How You Get and Actually Keep a Job at a Multi-Strat Hedge Fund

Multi-strategy hedge funds, composed of lots of individual portfolio managers, have seen assets under management boom in recent years, thanks to astonishingly consistent returns throughout the cycle. If you're one of the PMs, the money can be incredibly lucrative. But job security is fickle, and it's easy to lose your place on the team. So how do you actually get your seat and keep it? On this episode, we speak with Brian Yelvington, a consultant at the recruitment firm Carrington Fox. He's also a longtime veteran of the industry, having been a trader at many large firms. He discusses how people get their foot in the door, the skills needed to succeed, and how to think about optimizing returns while avoiding ruin. Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  Finance is increasingly being built on digital rails. But as the adoption of virtual assets, tokenization and stable coins grows, can regulation not only keep pace but help accelerate it? Find out more later in the podcast.

• 0:16Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 0:59Speaker 01

  But according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:39Speaker 02

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• 2:18Speaker 03

  Bloomberg Audio Studios. Podcasts, radio, news.

• 2:34Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:39Tracy Alloway?

  And I'm Tracy Alloway.

• 2:40Joe Weisenthal?

  Tracy, there's a lot we've discussed about multi-strategy hedge funds, but there's still a lot we don't know. And specifically, although I've come to learn things about comp and alignment and the importance of risk management and risk models and all that stuff, I actually don't know like how, how the pods make good trades.

• 3:01Tracy Alloway?

  This is part 298 of our attempt to understand multi-strat hedge funds. That's what it is. But you're right, we haven't really looked at it from the, I guess, the perspective of a PM who is actually working there and what it takes to get hired, what it takes to avoid getting fired and things like that.

• 3:20Joe Weisenthal?

  I have a feeling that like avoiding getting fired is a really big part of the story. Like you want to do well, right? You want to make money and all that. But I also get the impression that you just want to hang on to that seat for a really long time. And that a big part of, I don't know if the game is the word, but a big part of the game is yeah, holding on to that seat, avoiding being part of any given call, avoiding having your name show up on Bloomberg in a story that gets read spiked about so-and-so out after losing 260 million or whatever in a trade.

• 3:53Tracy Alloway?

  This is exactly what I was wondering, like, how do the drawdowns actually impact a bunch of PMs? Is it like really embarrassing and does it have like an actual effect on their trading? I imagine it does and it must have an effect on their confidence as well. But I am very interested in this subject and we have joked a number of times about, you know, if we were at a multi-strat hedge fund, things like that. So maybe we'll get a better idea.

• 4:16Joe Weisenthal?

  Yeah, we definitely have to learn more about the pod level because I do get the impression from talking to some people, we talked to Ron and Cosgrave recently. It's like, oh, you just put a bunch of people in a room and if you have the risk management right, it kind of works out. Anyway. We're going to continue our journey of learning more about these big.

• 4:30Tracy Alloway?

  There's a natural affinity between podcasts and pod shops.

• 4:34Joe Weisenthal?

  Oh, that's right. God, wouldn't you hate it if like if we screwed up or like we had like an episode that didn't do very well and our traffic was down or something? And there was like a big article on it, like Joe and Tracy out after, you know, after one month of underperformance on the podcast.

• 4:48Tracy Alloway?

  Oh, yeah. Well, this is the other thing. Like, what happens if you outperform for like half the year and then you underperform for the second half of the year? And how is that actually calculated in terms of your comp?

• 4:59Joe Weisenthal?

  Totally. And this came up before, which is that people who have really good starts, the at the fund level, you don't want them taking off risk just to lock in their annual bonuses. So these are important questions. Anyway, let's dive right into it. We have the perfect guest, someone with a long track record and experience across many aspects of this space. We're going to be speaking with Brian Yelvington. He's currently a consultant for executive search firm Carrington Fox, but he's been a former analyst and PM at several large multi-strat funds, Millennium, Moore Capital, et cetera, a few others in there. And so, Brian, thank you so much for coming on Odd Lots.

• 5:34Speaker 06

  Thank you for having me. Great to be here. I always enjoy the podcast and enjoy hearing the very subjects you guys come up with.

• 5:41Tracy Alloway?

  Oh, thank you.

• 5:42Joe Weisenthal?

  We love to hear it. We're going to clip that and put it in the mix. Before we go on, like, why don't you just give us the real brief version of like, who are you and why are we talking to you, other than the fact that if I go to your LinkedIn page, there are a bunch of famous companies listed on it?

• 5:55Speaker 06

  Yeah, probably a few too many for my taste, to be honest. I've kind of been one of the few people who've been both a pod PM as well as kind of helped bring those people into a large multi-strat. I left the risk-taking world and went to work in the business development area. Business development is just to badly disguise euphemism for manager selection, although it means very different things at very different firms. So I've seen it both from a junior analyst side to a senior PM to the person who's the necessary, if not sufficient, gatekeeper at a hedge fund.

• 6:33Tracy Alloway?

