The 2+2 Hedge Fund

[burningyen]

I understand the reference to Long-Term Capital Management - great minds failing horribly (bankroll issues?) - but what does "other people's money" have to do with anything?

[illiquid]

[ QUOTE ]

But a strong poker professional who is well funded, say has a 500BB bankroll, and a reasonable expectation of even a half BB per hour, would earn about 10% per month, or 120% a year, playing only 100 hours a month. There's no comparison. Skilled professional poker playing is a much better use of a smaller bankroll than investing.


[/ QUOTE ]

Absolutely disagree with this statement. 20% per year is considered phenomenal for any large fund, but there you are talking about billions in terms of capital, and size becomes a huge factor in limiting your nominal return. However, on the individual account level, nothing remotely comes close to playing the markets in terms of potential reward. Take a Paul Tudor Jones and give him a 5-figure account, and it's not impossible for him to have several consecutive 1000%+ years. A great trader at the helm of small account is capable of leveraging and compounding for ridiculous returns, there's just no equivalent for those two components in poker. Put it this way: if you had a real edge to exploit in any market as deep as the S&P or treasuries, you can throw expectation per hour out the window [img]/images/graemlins/smile.gif[/img]

[Leonardo]

That is great. You figure that you were one of the smartest people to graduate in your class at University of Penn. So what? While the Wharton business school is widely regarded as one of the best places to do an MBA, for undergraduate study, it certainly isnt anywhere near the number 1 choice for the very brightest of students. Buffett himself went there and noted that at the age of 17 he knew considerably more about business than any of his professors. So you were the smartest kid in one year of a school that doesnt attract very smart people. Good for you. From that you decide that because you have since met some guys that are smarter than those students you went to school with that they are the smartest in the world. If the pros you are talking about could beat the index nicely, why would they not do it? Its a guaranteed way to become a billionaire, quickly. By beating the market 'nicely', one can attract billions of dollars with which to invest, take a neat 1-1.5% per year plus bonuses. Now with all your mathematical genius Mr. Sklansky, you can work out that you can make a cool billion in no time. I will say the following. You dont know anyone that can beat the market on a consistent basis and for a long time. They are few and far between. No pro poker players can do it. Those that tell you they can, cant. Those that you think are intelligent enough to do it, aren't. I dont pretend to know everyone you know and how intelligent they are, but if they could do it so easily as you say, they would do it. One last thing. You cannot beat the market Mr. Sklansky. You cannot beat the Wall Street mediocrity. If you really could, you would do it. Like you say, the skills are highly correlated. The problem is that you are your fellow pro's work in a world defined by rules which make the game follow mathematical constructs which are not affected by the outside world. In business there are so many variables that investing cannot be broken down like that. It requires all the skills that a poker player has, then a whole lot more. My respect for someone has never been lost so quickly. I take back my comment about leaving Las Vegas. Dont. Stay there. Stay in that small world where you are deemed intelligent, it will make you happier than going out in the real world and finding out that you just arent very smart.

[nycfish]

LTCM was really about hubris not bankroll.

With far less than a few million anyone with real skills can build a track record and raise more money than they know what to do with.

Having said that, everyone wants to get rich running a hedge fund now. Only the few have what it takes to actually succeed. The rest will be generous guarantors for their competition's bonus. Nothing gets the boys more excited than hearing that an academic (except one or two) is getting into their market.

Similar to the internet bubble, many ideas for hedge funds are being proposed and even raise money. I'm sure at the moment a big name in poker could probably raise an amount of money that would be considered substantial by the avg man on the street. Heck, even Ashlee Simpson can capitalize her right place right time name into a short-term career. If one cld actually make a substainable risk-adjusted excess rate of return is another question.

Sometimes people convince themselves their self-recognized genius is underutilized if it leads to them getting a free call on other people's benjamins. Yet sometimes it really is underutilized.

IMHO, just like one of the best poker players in Peoria is almost certainly not one of the best in Vegas, a top notch poker pro playing the markets could very well find himself jumping from tee-ball to Yankee stadium.

[burningyen]

I guess it was hubris, too. My understanding of LTCM's failure was that their arbitrage strategy was fundamentally sound over the long term, but they began to play above their bankroll. So they didn't have enough to cover the kind of massive short-term event that the LTCM gurus knew was theoretically possible but so remote that they just didn't believe in their gut it would actually happen. I thought Buffett and the i-banks believed in the strategy even after the collapse, and in fact Meriwether is back at it but this time with adult supervision. So LTCM's hubris was a gambler's hubris of going against the smart play rather than the hubris of belief in the smart play.

[maurile]

[ QUOTE ]
In any case, Buffet is a bad example to use make my point.

[/ QUOTE ]
It is. I have very little doubt that anybody on your Top 50 Smartest Poker Players List (were you to compose one) would be a favorite in the financial markets over 95% of all hedge fund managers and other financial advisers out there.

But not over Warren Buffett. Not even close.

[maurile]

[ QUOTE ]
One last thing. You cannot beat the market Mr. Sklansky. You cannot beat the Wall Street mediocrity. If you really could, you would do it.

[/ QUOTE ]
Who says he hasn't? I know penty of investors who have comfortably beaten the indexes over the last five or six years. (Insert short-term-results caveat here.)

[David Sklansky]

"It is. I have very little doubt that anybody on your Top 50 Smartest Poker Players List (were you to compose one) would be a favorite in the financial markets over 95% of all hedge fund managers and other financial advisers out there.

But not over Warren Buffett. Not even close."

Why are so many people saying this? It is my understnding that he is the best when it comes to investing big boney, long term, in big companies. Since he has such a huge bankroll I understand that he has little choice. But why should that mean he would be so great at options, short term trades, hedging, going short, picking out good longshot bets in small companies, or any of the other strategies that many people tell me can, if done right, beat the 25% a year or so that he makes. Just yesterday Tobias Stone told me that he wasn't that great a bridge player. And as for the credit he got for not buying internet stocks during the bubble, why didn't he short them?

[DesertCat]

[ QUOTE ]
So they didn't have enough to cover the kind of massive short-term event that the LTCM gurus knew was theoretically possible but so remote that they just didn't believe in their gut it would actually happen.

[/ QUOTE ]

They were using leverage of 100-1, which is extremely risky. But they didn't rely on their guts, they had computer models that PROVED that the events that destroyed their equity wouldn't occur once in a hundred years.

In reality, their models were based on the limited history of our financial markets, were totally unrealistic and didn't account for their own impact on the market. They had borrowed so much money that they became the market for some of their positions, and when the crisis forced them to sell losing positions, their own selling caused their positions to collapse, putting them in an even worse predicament.

[BarronVangorToth]

A bit juvenial, I realize, but I'd love to see a Leonardo vs. David battle at:

http://simulator.investopedia.com/

Who does best with their fantasy $100,000?


Barron Vangor Toth
www.BarronVangorToth.com