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Hedge Fund Market Wizards: How Winning Traders Win

ISBN: 978-1-118-27304-3
544 pages
May 2012
Hedge Fund Market Wizards: How Winning Traders Win (1118273044) cover image


Fascinating insights into the hedge fund traders who consistently outperform the markets, in their own words

From bestselling author, investment expert, and Wall Street theoretician Jack Schwager comes a behind-the-scenes look at the world of hedge funds, from fifteen traders who've consistently beaten the markets. Exploring what makes a great trader a great trader, Hedge Fund Market Wizards breaks new ground, giving readers rare insight into the trading philosophy and successful methods employed by some of the most profitable individuals in the hedge fund business.

  • Presents exclusive interviews with fifteen of the most successful hedge fund traders and what they've learned over the course of their careers
  • Includes interviews with Jamie Mai, Joel Greenblatt, Michael Platt, Ray Dalio, Colm O’Shea, Ed Thorp, and many more
  • Explains forty key lessons for traders
  • Joins Stock Market Wizards, New Market Wizards, and Market Wizards as the fourth installment of investment guru Jack Schwager's acclaimed bestselling series of interviews with stock market experts

A candid assessment of each trader's successes and failures, in their own words, the book shows readers what they can learn from each, and also outlines forty essential lessons—from finding a trading method that fits an investor's personality to learning to appreciate the value of diversification—that investment professionals everywhere can apply in their own careers.

Bringing together the wisdom of the true masters of the markets, Hedge Fund Market Wizards is a collection of timeless insights into what it takes to trade in the hedge fund world.

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Table of Contents

Foreword ix

Preface xiii

Acknowledgments xvii

Part One Macro Men 1

Chapter 1 Colm O’Shea: Knowing When It’s Raining 3

Chapter 2 Ray Dalio: The Man Who Loves Mistakes 47

Chapter 3 Larry Benedict: Beyond Three Strikes 77

Chapter 4 Scott Ramsey: Low-Risk Futures Trader 103

Chapter 5 Jaffray Woodriff: The Third Way 129

Part Two Multistrategy Players 159

Chapter 6 Edward Thorp: The Innovator 161

Chapter 7 Jamie Mai: Seeking Asymmetry 223

Chapter 8 Michael Platt: The Art and Science of Risk Control 261

Part Three Equity Traders 285

Chapter 9 Steve Clark: Do More of What Works and Less of What Doesn’t 287

Chapter 10 Martin Taylor: The Tsar Has No Clothes 323

Chapter 11 Tom Claugus: A Change of Plans 359

Chapter 12 Joe Vidich: Harvesting Losses 385

Chapter 13 Kevin Daly: Who Is Warren Buffett? 405

Chapter 14 Jimmy Balodimas: Stepping in Front of Freight Trains 423

Chapter 15 Joel Greenblatt: The Magic Formula 451

Conclusion 40 Market Wizard Lessons 489

Epilogue 507

Appendix A The Gain to Pain Ratio 513

Appendix B Options—Understanding the Basics 515

About the Author 519

Index 521

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Author Information

JACK D. SCHWAGER is a recognized industry expert on futures and hedge funds, and the author of a number of widely acclaimed financial books. He is currently the co–portfolio manager for the ADM Investor Services Diversified Strategies Fund, a portfolio of futures and FX managed accounts. He is also an advisor to MarkeTopper Securities, an India-based quantitative trading firm. Previously, Mr. Schwager was a partner in the Fortune Group, a London-based hedge fund advisory firm that specialized in creating customized hedge fund portfolios for institutional clients. His prior experience also includes over twenty years as a director of futures research for some of Wall Street's leading firms.

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"A must-read for all would-be traders...while the book's focus is clearly on trading and investing, there is more than enough human interest on offer for the general reader.... Like Schwager's other works...Hedge Fund Market Wizards looks set to become a classic." (Money Week, June 2012)

"Offers valuable guidance and timeless insights for both investment professionals and market enthusiasts looking to improve their trading abilities by learning from the best." (trade2win.com, July 2012)

"This book is destined to be a classic just like the others by Jack. But the latest goes one step further, these traders aren't just at the top of their game, they have defined it. What can I say? This book was so good it almost made me want to get back into the game again!"
—Paul Wilmott, mathematician and ex-hedge fund manager

"Brilliant! Brilliant! Brilliant! Another book about true traders by a true trader. Jack Schwager has become the official author of traderdom for this and future generations. Not only does Hedge Fund Market Wizards deserve a spot in every respectable trader’s book collection, but the entire series should be read annually by both professional and aspiring traders. Timeless wisdom, priceless concepts!"
Peter Lewis Brandt, Futures Trader, Stableford Asset Management, and Author of Diary of a Professional Commodity Trader

"I read Jack Schwager's first Market Wizards book when I was just starting out as in investor more than 20 years ago. It put into brilliant focus the importance of trading psychology and knowing thyself. His latest work is yet another masterpiece. It brings to light new concepts in the world of investing that apply to all investors in today's markets. Anyone who reads this work will immeasurably enrich themselves on many levels because trading is life and life is trading."
Dr. Chris Kacher, Founder of www.SelfishInvesting.com, and Author of Trade Like an O'Neil Disciple

