REVIEW: Hedge Fund Market Wizards


Jack Schwager is no stranger to the trading world – not your typical American trader going out swords blazin’ slashing away profits from the masses. He is instead the proponent of the adage “The pen is mightier than the sword”. He writes and he writes dazzlingly good – not in terms of grammar or idioms but in terms of extracting pearls and diamonds from legendary traders by interviewing them. His direct yet thought-provoking questions would sorely leave the Magic Pill Hunters disappointed as really – there is no magic formula in this book to make you immediately profitable. It builds that bridge but you would still have to walk it and sidestep all the holes that the book tells you. Most of the time, fear and greed, two of your greatest enemies, would just make you look ahead towards the gold pot at the other end of the rainbow and this is where most will fall though the hole deep into the abyss where the majority would never make it back. Yes – this book will pinpoint the holes and it is still your job to take heed and constantly remind yourself of all the pitfalls of trading. Eventually you may make it but boy I tell you – be prepared to work your ass off with borderline obsession as how the legends have done it.


When I first read the Market Wizard series, I knew for a fact that trading/investing is a very personal journey. No guru or workshop can tell you that only their methods can make money. Plus, no 10-step trade selection process fits everyone’s personality. It fits the Guru’s personality and I can bet with certainty that no workshop participant has the same inherent DNA and psychology of the guru.  I have admired the likes of Anthony Saliba and Paul Tudor Jones among others but I do not emulate the way they trade. I just emulate their mindsets. The mindset of self discovery, hard work, pain and realizations that at heart, we are #1 Risk Managers and then only comes #2 Traders/Investors. Let me give you a hint that Gamblers and Lazy Bumps never made it to that list.



All the 15 traders chosen have their own way with the markets. Some I would describe as outright “insane” like Jimmy Balodimas . That being said, all of them have highly respectable P&L with envious Pain-To-Gain ratio (loss adjusted returns). They are that good that even the Sharpe Ratio (volatility adjusted returns) can be misleading as most of their volatility is skewed to the upside (huge periodical gains – up to 140% with very little downside volatility and drawdowns). Of course I need not mention of their decade-long track record that would immediately dismiss “all luck” as the sole element of success.

This book is split between macro, multistrategy and equity players. The traders were mostly interviewed post-Subprime so many of the topics discussed delved into their themes prior to the financial crisis although their decade long track record also included the tech bubble. Many believed that the recession started when Bear Stearns collapsed in 2008 but these guys thought otherwise and positioned shorts when the housing market stagnated and CDO’s were running rampant at the same time credit spreads were widening on top of the bull run. Nonetheless, there were a few who lost abit during the 2008 crash albeit multifold lesser than their hedge fund peers. One eye opening concept that dawned upon me was that the top fund managers tend to underperform bubbles as they refused to take risks. The interviewees admitted that it was quite painful to watch their peers made tons of money buying into bubbles while they were scaling out or reducing the overall exposure at the dismay of their investors. However, the outperformance comes when the market rolls over and it continues from there. Their track record speaks for themselves as the bubble gurus then disappear along with their funds.



Colm O’Shea – Founder and CIO of London-based COMAC Capital

I was really impressed at how Colm O’Shea expresses his macro themes via a different asset class. For example, instead of shorting the bubble break in 2000, he went long bonds instead which gave a nice uptrend which provided a better risk/reward setup. If he had shorted the NASDAQ, the 40% dead cat bounce might have hit his trailing stop and maybe even mislead him into taking a reversal trade. In other words, why torture oneself with such huge swings in volatility when there is always a better way to express a trade. Another example that I could have thought of in my own trading was to short the USD/JPY or long the Yen Futures when the markets topple over in a recession or maybe going long volatility as a hedge to my equity positions instead of shorting a basket of equities which presents much risk during a bubble. Whereas on the other hand, going long volatility in a low volatile bubble would be better with better risk to reward compared to unlimited losses shorting stocks.

Martin Taylor – Founder of Nevsky Capital. Closed down despite its sterling performance.

Another concept was on the asymmetrical risk/reward positioning of a trade where downside risk is limited while upside potential is unlimited via options and spreads. These guys are unapologetic when it comes to risk management and emotional control. Steve Clark, an event-driven manager, believes in being in one’s emotional comfort zone in terms of size which is also shared by Martin Taylor (emerging market equities) and Joe Viddich (long/short equities). It is never about the potential profit and financial freedom that one could have with a home run. It is about being comfortable within your own skin riding a position without being emotionally compromised from both the winning and losing side. In a nutshell, it is about not being fearful and hitting the bids at 70 when the stop was at 65 because the magnitude of the loss would be unfathomable or prematurely setting a loss at 80 when the correct stop would be at 75 because 80 is the pain threshold and you refuse to reduce size in order to set the correct stop.