  I'm trying to think where to start because there's so much for us to talk about. But if I'm a PM and I am applying to a multi-strat, what would my CV or resume actually look like? And then B, would I even be applying to a multi-strat or would I be headhunted and they would find me?

• 6:51Speaker 06

  The chances are generally better that if you're an established PM, you would probably come either through, you know, direct from the BD team who said, "We need somebody who represents the same risk that Tracy represents. We hear she's great. We'd love to speak to her." Or through an executive search firm, who that's, there's a lot of turnover in this industry and they do a lot of business as a result.

• 7:18Joe Weisenthal?

  So how do you know if someone is actually good? Because this seems to be like one of the core challenges in really all investing, right? Like past results are no guarantee of future returns. Everything always says that. You don't know. It's just a lucky streak, et cetera. So let's go through this process. You want to establish if someone is actually a good investor or trader or portfolio manager or whatever. Walk us through the steps of like how you actually would identify if Tracy is good at her job.

• 7:46Speaker 06

  Exactly. Well, first a caveat, you're never gonna know.

• 7:50Joe Weisenthal?

  Okay.

• 7:51Speaker 06

  The reason that past performance is not indicative of future returns is because it's the future and we never know how somebody's gonna act. So what I'm going to do during our first conversation, Tracy, is I'm gonna ask sort of like you guys did, a little bit about your background. I'm gonna be looking for things like where we might know people in common, where you might have worked for a really good group or something like that, that had a great reputation. And then we're gonna get into the nitty gritty of the conversation where I ask you in great detail, you know, what is your edge? That part's actually not too detailed. You should be able to elucidate that, sort of standing on one foot. Then I'm going to go into...

• 8:33Joe Weisenthal?

  Wait, actually, can you pause? Just give me, if that's an easy part, what is it? Because this is actually something that I'm completely in the dark about. How does someone go about articulating an edge in plain English during an interview? Like, what does that actually sound like? You say, "Okay, like, Brian, what's your edge? You used to trade fixed income at where and where." Brian, what was your edge?

• 8:53Speaker 06

  Well, I probably didn't have a very good one, but my edge was usually from the research side. What I will tell you is PMs who are extremely good at their jobs have boiled down what their edge is to a very well-defined two- or three-sentence elevator pitch-style answer. And the reason that they're able to do that is because this is something they've been doing a long time, and they've made a huge number of mistakes, and they know exactly the alpha that they want to identify are good at identifying and what they go after. So it's going to sound different for everybody. For, you know, a macro RV-type of fund, it may be that they really anticipate the shifts in monetary policy. For a credit

• 9:38Speaker 06

  fund, it's that maybe they understand, you know, corporate actions, and they're really good at reading between the lines of maybe even a specific niche of companies. So it's going to differ, but you can usually tell by someone's answer there how much they've thought of it. The bad answers tend to be something that relies on experience. I'll note that there aren't too many octogenarian PMs, or something that relies on, well, I'm just really good at this. You kind of have to be able to identify it to be good at it.

• 10:09Tracy Alloway?

  So going back to performance metrics, like what figures or numbers are actually available here? You know, does a potential PM come bearing sharp ratios? And then how does the potential hiring firm actually do due diligence on some of those numbers?

• 10:27Speaker 06

  It's difficult. And the reality is that, you know, P and L, even within a firm, as a BD person, and again, BD is very different from firm to firm, but if I were to hire Tracy as PM...

• 10:42Tracy Alloway?

  I'm regretting using myself as an example, by the way.

• 10:45Speaker 06

  No, this is good. This is good. No, we're going to have you do well.

• 10:47Tracy Alloway?

  Okay, all right.

• 10:49Speaker 06

  We'll we'll flunk out somebody else, but if we were to hire Tracy, in some places I might not even be aware of how she's doing six months after we hired. And others I would have kind of perfect inside. P and L's are extremely closely guarded secrets. Usually they're not discussed within the firm, except for a very few select group of people. And nobody's going to attest to that P and L, right? You of your own accord, Tracy, might provide some assurance to somebody. Maybe it's because you're a past cop or something. They can't ask, but you can certainly say, hey, by the way, there's proof that I did what I did. That's your prerogative.

• 11:31Joe Weisenthal?

  Wait, why can't they ask?

• 11:32Speaker 06

  I believe that's employment law.

• 11:34Tracy Alloway?

  Yeah, legally, you're not supposed to ask.

• 11:36Speaker 06

  Allowed to ask. It might not been designed to protect hedge fund PMs, but I believe it does cover them somewhat.

• 11:44Joe Weisenthal?

  Tracy, I've brought it up once or twice. I told you, I have talked about the time that I interviewed at a prop trading firm, right?

• 11:50Tracy Alloway?

  Many, many times, Joe. Yes. Are you going to tell the story again? You can if you want.

• 11:55Joe Weisenthal?

  I'll just tell the brief one, which is that when I was living in Austin, which you are, Brian, you're there now, I interviewed at a prop trading firm when I was right out of college. There were 200 interviews and they asked me about my own trading when I used to day trade on E-Trade by myself. And I told them a little about my trades. They made me play a video game to test my hand eye coordination. And then they made me play ping pong against the CEO. I'm not really sure what that was all about, but then I was one of, I was one, I was one of four people who got offered the job and then for some reason I didn't take it.

