Interviews with Paul Tudor Jones, Louis Bacon, Bruce Kovner

I am not entirely sure where these interviews come from – I got them on an email several years ago that had been forwarded around a few times. My copy cites Stephen Taub as the interviewer.

Paul Tudor Jones II

Paul Tudor Jones II founded Tudor Investment Corp. in 1980 at the age of 25. Since then this extraordinary investor has never suffered a losing year. His old-school macro approach is built on what he calls tape-reading, which involves analyzing price trends and riding momentum – with an uncanny knack for balancing risk and return – rather than obsessing over the fundamentals, as less intuitive or less self-confident traders might. Jones’s core belief is that often prices move and trends unfold only because of investor behavior (in this he and George Soros are similar). Business schools, Jones laments, are sometimes too steeped in teaching economic postulates and market theory. Through his Robin Hood Foundation, he pours millions of dollars into antipoverty and education programs in New York City. The Memphis-born manager, who began his career as a cotton trader, first made a name for himself in 1987, when he called the market crash and rode a heavy short position in stock index futures to a 201 percent gain. Today he oversees more than $18 billion in assets. Tudor’s flagship BVI Global Fund has returned roughly 23 percent annually since its 1986 inception.

What’s 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. It’s 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 don’t have the need to feel intellectually superior to the crowd. It’s a personality thing. But a lot of it is environmental. Many of the successful macro guys today, they’re all kind of in my age range. They came from that period of crazy volatility of the late ’70s 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. It’s very hard to find a pure fundamentalist who’s 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.

What’s 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 of gain is just too overwhelming for all of us to bear!

You’re 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 I’m 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 it’s the end of a bull market or the end of a bear market. There’s 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 we’re 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 ’70s 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 ’70s – 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.

Who’s 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. I’ll 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.

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? 
It’s 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 doesn’t 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 it’s going to end badly. We’ve seen it play out hundreds of times over the centuries, and this is no different. It’s 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.

Louis Bacon
30 Jun 2008

One of the most highly regarded macro traders ever, Louis Moore Bacon is the rare investor who can boast the hat trick of having made money on Black Monday in October 1987, the dot-com implosion in March 2000 and the subprime crisis that began in the summer of 2007. Bacon, the founder of the $20 billion Moore Capital Management – which operates from London and New York – is guided by aggressive risk management and an interest-rate-driven view of the markets. Since its inception in 1990, Bacon’s flagship Moore Global Investments fund has delivered annualized returns of nearly 22 percent. “If you look at Louis’s long-term track record, there is probably no trader alive who has better risk control on an asset base his size,” says Paul Tudor Jones II, a fellow Hall of Famer. He has been equally ahead of the curve in identifying environmental conservation as a key global concern through his Moore Charitable Foundation. Bacon, 51, a native of North Carolina, also has ties to Hall of Famer Julian Robertson Jr., whose sister is married to Bacon’s father.

Who has had the biggest influence on your career? 
My friend Paul Tudor Jones. We were both Southerners in the big city of New York. Paul got me my first job, with E.F. Hutton as a runner on the floor of the cotton exchange. That was many moons ago, but I would say that his real mentorship came when I started trading commodities and launched a CTA fund. I didn’t know that it would turn into a hedge fund, but when I started to raise money for a hedge fund, he was a big supporter with his investors.

His approach to research and trading had a real impact too. He wasn’t worried about small stuff. He taught me to think in points, not dollars, and he always used to say, “It’s just points, it is not money.” He gave me an ongoing tutorial in disassociating oneself from the result of the trade, yet still having passion about it.

Why do you live in London? 
Living here gives me broader perspective on a number of different countries. I find it ideal to be based in this time zone, and I use the time advantage to set up early for the U.S. markets.

How do you decide where to invest? 
We tend to make top-down, interest-rate-driven investments. We’ve been pretty U.S.- and European-centric throughout most of Moore’s history, and we have been pretty closely focused on what happens with the interest rate cycle and the reactions that it drives around the world. But our focus is shifting now because micromarkets – and those can be anything from individual equities to commodities and emerging markets – are becoming more and more dominant.

What accounts for Moore’s success? 
Hard work, patience, knowing when to hold ’em, fold ’em or go all in. We have a rigorous risk framework, and although I do not micromanage every position, my portfolio managers understand the risk format prior to joining the firm.

Does the label “global macro” reflect your style? 
We kind of had the moniker “global macro” thrust upon us. We didn’t sign up for it. But I look at it as kind of the 007 license to do whatever we want, and we’re in a period now where globally there is no lack of opportunity: in fixed income and currencies and the distressed and credit markets. We don’t have to try and decide to make our money in any one instrument or strategy – we can invest in private equity, individual equities or arbitrage. We feel that we are versatile enough that we can move into a number of different strategies, and if doing that means that we’re global macro, then we’re not going to argue with the label.

