnership is like a marriage and the data is supportive of that assertion. The average lifespan for a business is 8.5 years, which is precisely how far along in a marriage when the average divorce occurs. I come from a long line of entrepreneurs, have experience with partnerships and have been with my (first) wife for 24 years, so I have some experience in this area. Some say opposites attract, and it may be true, but it hardly makes for a lasting bond. What makes for a lasting relationship are a common set of principles, for that is what pervades all actions and expectations, in good times and bad. Likes, dislikes, interests and so many other extraneous factors are far less consequential than what might be implied by the weights typically applied to them. Just as wanting kids or hoping to be healthy and wealthy isn't enough to ensure a successful marriage, neither can a business depend solely on a common desire to "be the best" or "be world class," for in all of these cases, the goals are relative and therefore, dependent upon the assessor's core principles.
In a business, it is the set of principles which the partners hold in common that forms its culture. In bringing together the Bija founding partners, I sought out individuals who share my core principles, thereby purposefully crafting a culture which values and encourages transparency, discipline, creativity, introspection, individuality, equanimity, compassion, balance and accountability, no matter the task at hand or the challenge being faced. It's not enough for these to be my principles, though. In his book, Sacred Hoops (quoted repeatedly in this edition of Seeds), Phil Jackson, one of the most successful coaches of all time and someone I deeply admire, said it perfectly. "Visions are never the property of one man or one woman. Before a vision can become a reality, it must be owned by every single member of the group." It is this common vision, these principles, shared by my partners, Chuck Mounts and Will Wallin, which forms the Bija culture and pervades the relationships we forge with all who join us as investors, service providers and co-workers.
The Invisible Leader "The most important part of the job takes place on the practice floor, not during the game. After a certain point you have to trust the players to translate into action what they've learned in practice. Using a comprehensive system of basketball makes it easier for me to detach myself. Once the players have mastered the system, a powerful group intelligence emerges that is greater than the coach's ideas or those of any individual on the team. When a team reaches that state, the coach can step back and let the game itself 'motivate' the players. You don't have to give them any 'win one for the Gipper' pep talks, you just have to turn them loose and let them immerse themselves in the action." - from Phil Jackson's Sacred Hoops: Spiritual Lessons of a Hardwood Warrior.
I have a distinct management style, which Sunstein and Thaler coined, Libertarian Paternalism, in their book, Nudge. The libertarian aspect "makes it easy for people to go their own way; to not burden those who want to exercise their freedom." Combine this with paternalistic policies which "try to influence choices in a way that will make choosers better off, as judged by themselves," and you create an environment which is a breeding ground for intelligent, independent decision making. The Trade Write-Up is one of the tools I specifically devised to nudge portfolio managers away from impulsive trading; to be more deliberate in their investment process and disciplined in their execution. By sharing the Trade Write-Ups across the firm, as well as with investors, and encouraging feedback, the PM's ego becomes a force for good. It's based on a Taoist principle of yielding to an opponent's force, in this case our own ego, in order to render it powerless. By developing and implementing processes, structures and well-communicated policies designed to nudge the entire team, myself included, in the right direction, I become what Phil Jackson calls an "invisible leader."
Slower is Faster Every once in a while, someone will question whether my investment process isn't too confining. There is no doubt that limiting us to trades that have a self-liquidating feature (ie defined downside), requiring that we adhere to predefined take profits (or sooner), having to take the time to pre-script trades, and sticking strictly to only the most liquid markets and instruments, curtails our opportunity set. Question is whether it is too restrictive. In my experience, the opportunity set that remains when these restrictions are in place is somewhat positively skewed. That means, all else being equal, including the PM's skills and the market environment, the odds of putting on a winning trade are slightly better than that of a losing trade. Conversely, the odds, when selecting from within the restricted zone, are negatively skewed.
Try this analogy, from Mark Buchanan's The Social Atom. "A crowd rushing to the exit piles up in a traffic jam, whereas people avoid the jam and get out if they move more slowly. As Helbing puts it, 'Slower is faster.' But now for a bigger surprise. A room might obviously have some tables in it. How would their placement and size affect the escape of a crowd? It seems obvious that obstacles have to make the situation even worse. Yet, counterintuitively, they can be quite beneficial. In particular, a table placed a few feet in front of the exit can help regulate the human flow. The table changes the pattern of self-organization, helping everyone get out more quickly."
The self-imposed restrictions embedded in our investment process are very similar in nature to the tables strategically placed in front of the exits in Buchanan's experiment. For those who are impulsively inclined, obstacles of any kind can feel confining, even dangerous at times. Once again, Phil Jackson offers some relevant words of wisdom. "Inevitably, paradoxically, the acceptance of boundaries and limits is the gateway to freedom."
Is That Your Capacity or Are You Just Happy to See Me? "It's a small world, but I wouldn't want to have to paint it." -- Steven Wright Considering the fact that we invest via global macro instruments, it's interesting how often we're queried about capacity constraints for our strategy. For instance, in foreign exchange, the world's largest market, we have thirty of the world's largest financial institutions who are ready, willing, able and eager to provide two-way prices on every instrument and pair in our approved toolset. As for the massive sovereign fixed income markets, so long as the voracious appetite of our neighbors just down the California coast can be sated, I'd say we have plenty of room to grow. Add exchange traded commodity and equity index options to the arsenal and you have a strategy that could easily accommodate more investable assets than the great majority of hedge funds in existence today.
About the Author For nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
Mr. Duneier teaches graduate courses on Decision Analysis and Behavioral Investing in the College of Engineering at the University of California. His book, AlphaBrain, is due to be published in early 2017 (Wiley & Sons).
Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management. As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 50,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business.
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