• 12:29Tracy Alloway?

  Didn't you work at a sandwich shop instead?

• 12:30Joe Weisenthal?

  And I was making sandwiches at the Wheatsville Food Co-op at the time. And all my friends were working there. I was like, I don't really feel like working the corporate life just yet. And everything worked out and it was fine. That's still one of the stranger times of my life, but it was kind of like this where they asked me specifics. All right, here's a more important question. It's great to say like, if you're a PM, then you show, but the first you gotta become a PM. What does an analyst do? So a PM has a pod and they have analysts in their pod. What does an analyst actually do?

• 12:58Speaker 06

  Just as with the street, you know, how their analysts and function and analysts in rank, if you will, pods will generally have analysts covering, you know, specific areas. Basically, at most firms, it's sort of a euphemism. If you have trading authority, you're either a trader, a sub PM or a PM. If you do not have trading authority, but you're still committing or contributing to investment decisions, you're an analyst. It's just a generic catch all term. But you are generally in charge of building the, you know, specific type of surveillance that the pod needs. You may have names or industries or specific areas of a specific market to cover.

• 13:41Speaker 06

  And you're being eyes and ears and you will have specific projects. Yeah, in our current environment, there's no, no shortage of things to test out and look into as to how policies may change. So if you're in a macro pod, you're probably pretty busy right now.

• 13:56Tracy Alloway?

  Presumably you don't have to make perfect PowerPoint presentations for potential deals and things like that. It's much more idea generation and I guess like backtesting.

• 14:06Speaker 06

  There's, you know, there again, it kind of depends on the type of pod that you're in. If you're in a very directional macro pod, you're probably looking for a lot of historical analogues. You know, how has policy responded in the past? If you are in a more quantitative oriented pod, maybe something that does some form of arbitrage. Yes, lots of backtesting, lots of mathematical competency. But it's interesting who I've seen make the jump. I've seen a salesperson, we basically just sent out a weekly commentary with a model portfolio in it and people loved it. And PM said, hey, we want to talk to this person. Will you go talk to him for us? Analysts, public engineering analysts.

• 14:50Speaker 06

  Joey and I actually have a mutual friend that you've had on the show before, who was kind of writing for a newsletter. And it was a newsletter, I can tell you that most every PM I knew in macro was reading. And he built his audience on Twitter or X. Sorry, that doesn't make a very good verb.

• 15:23Speaker 00

  What's next for virtual assets? I'm Jacob Grease, host of Economy Scale, a series exploring growth in key global sectors. And in this episode, we're diving into the digital forces shaping finance. Shaun McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 15:38Speaker 07

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high-frequency traders and that sort of thing, and folks who service institutional clients.

• 15:47Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reese Merrick of Ripple says.

• 15:55Speaker 08

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that regulation and frameworks can come out, but some of them are maybe a slight iteration on some 80-year-old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

• 16:14Speaker 00

  Listen to the full episode wherever you get your podcasts. This series is brought to you by Bloomberg Media Studios and the Dubai Department of Economy and Tourism.

• 16:24Speaker 01

  This is the Bloomberg Tech Minute, brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 17:06Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 17:47Tracy Alloway?

  All right. And then if I am running a pod shop, what exactly am I looking for in terms of potential PMs? So I got probably past performance, even though, as we discussed, it's not a perfect indicator of future performance. But am I looking at personality? Like, would I hire a complete jerk who happens to be a star trader because it doesn't really matter how he works with other people because he's going to be completely independent? Or would I be looking at it very holistically and taking a sort of Moneyball approach where I'm trying to fill in or plug specific gaps in my overall business with maybe players or traders that are undervalued by the market?

• 18:32Speaker 06

  I think you're always trying to play the Moneyball approach. However, most hedge funds differ a lot in how internally they communicate. There are some hedge funds where you're really not allowed to talk to people from other pods. Like, I might say something to you, Tracy, like, I like the market here, I don't like it here. But I would never say, you know, I'm shorting the two-year versus the three-year DBO one-weighted something specific. And that's to avoid kind of cross-contamination of the pods. Whereas there are others who really value the esprit de corps and they like to have people collaborate. And those places, not only are you going to have the typical meetings with BD and risk

• 19:16Speaker 06

  and the CIO, but you're also going to meet a lot of other PMs to make sure that, you know, you're not a jerk.

• 19:22Joe Weisenthal?

  Let's talk more about getting a job as an analyst. There are probably a lot of people, maybe they're in college, listening to this episode right now. I think that if I were young and in college and didn't have any obligations, I would like, oh, this sounds really fun, working for a multi-strategy hedge fund. I would love to get my door in one. What would be like, what should I do to get that first role?

• 19:45Speaker 06

  There are a few firms that hire direct from college, direct from university. Those are very, very small programs normally. There is only a few of them that scale. I would say typically people who first move into a pod as an analyst or perhaps a sub PM generally come from the sell side.