Author Jack Schwager seems to have built his career on the market wizardry of others. Based on this fourth wizard book—interviews with 15 hedge-fund managers who recount their careers and strategies—Schwager's long experience with wizardry has served him well. Readers captivated by the hedge-fund mystique won't be disappointed.  Readers looking for insight into exactly how successful hedge-fund managers achieve success will have plenty to chew over. Schwager attempts to boil down the interviews into 40 "Market Wizard Lessons." Examples: Value investing works. Position size can be more important than entry price. Sometimes it's useful to do nothing.  But the one that may ring truest is this: There is no Holy Grail in trading. What works for one may not work for another, or for you. Fortunately for us, there's a wide enough variety of portraiture in Hedge Fund Market Wizards that at least a few lessons should resonate.

“Determining how great traders acquire and use their special skills has been an elusive quest. We have no shortage of cookbooks on how to trade, but only a limited number of books describe the decision processes of those who speculate as a profession. Trader confessionals exist often as testimonies to egos, but few focus on the details of decision making. Material that does successfully capture the essence of how speculators think is the Market Wizards series by Jack D. Schwager…. Even in the interviews of well-known traders, Schwager’s probing questions extract many new insights.”
—FAJ Book Review

“Even in the interviews of well-known traders, Schwager’s probing questions extract many new insights. The Ed Thorp interview, which is the longest, is almost worthy of a book in itself.”
—CFA Institute review


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Press Release

May 17, 2012
Jack Schwager Interviews Top Hedge Fund Markets and Highlights Lessons Traders Can Learn from Them

“Jack Schwager’s newest book, Hedge Fund Market Wizards, like his previous works, is yet another solid contribution toward how to effectively manage capital…Whether a reader is a professional money manager or simply managing their own capital, I have no doubt they will find Hedge Fund Market Wizardsboth entertains and enhances their ability to grow their capital.”

--Stanley Druckenmiller, Founder and former Chairman and President, Duquesne Capital Management

What differentiates exceptional traders from the multitude of pedestrian market participants? For years, financial industry expert and best-selling author Jack Schwager has picked the brains of remarkable individuals who have consistently beaten the markets to find out the answer. In HEDGE FUND MARKET WIZARDS (Wiley; May 2012; $40.00; 978-1-118-27304-3; Hardcover; Ebook), he talks with some of the world's greatest hedge fund experts, highlighting the lessons to be learned from each so that can be applied by individual traders.

The book features interviews with 15 traders, including Ray Dalio (Bridgewater Associates), Edward Thorp (Edward O. Thorp & Associates), Michael Platt (BlueCrest Capital), Martin Taylor (Nevsky Capital), and Joel Greenblatt (Gotham Capital Partners). While they all approach their field in radically different ways, each of them has brought new and unique insights and developed distinct strategies that have allowed them to repeatedly outperform the markets.

From the founder of the largest hedge fund in the world with $120 billion in assets to a solo operation with only $50 million in assets, all the traders profiled share a superior return/risk track record for significant length periods—usually 10 or more years. “Because so much of what passes for high returns merely reflects a willingness to take more risk rather than being an indication of skill,” Schwager explains “I believe that return/risk is a far more meaningful measure than risk alone.”

Schwager distills 40 essential lessons to be learned from the market luminaries it profiles, including:

  • There Is No Holy Grail in Trading: Many traders mistakenly believe that there is some single solution to defining market behavior. Not only is there no single solution, but the solutions that do exist are continually changing.
  • Don’t Confuse the Concepts of Winning and Losing Trades with Good and Bad Trades: A good trade can lose money, and a bad trade can make money. Even the best trading process will lose a certain percentage of the time. As long as a trade adheres to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead.
  • The Road to Success Is Paved with Mistakes: Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure.
  • Trading Around a Position Can Be Beneficial: Most traders tend to view trades as a two-step process: a decision when to enter and when to exit. It may be better to view trading as a dynamic rather than static process between entry and exit points. The basic idea is that as a trade moves in the intended direction, the position exposure would be gradually reduced. After reducing exposure in this manner, the position would be reinstated on a market correction.
  • Position Size Can Be More Important Than the Entry Price: Too many traders focus on the entry price and pay insufficient attention to the size of the position. Trading too large can result in good trades being liquidated at a loss because of fear. On the other hand, trading larger than normal when the profit potential appears to be much greater than the risk is one of key ways in which many of the Market Wizards achieve superior returns.
  • Volatility and Risk Are Not Synonymous: Low volatility does not imply low risk and vice versa. Investments subject to sporadic large risks may exhibit low volatility if a risk event is not present in the existing track record. For example, the strategy of selling out-of-the-money options can exhibit low volatility if there are no large, abrupt price moves, but is at risk of asymptotically increasing losses in the event of a sudden, steep selloff.

HEDGE FUND MARKET WIZARDS offers valuable guidance and timeless insights for both investment professionals and market enthusiasts looking to improve their trading abilities by learning from the best.

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Hedge Fund Market Wizards: How Winning Traders Win (US $40.00)

-and- Market Wizards: Interviews With Top Traders, Updated (US $26.95)

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