The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money, Revised and Updated

Chapter 11

The Predator

“The Predator” is the quintessential gentleman. He warmly invites me inside his corner office, overlooking both his trading floor and the city outside, the latter a more peaceful financial center than most. A burning cigar lay half-smoked in an ashtray, and he promptly asks me if I would like one, or if I mind if he smokes.

The Predator is candid about what he calls the “wealth transfer” in markets: the transfer of capital from his competitors to him. Conditions must be right for this to happen; if they are not, The Predator—like a lion after a good meal—could merely laze around with not much to do.

He claims to change his style every six months or so, in order to never be figured out, to remain a step ahead of the competition. Although he expresses most ideas in the equity markets, he is not afraid to look elsewhere in the capital structure, again a function of the environment in which he is trading. He survived 2008 by abandoning valuation considerations, reducing gross exposure, and ultimately going to cash, as he says that cash is the only thing that can save you in a liquidity crisis.

The Predator makes the big bucks from the long side and uses the short side to manage risk, but being a stock picker is not good enough over time. To survive in the long term, he insists you have to have a macro overlay to be able to manage the downside risk; otherwise, you become the prey.

Why did so many institutional investors, including hedge funds, lose money in ...