• 20:03Joe Weisenthal?

  Okay.

• 20:04Speaker 06

  Or maybe prop, but they generally have spent a couple of years on the sell side, have a lot of the great training that the street can provide, and have advanced themselves to where they are saying, you know, I no longer just want to make markets. I actually want to trade my own risk.

• 20:21Joe Weisenthal?

  So you get a job on the sell side and you establish yourself as someone who knows something, who people like reading from, and who people like reading their, you know, their takes and their models and have interesting insights to say about whatever asset class is being traded.

• 20:35Speaker 06

  Either that, or you have a business that actually would work good on the buy side and it just happens to be in the sell side. But in terms of how you get that first job, I would say be useful. Think that everybody is kind of concentrated on the, you know, I want to be coming with ideas that go into the book and you sort of grow into that slowly. But if you're somebody who, you know, has read the history or done the work or researched, you know, what happens when on the first Fed cut, what happens on the last, what happened in the dollar the last time we had tariffs, those sorts of analogs in the macro world are very good. If you understand restructurings, you're probably going to be pretty valuable

• 21:16Speaker 06

  to high yield or distressed pod. You're not going to get that, you know, I've got the con kind of job right away. So you need to be useful in the job you're applying for.

• 21:28Tracy Alloway?

  And then you kind of touched on this before, but I would love to hear more. What are the pools that multi-strats are actually drawing from? And have those changed over time? Like, you know, when they first started popping up, were they hiring from fund of funds and the sell side? And then as they progress, maybe get a little bit more experimental and start diversifying into other industries to draw PMs from?

• 21:54Speaker 06

  Yeah, I mean, for instance, we've seen a lot of interest in commodities PMs over the past few years. And a lot of those are at trade houses or perhaps they work for large oil and gas companies, a lot of which are really more engineering than trading. They'll look anywhere if there's sort of, you know, a definable edge. And we were talking a little bit about, you know, the process of interviewing. Part of what somebody is looking for is, you know, can we do what you do? I'll give you an example. Funds really want to expand their balance sheet and be as efficient with it as possible. If you look at gross notional exposure to net assets for multi-strats, we hovered around 10, 10x through about 2020. And since then, now we're between 14 and 16.

• 22:39Speaker 06

  And that's grossing assets up as a multiple of their investable assets. So that tells you they're looking for things that are a little bit more highly leverageable. But any edge they will, they will look at, you know, 15 years ago, no multi-strat traded munis. Most all of them do now. You know, there were certain businesses like index rebow, things of that nature, basis type trades that once were the exclusive province of the street. And now because of the ability of a lot of these multi-strats to effectively use the balance sheet, they can engage in those businesses.

• 23:17Joe Weisenthal?

  Right, this is one of the themes that's come up is the sort of like post Dodd-Frank era where a lot of certain types of trades that used to exist in-house at the major banks are now, have now effectively been outsourced in some manner to buy-side entities where it's more appropriate to take these risks. Let's talk about your time when you were a PM. We talked about the value of the seat and not getting fired. And I also get the impression that on a sort of day-to-day or week-to-week or trade-to-trade basis, there's a lot of constraints from the risk manager. Talk about the incentives of the PM to survive and make it to the next year or make it to the next bonus season.

• 23:54Speaker 06

  I mean, you can essentially think of working for a multi-strat as you're running your own business.

• 24:01Joe Weisenthal?

  Okay.

• 24:01Speaker 06

  You're sort of running your own fund, but you only have one client. So you have to make very sure that that client's happy. Your constraints are usually put in, in, you know, two terms. You'll often hear the term capital thrown around, you know. Tracy manages 700 million in XYZ and Joe has 50 million in ABC, that sort of thing. The truth is, those aren't really easily comparable numbers, right? The hedge fund itself is inherently leveraged. They'll typically allocate somewhere between three and four times their notional value, maybe even more in terms of allocations to traders. So if you've got a billion dollars, you're allocating out theoretically

• 24:44Speaker 06

  three or four billion. But there are two numbers that are going to matter a lot to a PM. The first one is how much can I lose? That's your drawdown. And there are two ways to measure that. Most hedge funds are going to measure it on a peak to trough basis. Meaning even if you're up five, if you give back, suppose your stop is seven, if you give back seven, then that's going to be your drawdown, even though you really weren't down from zero much at all. The other way to measure that is from zero, from flat. So you can actually be fired from one of these places and be up money on the year when it happens. You just gave back too much of your sort of new money.

• 25:24Joe Weisenthal?

  So actually, explain that further. A, why would you fire someone who's managed money profitably? But then here's another related question to that is like you hear about, okay, someone gets fired from place X and then they go get a new job at place Y. But if they're objectively talented, and maybe they're not, but if by some measure it can be established that they're talented, why are the pods so quick to fire them? I mean, I get, yeah, you lose money. That's not good. But if, you know, losing money happens, if the person has talent, why the quick fires?

