How Hedge Funds Work & Landing Your Ideal Role

It's the end of the week, so it's my usual catch-up with AmplifyMe co-founder Piers Curran, and we are not going to talk about the Bank of England, and we're not going to talk about the UK exiting recession this morning. Um, we are in fact going to talk about something a little bit more sexy for a Friday morning, which is hedge funds. Because we get a lot of questions about this from our community, from a potential career perspective. So there was some hedge fund news, in fact, this week. The infamous hedge fund manager Ray Dalio, which I'm sure you might have heard of him, he founded Bridgewater Associates, who were the biggest and most profitable hedge fund for a long period. We will go into that running order of ranking in a moment. But they had some comments out of their new chief executive, uh, and he's basically overhauled the hedge fund because Ray Dalio has come under some sharp criticism of late. So we'll have a quick look at that, but we're going to use that more of a vehicle to then talk about and explore how hedge funds work. So we'll look at the history of hedge funds, we will look at the different strategies that they use, like equity long-short, multi-strat, macro, event-driven, quant, all of these different terms you've probably heard, but we're going to see just how clever Piers is now in terms of his breadth of knowledge.

Oh dear.

And then we'll talk as well, we'll have a bit of fun with it, we'll look at some of the best ever hedge fund trades that they've been, but in the end we'll also look to tie this back into, um, what does a potential career look like in this field and how would you get into it if you were in your early career. Alright, so perhaps it makes most sense to talk about the history first. Yes.

Yeah. And there's, so, well, here's a, I'm going to have a few little quiz questions for you along the way here, and so prepare. Question number 1. What year was the first ever hedge fund founded? This is the fast response round, by the way.

1927.

No. So, well, no, 1949. So 1949. So this was a seminal moment for, well, I guess the, the history of investing actually, and, and kind of shaped and, and kind of paved the way for what has become now the, the hedge fund industry, which is obviously a giant, giant, giant industry. But there was a, a guy called Alfred Winslow Jones, okay? 1949, he set up, uh, A.W. Jones Co. And what was unique about this was his style of investment— well, two things: his style of investing and how he how you measured his performance. And these are the kind of two factors that kind of define a hedge fund, or certainly historically, right? So number one is it was the strategy. So a hedge fund, the word hedge is talking about hedging, therefore hedging risk. It should be kind of a lower risk style of investing than, let's just say, buying shares. Okay, um, so what he did was set up this idea of, right, well, hang on, I could buy some shares in companies that I think are going to go up, and I'm going to offset that by selling and going short other shares of different companies that I think might underperform. And so he invented this long-short— basically, it's now the long-short equity strategy, which is the, the roots of the hedge fund industry. But the idea is you're hedged. Because you're long something and you're short something else. Okay, so that's where the word hedge fund comes from. Secondly, then it was about because of that sort of hedging off rather than his performance being compared to an underlying benchmark. And this is really what separates asset management and hedge funds. It's how you measure performance. So the asset management world, we measure a fund's performance through a benchmark. So if you're a, I don't know, if you're a UK equity asset manager, then you're running a portfolio of UK equities, then your performance will be compared against a benchmark, something like the FTSE 100 index. And you as an asset manager, you'll be expected to deliver something called alpha, which is a return on investment that's over and above just the underlying generic index. Okay. And your clients will pay you. Asset manager to actively manage their money, and they're paying you a fee, so they expect you to deliver better returns than, let's just say, them just buying a FTSE 100 tracker. All right, so that's asset management. Now, hedge funds, because they're long and they're short and they're this and they're that, and we'll talk about the different strategies, you can't— there aren't any obvious, like, index benchmarks, right? So we call this absolute return. And so this was invented by a, you know, Alfred Winslow Jones. He said, I'm going to be based on absolute return, which is basically, forget get any benchmarks. It's just, am I making you any money each year? What's my return on investment each year? So he kind of kicked off this new style, and of course, then it grew into a bit of a beast.

