Similarities between setting up Medici Capital vs OxAM
It’s a very different feeling running a quant fund to running a relative value fund and the sorts of people you hire tend to be different. Trading at Credit Suisse First Boston (CSFB) and Deutsche Bank was all about smart guys who are looking for market anomalies. The people we tend to hire at OxAM we PhDs in mathematics, or physicists, who are not always quite as commercial, but are much more research driven. OxAM was much more of a research operation than a trading floor. Quant firms have more of the feel of a research department of university than a commercial, buzzy trading floor feel.
Medici and Deutsche I regard them as being very similar. Typically you would hire people who were traders, people who had an eye for market anomalies and for trading in the world of OTC Markets, rather than quantitative, computer based trading.
What expansion meant to the trading operation of the firm
It is an excellent question, let's just talk through, some of the ups and downs of OxAM. We grew gradually, from $10 million at the beginning to 100 at the end of the first year and 200-300 at the end of the second year. One of the salient things that happened was the quant crash of 2007. All quant funds lost stacks of money over a two-three day period. There was a big unwinding, it was the beginning of the great financial crisis and we were very much the canary in the coal mine. We lost money over the quant crush but we only lost the money that we made already that year. However, when 2008 happened, we had a lot of redemptions not because we lost money in 2008, we actually made money in 2008, but we had monthly redemptions, which allowed people to take money from us. When those fund they really wanted to take their money from, they couldn't get the money out. Thus, we lost a lot of assets under management. And as I said, we got down from having been $1.5 billion, we got down to $700 million. Due to good performance over this period, the money gradually started coming in again.
And we got up to a billion, a billion and a half and when we got to 2 billion, we made the decision that we are going to take on more assets, hire more people and expand the firm. So up to this point, we'd been 25-30 people and 25-30 people is an organisation that is very easy to control. You've got two main partners who are really completely on top of everything that's happening. I knew every little piece of research, I knew the equations, it was my baby, totally. But once you take on more people and it gets 50-60-70 people, and ultimately we became 100 people, it feels very different, it feels different working there. It’s a difficult firm to control and you start having to have sub layers of management, a whole lot of meetings. There are personalities, guys that aren't pulling their weights or that aren't doing as well, and it becomes much less dynamic place.
Now, frankly, managing a firm of that size was something that we struggled with, it was much harder than I think either of us thought it is going to be. If I had my time again, I’d at least resist that temptation to grow it. I mean growing is very tempting, to think about all the things that you want to do that you can't quite do because you don't have the resources. But you can hire a couple of guys to make that process more robust or improve that system buy better computers, infrastructure that needs several people to manage it. Each individual decision you make is very seductive. It looks like the right thing to do to get better, to get bigger and to have guys who specialise in things as opposed to people who do things in a not quite perfect way. And then suddenly, you end up with a firm two or three times the size of the previous one. And it no longer has the same dynamism, or it seemed to me that OxAM at the time lacked the dynamism of the OxAM in 25-30 people.
When there were 25-30 people, you had a new idea, people would work on it overnight, and you get it working the next day. Suddenly, when it was 70 or 80 people, you had an idea and it would take a while to finish and then someone needs to write production code for it, and it just became slower and more stodgy as an organization. Whereas it was super dynamic in the early days, and it was more fun place to work in. Perhaps some people are better at it than others. But I felt that was something we lost along the way.
Outlook on the hedge fund industry
I think it's the supply and demand of opportunity. There’s a lot of money, chasing opportunities in hedge funds. I think you will always find, that there are really smart people who are better than the others, who will still manage to generate supernormal returns. But I think for the average guy, doing sensible things, but not extravagantly different things, it's just become a whole lot harder to make money. When I started out, it was very easy to see how to make money and it was very easy to see where the anomalies were. It was very easy to generate consistent returns and find ways to diversify them across, different strategies. I think it has gradually become a whole lot harder.
The expectations around hedge fund returns have become much lower and arguably more realistic. In the 90s people would expect double digit returns from a hedge fund. I think those are long gone. Institutional investors are really looking for something that is uncorrelated, which offers reasonable returns. So I don't think hedge fund industry is dying, but I don't think it's any longer as sexy and exciting and I don't think that the claims for excess returns, can possibly be as extravagant as they were.
If you invest in hedge funds in general, as oppose to the top decile of them, then I think you're going to get a pretty disappointing experience. And if you look at the data and statistics for hedge fund returns over the last years, there are all sorts of survivorship bias in this data, but even allowing for that, some of the average hedge funds has done poorly. I think you clearly have to believe that you're picking good ones, and know why you're picking good ones as an investor.
Advice to younger self
To be successful in a career it's better to be clever than smart. But being clever is less important than you think it is. There are an awful lot of other skills that you need to have now. I think I was rather slow to realise that, and as a rather intellectually arrogant person in his mid 20s associated with being clever and expected to paddle back. Clever is a tool, but it’s not the most important tool. If you work in quant finance, you're quite used to hiring very clever people, some who are successful and some who are not successful. Some of the ones who are not successful haven’t quite figured out what other skills they need as well as being clever. So that's the first thing.
Take control of your career and be aware that there are going to be big opportunities along the way. And I think you have to recognise what those opportunities are. There will be two or three moments when you made a decision that really made a difference to the outcome. If you'd made a different decision, the outcome might well have been quite different. A lot of things that happened to me were in fact a good fortune and serendipity. Looking back, I think I could have tried harder to take control of my career and to be proactive about it. I would encourage other people to be more proactive than I was. I think I was fortunate that when the opportunities came along, I seized them, but I think I should have tried rather harder to purpose things, my way.
Recognise that there's an awful lot of luck involved in a career being in the right place at the right time. The timing of a particular market and being identified with that market or getting on with a particular person and that particular person taking you with them or getting the opportunity. To some extent you make your own luck, but there is luck involved and whether you're successful or not, can be quite path dependent. If you happen to set up that fund just before that crash, there's no chance of you succeeding. If on the other hand, you happen to surf the wave of setting up at a time with benign market environment and you had good performance for two or three years, it's' a lot easier than setting up in a difficult time and there's not much you can do to control that. So you can be kind of philosophical about it and accept that there is luck involved. And keep trying if you get knocked down and run lucky.