• 25:58Speaker 06

  It helps if you think of the multi-strat itself as managing a portfolio themselves, but it's a portfolio of risk takers, not to be reductive. But generally, most of those types of decisions are made on a fun by fun basis. In other words, you know, maybe this person is not as uncorrelated to what we have as we already thought. They are not really making a lot of money. They just exceeded their drawdown because it's not like they don't know that it's a peak trough number. They're perfectly aware of it. Or perhaps there is another opportunity in the market to replace them with someone better. They're always looking to optimize their portfolio of risk takers.

• 26:38Speaker 06

  As far as the other firm, they could be thinking this person does fit what we need and we really like their risk profile. Even a really great PM is going to have a significant drawdown every two to five years. And there aren't too many who've gone 10 plus years with no losing years. You know, you just don't want to be that person who experiences that 5% of the time drawdown in your first few months in a new firm.

• 27:04Tracy Alloway?

  I used to know a credit guy who always said like, you're not a proper credit trader until you've had at least one major blow up. Maybe, maybe that's true. But on this note, okay, if I get a big drawdown, I understand, maybe it depends on where I am with my career. And if I get it in the first six months of working at a shop, that would be very bad. But if it's in, you know, year six or something, maybe it doesn't matter so much. But how embarrassed am I when that happens? And am I like publicly shamed within the organization for this happening? Or how does it work exactly?

• 27:42Speaker 06

  You know, it's sort of funny because obviously we had a period just a few months back where there were a lot of headlines about large losses. Is the marketplace views it, it's going to feel awful to the PM, right? You never want to be on the screen for a loss. But whenever you see somebody up there with a hundred million dollar loss, that means they had a hundred million to lose, which means that they were managing a large book and they were taking a lot of risk. And if you'll notice, some of those PMs from a few months ago are still exactly where they were. You are really generally better off getting bounced for a large loss than you are a small one.

• 28:22Joe Weisenthal?

  This goes fits with something, one of my beliefs that a billionaire is someone who either has positive $1 billion in net worth or negative $1 billion in, in $1 billion in debt. Cause you have to be like a really rich to have lost that much money. And anytime you hear about like a former billionaire and they lost everything, they're almost always still somehow living large. So being deeply, deeply in debt is almost as good as having tons of money. So I'm glad to hear this. How does that constrain your actual trading? Okay, you know that drawdown number, you know, at the point where you're going to get stopped out of the seat. How does that actually translate into thinking about the trades that you put on?

• 29:00Speaker 06

  I hate to do it, it depends, but it sort of depends on where you're at. Because even though common drawdown for, you know, limits are usually somewhere between seven and 10% for what's called a stop out, you might end up getting your capital reduced well before that, three and a half or five. And that makes it really, really hard to come back. The key is, you know, do you have a process? Do you have risk management and portfolio construction where you are still applying your risk management? I'm only going to risk this much of my risk capital. What is between me and a capital reduction or drawdown? I'm going to be pickier, I'm going to trade smaller.

• 29:41Speaker 06

  There are a lot of funds that have, you know, internal coaches, psychologists like this. Wendy Rhodes is based on real people who do real things. And, you know, certain firms will sit you down and talk to you, or they'll make you take a timeout. Other firms will just say, that's it, you're out. But psychologically, it makes you, you want to get it back, which is not a great feeling because even when you get there, you're just at flat. And it, it really impacts your risk-taking tolerance. I think one of the best things that, you know, I ever heard was if you're kind of in a losing streak, just get flat and go away. Don't keep any marginal things. You can always buy it back later, you can always sell it later, but get your mind right.

• 30:24Speaker 06

  But it does negatively affect you. And you, you kind of skew your thinking either to, I'm going to take more bets to get it back faster, or I'm not going to do anything because I'm going to be so picky. Overtrading is really common. I'll give you a for example. People coming from the sell side almost always overtrade when they first get to the buy side. The reason is, trading has a positive expected value for them. They are in the bid ask.

• 30:51Speaker 07

  Oh.

• 30:51Speaker 06

  Not only that, but facilitation desk on the sell side, they lose money if vol explodes, but they generally make a lot of more money after it subsides. The bid ask widens out and they could collect a lot of client flow in the back end of that. One of the questions that I always ask people is, you know, tell me about your biggest drawdown. What did hap- when was it? What was going on? What happened? What'd you do? And the sell side traders will always have very quick times to recovery. And they expected to get it back. But that's not the positive expected value you have on the buy side. It costs you money to trade.

• 31:44Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 32:28Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 33:07Tracy Alloway?

  Brian, tell me about your biggest drawdown and what it was and what you did.

• 33:12Speaker 06

  Well, my biggest drawdown was losing my job. I can't name numbers, but essentially I dilated my own risk. I usually never speculated on outright vol and I had a long vol position. And I normally would have structured that as a spread and I didn't. And though I was directionally right, I bought really expensive vol and therefore didn't make much money. Got hit on volatility in a much larger fashion than I thought I would. And I was in that camp of not a big drawdown and it was almost unreal to people that I knew. Like, why would they let you go? Because there's not a lot of verifiable information out there, that always sounds very suspect to people.