Do we know what his background was prior to that?

He was— well, it's a good question. I do know the answer to that. Oh, no, I don't, actually. I think he was a he was an analyst, um, like a stock analyst. Um, so he was trading. Um, I think he was from a soci— I want to say a sociology background. For some weird reason that sticks in my mind, I don't know why. But, um, but he was also a stock analyst.

Yeah, because I was going to say, bringing that new, uh, thesis forward to get investment or capital, he must have had a track record of something. To have people to have confidence to buy into this new approach.

Yeah, very creative and very innovative and basically spawned a whole industry, uh, with his one idea. Um, now I would say that there's a misconception out there about hedge funds because people hear the word hedge fund and they think— all they think is like money printing machine. It's just some kind of outperforming phenomenon. Right? But that's completely untrue. So here's your quiz question number 2. How many hedge funds are there in the US today? 2024. How many hedge funds are there?

You see, the thing is that I'm so good at now using AI Copilot that I almost preempted your question, but I've made a typo on the request.

User error.

Um, so how many hedge funds are there in the US was your question?

Yeah, actually registered hedge funds.

Um, ballpark, say 558.

3,460. Yeah, so like number one. I mean, I saw that and I was like, wow, that's—

I thought it would be small actually.

So there's way more than you think, but Here's the second thing. On average, 10% of hedge funds fail in their— sorry, 10% of hedge funds fail each year. Okay. And generally speaking, 50% or more of funds close after just a few years in operation. So the point is, most, the majority fail. So it's definitely not a, you're gonna start a hedge fund and you're guaranteed to coin it in. This is a high risk, you know, ultra competitive landscape and most don't make it. So that's number one.

Is that because, and I'm sure we're gonna dive into this, so don't, you don't have to go too deep right now, but is that because you need a certain amount of capital to deploy a lot of these strategies and a certain access to a level of technology to execute them. And so therefore the barrier is almost like a big capital barrier to startup cost to get there.

Absolutely, absolutely. And you know, normally these hedge funds will be spin-offs, right? There'll be people coming out of a more established hedge fund, people or a team will just step out and they'll try and start up on their own. And yeah, it's very capital intensive. Obviously you gotta, if you want to, if you want to be the best, you've got to attract the best talent. And there's a war for talent at the moment. I mean, salaries in, in the hedge fund space has just gone stratospheric. So the barrier to entry has become even higher in terms of that capital outlay up front. You've gotta, you've gotta be, you know, you've gotta position yourself in the best areas of town, like in London. You know, you gotta be in Mayfair if you wanna be taken seriously. And I mean taken seriously from the point of view of, can I attract the best talent to my fund? Well, you've gotta be located in the location, right? And, but that's super expensive. You gotta build out all the infrastructure and the IT and all the rest of it, right? And then there's actually a lot of regulatory groundwork that needs to be done, you know, even to register as a fund before you can start operating. Then you've gotta, Then you've got to start your sales and distribution and marketing engine because you've got to then attract some, some capital into the firm to actually then start managing it and trading, right? So there's a huge, I'd say a pretty steep on-ramp that most kind of fall off.

So to be clear, they're not necessarily using their own money, although there will be some. This is about having a reputation a track record, probably a decade, two decades worth, and therefore people know that you're going to make money consistently. And so the road— the roadshow is very limited in a sense of they already know who you are. You spin out and you get back.