Are there historical precedents to the current turbulence? 
You can find similarities, but this situation is shaping up to be a long-term bear market – and it is corresponding with a secular decline in American financial power. You have to hark back to the ’70s to get an equivalent sense of loss of U.S. control. At that point in time, though, the U.S. had no natural economic rivals. Now there are a number of emerging markets, like the BRICs – Brazil, Russia, India and China – that are vying for power and showing economic leadership. They may, in time, rival U.S. global dominance.

How worried are you? Especially about inflation. 
The U.S. has gotten out of a number of really difficult economic situations where inflation was a pressing issue, so there is an expectation that we’re going to get out of this crisis, too. But I’m very concerned, given the negative savings dynamic in the U.S. and the inability of our politicians and people to acknowledge that we have the financial structure of a third-world economy dependent on leverage and dissaving, coupled with an addiction to foreign goods and oil. Other competing economies are much more disciplined.

What was your best trade? 
I’m lucky enough to have more than one. The first was a complete market malfunction. In the crash of ’87, I happened to be short Nikkei contracts, and as we were finishing up and closing the books late on that Monday night, the Nikkei futures opened at 4,000 – it had closed the night before at 28,000! I bought shares to close the short position between 8,000 and 18,000. It was incredible buying the second-largest stock market down by almost two thirds.

Had I not been in the office during those 15 minutes after the market opened, I would have missed it. The lesson was that a good part of success is predicated on showing up and putting in time.

The second great trade, or a great exit, was in the last week of the Nasdaq rally in March 2000. We were really worried about what the Fed was going to say, so we sold close to $2 billion of Nasdaq futures just before the bottom fell out. Now that sounds great, but I had told my head trader earlier in the week to get rid of all of our technology longs we had been riding for months. But he didn’t sell anything that week, so we ended up with a lot of dot-com equity on our balance sheet. Not executing the entire trade cost us dearly, however beneficial selling at the peak of the market. The lesson was, Don’t rely on others when you are really sure.

The last one, last year, was probably where we made the most absolute money, and that was in subprime. We traded around the position very poorly and yet made a ton of money. The lesson was that picking the right investment will trump any lousy trading around it.

Worst trade? 
I have probably blanked them out of my mind – not enough memory for them.

What’s it like to work for you? 
We run a laissez-faire, entrepreneurial shop. I started my career in futures, and the rallying cry was always free markets for free men, so I’ve tried to create an open architecture here for traders to test their ideas and thrive. I think that we have a good understanding of risk, but we take a different approach to it. We prefer to see what our traders want to have as their individual risk profiles, and then we fit our assets around those to modify our net exposure.

Should hedge fund managers give back? 
They should, and they do, probably more so than other pockets of wealth, perhaps because after mastering the markets on their wits, they believe their wealth is replicable. In 1992 we founded the Moore Charitable Foundation, which aims to conserve and protect our natural resources. Conservation remains underfunded relative to other charitable causes, and the organizations we support are working to slow the loss of Earth’s resources.

What’s the most pressing issue facing the world? 
A Malthusian population explosion intersecting with globalization. We have encouraged all 7 billion of the world’s inhabitants to live like Westerners, and now that they have taken the bait, we are realizing it is impossible on this small Earth. The first big hit has been to the environment; the next, which we are witnessing, is to energy prices, and it is leading to food shortages and eventually more famines.

Governments are only starting to address the problem, and the planet’s most inventive and powerful economy, America’s, is leading only from the rear, if at all, given our present administration.

Bruce Kovner
20 Jun 2008

The curious young Bruce Kovner didn’t set out for Wall Street, choosing instead a nomadic life, first as a political science student then as a consultant to Congress and the National Science Foundation. He taught at Harvard University on a fellowship for a while, drove a cab in New York City, took night classes at the Julliard School and in 1977 – on a wing and a prayer – discovered the joys of commodities trading (he used a $3,000 credit card advance to do his first trade, a soybean futures contract). Six years later Kovner started Caxton Corp. with $13 million, which included a stake from the Rothschild family. Along the way he made commodities trading respectable for hedge fund managers. Today he runs $12 billion at New York-based Caxton Associates, known for its global macro strategy and its average annual returns of 25 percent. Kovner, 63, donates heavily to the charter schools movement in New York City and is chairman of the conservative American Enterprise Institute. He also dabbles in publishing, as an investor in the New York Sun, which Hall of Famer Michael Steinhardt also backs.

How did you wind up as a trader? 
I was looking around, and this work seemed very interesting because the structure of the world financial markets was changing, which meant opportunities would arise. So I started trading for my own account.

What changes have you seen? 
First, the collapse of the Bretton Woods agreement, which freed up currencies to move. Second, ending the prohibition on gold sales. But probably the single most important factor was the development of the futures markets in currencies and interest rates. I remember one of my first trades involved calculating implicit yields in Ginnie Mae spreads. I was just an unemployed ex-professor doing fairly rudimentary work. But a number of us felt these were going to be very important new markets.