• 33:57Speaker 06

  I wish I could be more colorful for that.

• 33:59Tracy Alloway?

  No, no, no, that's really helpful. But on this note, I'm also curious, do PMs ever go to like risk managers or the people above them and beg for like either more money or more risk tolerance?

• 34:14Speaker 06

  Oh, absolutely. And a lot of, a lot of firms actually have, you know, programs where if you have something that's really scalable that you think is very functional, they may give you sort of a side account and you, you get paid on that, but it's not part of your regular book. Once you work in BD, a lot of the people who you bring in sort of ask you questions like, hey, I want to do this. Who should I ask? When should I ask? I generally tell PMs, unless it's an actual trade idea, don't just ask for more capital unless it's one of two situations. Number one, you just got there because they love you, you haven't done anything wrong and they just probably paid up to get you. Number two, you've just made a hundred million bucks. Other than those two situations, don't ask for things.

• 34:58Joe Weisenthal?

  Wait, let's talk more about violating your own risk book. There's a famous story from Stan Druckenmiller where he apparently like bought the very top of the internet bubble. And he says, you asked me what I learned. I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basket case and couldn't help myself. So maybe I learned not to do it again, but I already knew that. When a fund manager is sort of like violate or a PM is violating some of their own things, do they know it? Do they feel differently? Do they get like some sort of acidic taste in their mouth? When I like go on tilt, when I play poker, I always sort of know it, but I can't help myself anyway. Like I just do it and I go all in and I know I hadn't done, I have to embarrassingly walk out the table. Like, what does that feel like?

• 35:41Joe Weisenthal?

  Talk about like what's going on in someone's brain when they're like taking these risks that on paper they shouldn't be.

• 35:47Speaker 06

  Well, usually you only recognize it in the rear view. If you slow down and think through the trade, you know, you sort of realize that, hey, you probably shouldn't do this. But I think you're parallel with being on tilt at a poker table. It's, it's that knowledge, you know, after you call somebody or after you raise that instant feeling that, man, I just leaped up. It's that feeling, only you're going to feel it for a few days and you're going to get a little email or call from your risk manager. And then you're not going to know what that sit down is going to be like. It might be, hey, no big deal. Get back out there, you know, don't worry about it. It may be an entirely different conversation. You may be told, go to HR, don't take your jacket. Or take your jacket, I should say.

• 36:33Speaker 06

  But it is a bad feeling. And I think some of the better mentors that I've had through the years have kind of taught me like that mental health thing and where you're at is, is very important. And I think it's even worse when you're at a multi-strat or a situation where you have a A single client, that's it. If that one client isn't happy, you are probably out for at least six months and potentially much longer. The BD process to bring a new PM on board is somewhere around three months on its own.

• 37:05Joe Weisenthal?

  Do you do postmortems on winning and losing trades? Kind of, you know, like after, if we're talking about poker, you go back and you run the poker hand through a solver and you see if you played it correctly. Often whether you made money or lose money, is there an equivalent process that's done in the trading world?

• 37:22Speaker 06

  A hundred percent. As a matter of fact, if you guys had never had Brett Donnelly on, he wrote a book called Alpha Trader and I've probably never seen that information written down in one place before.

• 37:32Joe Weisenthal?

  We should have him back on or something to talk about just that. But keep, tell us more about it from your perspective.

• 37:37Speaker 06

  Yes, you know, and, and that is part of the other process. Like we mentioned edge, like the other parts of the BD process. I want to know the process by which somebody selects trades. I want to know about their portfolio construction and I want to know their approach to risk. Especially on risk, you'll find that very good PMs and especially these firms, the firms themselves, even though the PM may not see it, they know exactly how many bets you've taken. They know about your hit rate. They understand your skew. They can sort of tell when you're deviating from your risk mandate. They have a lot of analytics. But it's been my experience that the best PMs look at it themselves. They're almost religious with it. You know, how did I do today? It's very similar to an athlete watching

• 38:22Speaker 06

  tape or, or a dancer. My daughter loves dance. You know, she'll watch tape of herself. This is what I missed. This is what I didn't do. And the great benefit of doing it in a statistical fashion is you can remove, oh, I won't count that because it was a Tuesday and a full moon. Any excuse you have goes out the window. Those are the numbers.

• 38:42Tracy Alloway?

  On this note, and since Joe brought up poker earlier, are there like popular ways to become a better, better, better? Does that work for audio?

• 38:53Joe Weisenthal?

  Yeah, better, better.

• 38:54Tracy Alloway?

  Better, a better, better.

• 38:54Joe Weisenthal?

  A better, better.

• 38:55Tracy Alloway?

  And I'm thinking, you know, I'm thinking back to liar's poker. That's a famous example. And then wasn't there something at Jane Street that Sam Bankman Fried was doing a bunch of different like gambling games?

• 39:07Joe Weisenthal?

  Yeah, they love that stuff.

• 39:08Tracy Alloway?

