How do you pick a Market Wizard? The broad-brush traits range from the reassuring (focus on risk management) to the somewhat obvious (confidence and flexibility) to the borderline pathological (inclination to work long hours and an obsession with markets).
But, explains Jack Schwager, author of the Market Wizards books and now investment director at Fortune Asset Management, part of Britain’s Close Brothers, in reality picking a star trader or hedge fund manager can’t be boiled down into a check-list of attributes. “It’s things like the confidence you sense in a manager, or whether they started trading at high school - things that through experience you pick up,” he says. “Ultimately it’s how the manager thinks - what his edge is.”
Schwager has put his name, and the title of his books, to the Market Wizards Fund - a fund of hedge funds set to float on the LSE in April, which invests solely through managed accounts and has been running for seven years.
The first of its kind to list, the fund is aiming to raise up to £200m, to add to the current £75m, and will invest with between 25 and 40 managers. Schwager, unsurprisingly, enthuses on the merits of limiting the fund’s investment to managed accounts, listing benefits such as transparency, daily independent pricing, the ability to move money quickly and retain control of those movements while avoiding nasties such as gates and side pockets. “It’s a much-more investor friendly structure and a much safer structure,” he concludes.
The counter argument is that many top managers just won’t run managed accounts. They can be a pain operationally, create unwanted complexity and come with rights, such as preferential liquidity, for their owners that managers are reluctant to give. Why limit yourself to those offering managed accounts and exclude a raft of talented, and potentially lucrative, funds?
“The only downside, or only negative, is that by definition you’re dealing with a smaller universe of hedge funds,” concedes Schwager. “It’s not as large a universe but it is sufficiently large to build a balanced portfolio.” Market Wizards also won’t put money into funds dealing in illiquid assets, but that still leaves, “a surplus of opportunities for constructing a portfolio.”
In any case, he points out, if the largest or most established managers aren’t interested in offering managed accounts, that’s fine by the Market Wizards Fund.
“We have some extremely talented managers in the portfolio,” says Schwager. “But what we don’t and won’t have is super-large funds. We’re looking to find for the most part smaller managers but that have demonstrated potential.”
That has the advantage of keeping life interesting, avoiding those who as they’ve grown have lost that all-important edge - and also employs Mr Schwager’s key skill for picking future stars. He identified some of the big names of today, such as Paul Tudor Jones, at an early stage of their careers.
Some of those in the fund have track records stretching back to the early 1990s, while some have just two and a half years under their belt, he says. “Maybe there are some people out there who can pick managers with no track record, but I haven’t figured out how to do it,” he adds.
Market Wizards, as Nils Pratley pointed out last week in the Guardian, doesn’t think it can shoot out the lights - it has averaged 12.4 per cent a year over the past seven years after paying Fortune’s and everybody else’s fees. The target return is 10 per cent plus, with performance fees of 10 per cent charged on new gains over a Libor hurdle, but part of the fund’s appeal is that Schwager is putting his considerable reputation on the line.
And Schwager makes clear that he’s looking at people, not strategies. “We’re concerned with the manager, not which box he falls into. It doesn’t make a difference what label he has.” In the pie-chart breaking out the fund’s wide-ranging diversification across strategies, he highlights one labelled “options trading,” which accounts for 18.2 per cent of the total. “That’s not a standard category, but it’s the best [description] I can think of.”
The importance of a prospective trader finding an approach, or method, that suits their personality is a theme in Schwager’s books. “The need to match personality and trading style may be a matter of common sense, but it is certainly not common,” he writes in the New Market Wizards.
So how does his experience as an author help with his brief at Fortune?
“It’s a completely different intention,” he says. “For the book you want something that’s also a good story, a readable story. For the fund, you’re looking for low volatility, low risk managers.”
There are managers, he adds, who fit very nicely into the portfolio but “would be painfully boring to write a chapter on.” On the other hand, “if the traders in the book were in the fund, I’d have trouble sleeping.”
It’s also more difficult to pick the stars of today. Back in the 80s, when Schwager began the process of seeking out the best in the market, it was “easier for a manager to shine. There were brilliant managers in a pool largely filled with amateurs. Now it’s much more difficult for people to excel - there’s so much more competition. Strategies that were original become crowded.”
Yet another reason, he says, to focus on trading skills - a “quality that is idiosyncratic to each trader.” He cites the example of Michael Marcus, the commodities trader and one of the original Market Wizards. The pair would trade, Schwager knee-deep in economic analysis, but it was Marcus who almost invariably called it right.
“Of 100 factors, he’d know what one the market would focus on. It’s just an innate skill.”
That experience, and presumably others like it, led Schwager to where he is today. “I decided a long time ago that I could do better allocating money than trading it….I don’t have the ideal emotional temperament to be a trader. You’ve got to know your temperament.”