Were many hedge funds doing this? 
Not many. The term “hedge fund” didn’t start being used until the late ’80s or early ’90s. I was a commodities trader for a very long time, even though it was not literally what I did most. I was registered as a CTA, a commodities trading advisor, and I remember the totally blank looks I would get on the faces of people when I would explain what I did. I’d explain it for five minutes and you could see them drifting off. And then they’d say, “So you’re like a stockbroker, right?” And I’d say, “Yeah, sure, like a stockbroker.”

Did you ever work in the futures pits? 
For a short period of time, I went down to the floor of Comex. I got a seat on all the exchanges – I had a wonderful little gold badge that let me trade on all of the New York commodities exchanges. I wanted to understand what happened on the floor. I thought it was an essential factor in understanding the behavior of markets – the daily behavior, the way risk works and how stops were placed. I was totally unsuited for it. I wasn’t aggressive enough to push my way into the front of the pit. You know, it’s a bit like being under the hoop in basketball. You don’t get to stay there very long. People push you out. It’s quite a physical thing.

Did you get the understanding you sought? 
In all things you get only partial understanding. But did I get some? Sure. And it was fun. I think part of it was just the pleasure of exploring a new world. But my skill set had more to do with analytics – what we call upstairs trading.

What market lessons have you learned over the years? 
Some markets have very long, quiet periods. Some markets and some instruments become obsolete. Some markets become arbitraged out. The excess return in them goes away. One of the most important skills you need is to constantly reinvent where you put resources. Commodities markets were quiet for years. Now they’re very strong.

Does this mean that you must constantly make a macro judgment? 
The view I started with and embodied in Caxton’s fund was that business cycles were very important and that they occurred all over the world, and it was useful to observe them and to take advantage of the opportunities across four different asset classes.

Which four asset classes? 
Equities, fixed income, commodities and currencies. The raison d’être of the company is to observe the nature of the macro cycle across multiple economic and political zones and to take advantage of the character of each business cycle so that we would have multiple business cycles to trade. We trade Asia differently than we trade Europe or the U.S. And we could be long or short across multiple asset classes and regions. Until the late ’90s, this was not widely done.

Does the tremendous amount of money in hedge funds now make it more difficult than ever to exploit inefficiencies? 
Yes. The crowded nature of the hedge fund community has changed the character of trading so that you can see waves of risk-taking and derisking coming from the hedge funds themselves. When there were ten or 15 very active hedge funds, it didn’t matter what they did. When there are 10,000 hedge funds, it does matter. They move the markets. In addition, market opportunities get arbitraged out somewhat. Fifteen years ago, I might have traded some things that we don’t trade at all now.

Like what? 
I don’t try to outguess the employment statistics on the first Friday of every month, because everyone is watching the numbers coming out. So now you must seek out undiscovered information somewhere else.

Outside the U.S.? 
We’ve always looked outside the U.S., but in the past decade non-U.S. markets have become so much more liquid. There are many more opportunities in emerging markets. But we also find plenty of opportunities in U.S. and developed markets. U.S. markets are still more liquid than almost any other market, and that opens up opportunities.

What role have hedge funds played in the rapid run-up in oil prices? 
Hedge fund participation in the oil price rise has been somewhat smaller than I would have expected. The price of oil is elevated for reasons that have much more to do with fundamental demand out of China and India and other places. The weak dollar has added to it.

Are hedge funds beaten up on too much? 
I think so. Hedge funds are part of the demonization of financial markets. I think it’s a tradition in American politics to blame the banking community. This tendency goes all the way back to the famous William Jennings Bryan speech that ended “you shall not crucify mankind upon a cross of gold.” This was essentially an anti-inflation policy that was thought to benefit bankers against the interest of the average man – the gold standard policy. And now in the present period of extreme tension on financial matters, it’s hardly a surprise that people blame the participants in the financial markets. Hedge fund managers often get blamed because their profits are seen to be large. It’s easy to confuse public policy problems such as a collapse in the credit markets with ad hominem complaints about hedge fund managers who have made correct market bets. But in reality, the hedge fund manager didn’t cause the problem.

Politicians are looking closely at the taxes that hedge fund managers pay – or don’t pay. 
I think it’s an absolutely legitimate public policy question: What’s the right tax policy? It’s a good thing to have a public debate on that. No single policy will make everyone happy. I can’t say I like writing large checks to the IRS, but I am very happy that good trading has put me in a position to do that. The best policy would probably be to have an extremely simple tax rate for all income. But our tax code is tens of thousands of pages long, and it creates a lot of problems.

– Interview by Stephen Taub

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2 Comments

  1. When was the PTJ interview conducted please? Thanks for the wonderful article.

    Reply
  1. 5) Being Right or Making Money – When to Sell (Exits, End of Uptrend) 2/2 | cimtr

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