  Yeah. Like, what is popular in terms of, I guess, building up your risk return muscle?

• 39:14Speaker 06

  Well, I think anything where you have some element of strategy. And I think one of the reasons that poker is so popular is that it combines not only strict strategy, like you might see in chess, but also a fair degree of complete randomness. And you're going to take some bad beats and that's going to happen in trading. It's easy to forget, but a really good PM might have a 52, 53% hit rate on their trades. It becomes what their skew is, how much they make on their winners versus how much they lose on their losers. So anything where you're actually becoming more in tune to your own risk taking, your ability to think in what, you know, most people call probabilistic terms, or thinking

• 39:57Speaker 06

  in bets after the Eddie Duke book, any exercise like that. And I think poker is probably just the most popular. It's also a great, fun, I don't know whether I'd say team building game, but it's a fun social game that people play often around hedge funds. And it fits with the gambling mentality. So we hear about it a lot, but there are a lot of different internal games that people engage in.

• 40:20Joe Weisenthal?

  I just have one last question, and it goes back to the role of the analyst. And you mentioned, oh, maybe, you know, an analyst could be valuable if they really know the history of what happens if they're X or Y. I could just look that up on oh, three on chat GPT or perplexity these days. Like, how realistic is it, in your view, that firms could meaningfully reduce analyst headcount by using artificial intelligence? Or if they saved money on by using artificial intelligence, would that just create new roles for more sort of advanced research? Like, where are we at with this? You must talk to people about what they're doing with this.

• 40:57Speaker 06

  I think there's lots of things they can do and obviously, you know, you're talking about pretty secretive organizations. So there's an enterprise sharing issue there to deal with. But yeah, a lot of things could be really computerized. But you're also looking for people who are going to be able to tie the story and the narrative in with what was going on with the instruments. And it's probably not something so simple as, you know, what did the dollar yen do the last time the Fed hiked? It might be something more like, what was a reds, greens, puts, puts, steepener doing the last time the Fed hiked? Which you're going to require a lot of modifications to those AI models.

• 41:39Speaker 06

  I'm always hesitant to talk about this because I can remember we were told that all the paper companies were going to go out of business because everybody was going to read everything online and what happened? We just all printed it.

• 41:49Joe Weisenthal?

  Oh, yeah, that's true.

• 41:50Speaker 06

  So.

• 41:51Joe Weisenthal?

  And they, and they, a lot of them also sell cardboard boxes. And so they benefited from e-commerce, those same companies, actually.

• 41:57Speaker 06

  Absolutely. Georgia Pacific is probably huge in, in Amazon's warehouse. But I think that there will always be people who, because this industry thrives on, you know, I can do this even though the odds are very much against me. Uh, and they will definitely use any edge they can get informationally as far as analytics or anything like that. But usually there's something that you're going to have to ask that maybe not everybody understands or knows. I think everybody who's in this business got into it in one way or another. And somebody handed them what I just generically call, you know, street porn, which is the market wizards books or any of those types of things.

• 42:39Speaker 06

  And they're fantastic because what I got out of reading those types of books is there's a lot of different ways to make money. You just have to find out what you're good at and how you can apply your particular set of skills and attributes to doing it. And I think that there's going to be somebody who gets really good at asking, you know, one of these AI models, market questions. And that person is going to get built up. We're already seeing inquiries for heads of AI at several different funds. And I think that that's going to continue as they explore more and more, you know, what they can actually do with it. They have no problem spending money on the, either the AI or the human being. It will ultimately come up to who can perform.

• 43:19Tracy Alloway?

  So how do you avoid, I guess, group think among your PMs? Because the whole point of multi-strats is those uncorrelated returns. And you don't want everyone just putting on the same trades, either literally or maybe through another angle. And I'm thinking specifically about journalism. So some newspapers used to always move reporters from a certain beat after they'd been there for like 10 years or something. And the idea was just to shake it up a little bit and make sure that they're not getting like too cozy or too comfortable with that particular industry. The downside of doing that, of course, is that you lose expertise. But I'm just wondering, like, how do people?

• 44:02Tracy Alloway?

  Yeah, how do people avoid that group think aspect? And make sure that everyone's doing, you know, new stuff kind of independently?

• 44:10Speaker 06

  Well, one way is limiting the communication between the pods. Some places do not really allow their pods to communicate. Another way is basically structurally, you don't want to see people hang on to each other's trades. You're going to be looking at this from, you know, a macro view within the firm. You're going to see this type of trade that this person had on is increasing in size in the firm. But by and large, if you've hired right, you're going to hire independent thinkers. And a seasoned PM will tell you, I might like somebody else's idea, but I can't really trade it properly unless it's my idea too. I kind of have to adopt that as my own. So group think is not as prevalent as you would think

• 44:55Speaker 06

  because it's structurally prohibited in some places. And the places where it's not, you know, a seasoned PM is like, hey, I may love that trade that you pitched me, Joe, but that's yours. And I can't, I'm not doing my job if I say, Joe, when are we getting out of this? That's not what I'm paid to do. So part of it is on the part of the PM internally. And then the other part of it is on the fact that they don't want to be seen as copying the next guy's trades.

