Hedge Fund Quits Because of Political Economy - Does it Affect Trading

The full title: Stratfor Article: Hedge Fund Quits Because of Political Economy - How Does It Affect Your Trading?

The Article:
http://www.stratfor.com/weekly/finan...nd-new-reality
Money quote, 1st paragraph:
Louis M. Bacon is the head of Moore Capital Management, one of the largest and most influential hedge funds in the world. Last week, he announced that he was returning one quarter of his largest fund, about $2 billion, to his investors. The reason he gave to The New York Times was that he had found it difficult to invest given the impossibility of predicting the European situation. He was quoted as saying, "The political involvement is so extreme -- we have not seen this since the postwar era. What they are doing is trying to thwart natural market outcomes. It is amazing how important the decision-making of one person, Angela Merkel, has become to world markets."

Other interesting related reading:
http://www.stratfor.com/weekly/20100...sis_legitimacy
http://www.investorsinsight.com/blog...thodology.aspx

Oh, and don't forget this video: www.youtube.com/watch?v=p_KKN_jltI8

He probably didn’t have a genuine edge that worked over the long term. Taleb wrote some interesting stuff relating to this (in fooled by randomness I think). Look up the Taleb Distribution.

Some quotes from the link:

This describes a returns profile that appears at times deceptively low-risk with steady returns, but experiences periodically catastrophic drawdowns.

Some critics of the hedge fund industry claim that the compensation structure generate high fees for investment strategies that follow a Taleb distribution, creating moral hazard. In such a scenario, the fund can claim high asset management and performance fees until they suddenly 'blow up', losing the investor significant sums of money and wiping out all the gains to the investor generated in previous periods; however, the fund manager keeps all fees earned prior to the losses being incurred – and ends up enriching himself in the long run because he does not pay for his losses.

As with everything in life, the rule is: adapt or die.

If you read the "Turtle Trader" book and then bother to look up who kept their edge in the long run, you'll notice that most of them aren't still as successful as the book suggests. A lot of the old "greats" simply missed the train and can't deal with algos doing most of the trading. Schwager's "Hedge Fund Market Wizards" book goes over this a ton and highlights how edges change over time...

You can still adapt to the new environment and profit greatly from it.

Either way, the system I use still seems to work...so to me it seems he's simply not adapting quickly enough.

Having said all that, it should be clear that a politics driven economy is pretty horrible in the long run.

Adaptation is a long process. In the context of trading, to say "adapt or die" is not that simple. You have to go through the whole process of rebuilding from square one; research, trial and error. It is not accomplish overnight. It is like building a new successful company from scratch.

For a successful existing hedge fund (or any trading investment) to adapt in our new era will take between 5-10 years (and this is the fastest adaptation if they succeed).

Of course there are some who will adapt, but the Lords and the Kings of trading will die out and new Lords and new Kings will take their place. For every Lords and Kings, has their own time. And for every generation and time, has its own Lords and Kings.

1900 to 2000 was an era. The new era is 2000 and onwards.

There are two possible outcomes;
1. The bubble will burst
2. World debt will reach to Quadrillion

If I had it my way... I'd ban trading (non-existing money out of thin air). And then the world will be a better place.

Won't ever happen and I'd be out of a nice way to make money...but having said that, I agree with you. Especially commodity trading is pretty horrible, especially for developing nations as their food cost gets driven up far above income growth. Global warming will only intensify this trend.

Trading overall is fine though, there just needs to be some sanity regulation...better than now. It's not right that a single trader can screw with the price of a commodity to the point where it harms people and businesses...if that trade is based purely on price manipulation instead of a true change in supply/demand based on the economy.

Oil speculation needs to go, it entices politicians to start wars in the middle east...

Thanks for your input guys!

I heard about this Taleb guy... but he just uses just way too much trading mumbo-jumbo for a nontrader.

returning one quarter of his largest fund
is a euphemism for "we lost too much money"
hedge funds are like private individuals -- except the money they gamble and lose is not theirs.

most of the advantages of the big boys is being edged out.news is instantaneous, quality of execution has improved for all.all of their competitive advantages have been evened out....and here comes the biggest challenge,CORRELATION.the fact that almost all financial instruments of late are highly correlated means there is no diversification for macro strategies,also their size keeps them out of most non financials coz of liquidity reasons.

in short a new era has been ushered in.but always remember that wall street always makes money in bull markets ....the bear belongs to a select few.