Ray Dalio – Founder of investment firm Bridgewater Associates, one of the world’s largest hedge funds

When Ray Dalio harped on making mistakes as part and parcel of one’s learning curve, I could not help but reminisce the past when I first started out indulging on the markets, I kept making mistakes after mistakes before discovering my true self and realized what would work for me. Along the way, it was all about being an independent thinker first and foremost and no one could hammer this fact better than Ray. I have always believed that as a trader, we have think differently from the masses and sort out all the bulls**t that the media is feeding us. Thus, I mostly analyze primary data sources from Fred St. Louis, and live market action from my brokerage software. My biggest satisfaction comes when I work up a grin seeing research/analyst reports or market articles misconstrue real market sentiment or perhaps deliberately emphasizing on the obvious that everyone else already knows as widely reported by the masses but fail to acknowledge on changing conditions as reflected by asset prices. No doubts this is the reason why 90% of traders lose money. The last point would be on everyone’s favorite word: Correlation. This word apparently makes life easier as no dazzling mental gymnastics are required – you just need to think “If X happens then Y happens.” Sadly, correlations don’t work all the time and even if they do, people get it wrong. It’s baffles me when bankers tell me about the gold – market correlation where one should buy gold when the market crashes. Ermmm – good luck with that. It’s key to understand market dynamics to truly appreciate what drives correlation and why certain correlations work in certain conditions only. Hence, we will be able to capitalize on such money-making opportunities.

Watching how price action reacts to news and how it correlates with other asset class contain as many clues as coming home to a torn pillow sitting beside your innocent-looking dog – you just know what the facts are telling you. I felt that this point by a market wizard struck a chord as many traders and investors out there are opinionated about the markets but fail to remember that it is not about being right or wrong. It’s about losing less when you are wrong and making more when you are right. Having an opinion is one thing but having the market validate that opinion is an entirely different thing. Thus as macro-oriented as I am, I’m a true believer of price action to add conviction to my trading ideas. I may position myself in a secular theme but won’t add considerable risk until prices start to reflect my ideas and I manage risk accordingly. Price action provides us with clues as to what the sentiment is really telling us and what is likely to unfold based on macroeconomic conditions. This is akin to a pilot checklist before a take-off: there will always be a checker to validate what the other party has performed. This process is key to keeping everyone on board alive so why not apply this concept to survive the market sharks.

Jimmy Balodimas standing in front of a train.

Jimmy Balodimas may already wear the “crazy” tag by being so counter intuitive but hats off to him in growing his bottom-line despite breaking nearly every standard trading rule, that Schwager tagged him with the perfect description: “Standing in front of a freight train”. He adds into his losers, cuts his winners short, sells into the uptrend, buys into downtrends, does not have stop losses but managed to remain profitable in the 15 years of his career. Large pockets and an enormous dose of patience are strongly required, not forgetting a very strong heart and nervous system for anyone attempting to do this. After all, markets can remain irrational longer than one can remain solvent. Nonetheless, anything is possible and it takes a very special “breed” to go against the grain – especially a grain in this manner. I swear by my own trading rules and cannot do what he psychologically can while remaining sane for this interview.

Steve Clark – Prior to joining the Royce Funds in 2014, he worked for more than 16 years at Fidelity Investments.

Last but not least, Steve Clark’s message of “doing more of what works and less of what doesn’t” may seem like a a no-brainer but you would be surprised to see many successful traders/investors do the mistake of gravitating towards strategies they have no business in – could be due to overconfidence or boredom. Hence, the power of a trading journal can never be doubted as this enables us to see where our flaws lie. We figure that out and do lesser of it and focus on our strengths. One may argue that we are as strong as our weakest link but in trading, you can ignore your weakest link altogether BUT if core principles such as discipline and money management is your weakest link, then this holds true. The assumption is that your discipline, psychology and money management has to be sound to begin with. Key point is to know what are you best in and focus all your energy on those type of trades.



Each individual has his/her own reservoir of experience to relate to, hence clicking with varying aspects of the book. For myself, I have to unabashedly admit that I merely skimp through certain interviews that focus more on systems/computerized trading. My interest and obsession was towards discretionary players as I see trading of more of 70% art and 30% science. No doubts that technology is the way forward but no cold-calculating machine can defeat the human intuition. You may argue that AI will reach its peak by imitating emotions and intuition but I would argue back saying its reliable widespread use will be after I’m six feet underground. I am all for discretionary trading. Unfortunately, quant and computerized trading has little place in my repertoire.

Various points were rather mundane in which I would categorize them as “small talk” as my motivation was to obtain the golden nuggets of uncommon wisdom. The author could do a better job in editing the content to eliminate content that has very little value to the readers. I could perhaps understand that some small talk is required to build rapport in order to solicit an outstanding interview but please leave it out for us readers.

Other than that, I’m glad to know that certain adage like cutting your losses and letting your profits run, the importance of doing nothing, learning from mistakes and stringent money management are survival keys in this cutthroat business.

UPCOMING REVIEW: Winning Psychology of Defensive Traders by Conrad Alvin Lim

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