• 45:20Joe Weisenthal?

  All right, but just real quickly, maybe you don't want to do group think or copy the next guy's trades. But if there's a hot beta, right? You're always looking for alpha. But if there's a hot beta, like AI beta or whatever, or falling inflation beta, like some of these long-term trends, but that's not your thing. Do PMs find ways to backdoor their asset class into the hot trade in a way that like may de facto become trade crowding?

• 45:45Speaker 06

  Yeah, a former boss of mine used to say, there's never been a risk management framework that a smart trader could not with.

• 45:53Joe Weisenthal?

  That's what I'm wondering. That's like, is it this cat and mouse game where you're in part trying to outwit the person who could tap you on the shoulder by trading something that looks like something else?

• 46:01Speaker 06

  Yeah, there's a lot of downside to doing that, you know, if you don't have a trade kind of properly thought out. But, you know, in general, if I hire one of you to trade credit and the other one to trade the front end of the yield curve, and, you know, all of a sudden, Brazil is very hot, the real, and you're both asking me for limits on the real, like, you won't have limits in something that you don't already trade. So you can't really deviate from your mandate too much. It's kind of a-

• 46:33Joe Weisenthal?

  I'll just find a credit spread that's correlated with the rail.

• 46:36Speaker 06

  Yeah, or, or, you know, there are a lot of ETFs that basically contain macro trades, if you will. And I have often wondered, you know, are those there so that mutual fund managers can, you know, and investing in equities can speculate on the yield curve? But there are always ways to do it. You just have to kind of hire the right people who aren't necessarily going to do that. And if you get in trouble for something like that, I sort of like to say that this is the second most voyeuristic industry in America. Word gets out. As large of an industry it is, it's not that big in individual areas. And if somebody has really done something untoward, then it's, people are going to hear about it.

• 47:18Joe Weisenthal?

  Brian Yelvington, thank you for coming on Odd Lots and talking about getting and keeping multi-strat jobs. Our journey continues. Thank you so much. Really appreciate chatting with you.

• 47:29Speaker 06

  Thank you. Thank you for having me. It's great to get to talk to you guys.

• 47:45Joe Weisenthal?

  Tracy, if I were like young, I think, or if I were in college or something, I think I would have taken that trading job now. I mean, I like the way my direction, life direction went, but if I like wanted to do over, I'm curious what that fork in the road looks like.

• 47:57Tracy Alloway?

  There'd be no odd lots.

• 47:58Joe Weisenthal?

  Yeah, I know.

• 47:58Tracy Alloway?

  That's so sad.

• 47:59Joe Weisenthal?

  It'd be a different pot, you know, like there, I feel like I would, I would trade, you know what would happen? There would still be an odd lots. I would trade for a while. I would blow up. I would get a job in journalism and then I would be one of those journalists who reminds all of their colleagues all of the times that they used to work in finance.

• 48:17Tracy Alloway?

  You know what's funny?

• 48:18Joe Weisenthal?

  I would be like the person on the call. They're like, I just love the, you know, it's like, I was like, oh, I used to work at a multi-strategy hedge fund. Yeah, yeah, yeah. Well, I used to be a trader. Anyway, sorry, keep going.

• 48:27Tracy Alloway?

  Joe, how many times have you brought up that interview with the trading company on this note? Okay, that was really interesting. One thing that kind of jumps out at me is the last discussion about, you know, how do you avoid everyone just taking on the same risk? It really seems to me like it's correlation built on correlation, built on correlation, right? And I often think correlation is one of the hardest things to actually nail down on Wall Street. So, you know, you gotta wonder, so far, so far, you know, a bunch of multi-strats survived April pretty well. So I guess we'll see.

• 49:07Joe Weisenthal?

  I think if I were a risk manager and I had one person trading credit and the other person trading the short end of the yield curve, and suddenly their month to month return started looking identical and it happened to be identical with the person who traded Brazilian real, that would set off a red flag for me, you know? Like, I feel like the return profile itself is probably part of the hint, right? That even if you can't really articulate why this person's traded, secretly this person's trading, this guy's, if their return profile looks too similar, that probably sets off some red flags.

• 49:44Tracy Alloway?

  We gotta talk to a risk manager. Don't we?

• 49:47Joe Weisenthal?

  Yeah.

• 49:47Tracy Alloway?

  We should do that.

• 49:48Joe Weisenthal?

  Okay, if you're a risk manager, you want to talk about what that job is like. Or if you know one, shoot us a message.

• 49:55Tracy Alloway?

  All right, shall we leave it there?

• 49:56Joe Weisenthal?

  Let's leave it there.

• 49:57Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 50:02Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers, Carmen Rodriguez, at Carmen Armin, Dashal Bennett, at Dashbot, and Kale Brooks, and Kale Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where the daily newsletter and all of our episodes, and you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 50:23Tracy Alloway?

  And if you enjoy Odd Lots, if you like our ongoing exploration of multi-strat funds, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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