So yes, there's something else called a family office. So you mentioned those words. It's not— they might put some money in themselves, but it's not about managing their own money. It's about attracting funds But if you want to just manage your own money and you've got a lot of it, like enough where you need to employ a team to actually manage that for you, then that's called a family office, right? There, they don't have any intention of building a hedge fund and attracting outsourced capital. So that's a family office. A hedge fund is absolutely, yeah, I mean, look, it's definitely about track record, of course, because without that, you're basically dead on arrival. You need some kind of historical track record to be able to go out with your sales and marketing pitch and say, well, look, this is what I've done already. This is why you should put your money with me. Right. But then, yeah, it's about trying to grow the assets under management and ultimately that's how you get paid. Right. It's, you know, it's an AUM game where your pay structure and I guess, yeah, sorry, something else that Back to Alfred Winslow Jones. Another thing that he invented was the fee structure for a hedge fund. So he was the one who came up with this 2 and 20, which is that kind of typical fee structure for a hedge fund. 2 and 20, meaning that the hedge fund will charge their clients a, a management fee, which is a fixed cost, and that's 2% of the assets under management. Okay? So that goes towards kind of paying for the operation of the business. Then you get 20% of any profits generated. Okay, so that's the 2 and 20 structure. Alfred Winslow Jones invented that, and that's become even to the— even to this day, although we'll talk about Citadel where they've kind of veered off that fee structure a little bit actually. Um, but even to this day, most hedge funds are set up as a kind of 2 and 20 fee structure. But just like an aside, you know, even if You're not interested in hedge funds per se, because it is difficult to get into hedge funds at a grad level. We'll talk later about that, but there's a whole industry that's kind of spawned up to support hedge funds. So if you're interested in getting into, you know, a grad role at an investment bank, for example, then there's a division of the bank that's called prime brokerage. And the prime brokerage division is basically a services provider for the hedge fund industry. And look, a lot of that is helping them with their trade flow and so on. But actually, there's parts of the prime brokerage division that's helping them with getting set up, you know, with the regulatory hurdles that you got to jump over and all the rest of it. So yeah, prime brokerage is on the sell side. These big investment banks will have those divisions and they're servicing the hedge fund industry.

Yeah. And I guess the other offshoots from a career perspective would be based around technology. Technologies from an infrastructure perspective, from a software perspective, from a data perspective. And each one of those has its own players within those fields that would service the hedge fund community as well. So yeah, there's lots of offshoots that you could work in for sure. I mean, I was just looking there, so let's kind of pivot into Ray Dalio because I just saw that Ray Dalio's Bridgewater Associates was originally set up as a family office.

Yeah, that is right. And that's why he, the, so Bridgewater actually, it's gonna, it'll have its 50th anniversary next year. So, um, how old is Ray? Well, yeah, exactly. He's in his 70s.

Wow.

Because he set up, he set up the, the fund. Well, it actually wasn't a fund to start with. Um, and actually wasn't even a family office really initially. Basically, he, basically he started this business in a, out of his bed, out of his two-bed flat in New York in 1975. And, and the business was to provide institutional investment advisory services. Then, so that was 1975. It was in the 1980s, early '80s, he kind of expanded out to kind of take on sort of institutional clients and began producing like detailed market research and his alpha, sorry, his pure alpha. So when he really, the hedge fund part of his story only properly really started in 1991 when he launched his like flagship Pure Alpha fund, which was a straight up, right, give me your capital, I'm going to trade it for you. This is how I'm going to do it and I'm going to outperform the market on a consistent basis. So yeah, Pure Alpha was born in 1991.

Yeah, and Pure Alpha, which is like the flagship fund of Bridgewater, big losses the end of 2022, then recorded one of its worst ever years in 2023. So feels like there's been quite a big significant change at what was kind of golden boy of the hedge fund community for such a long period.

Well, this is it. I mean, Basically, so 1991, Pure Alpha launched. Okay. And then in the kind of late '90s, he expanded it out to be like a bit more like going beyond just— he kind of specialized in global fixed income to start with and currencies. They were his two asset classes. But in the late '90s, he then moved into commodities and equities and the full monty, basically. And then in 2005, he became the global leader. That's where Bridgewater became the biggest hedge fund on the planet. And really then the great financial crisis in 2008, he absolutely nailed it. So further cementing his reputation as the man, the one. And I think after that, that was probably in Ray's kind of journey, that was his peak. And I think really after that, he kind of started to get distracted, I would say.

Yeah.

And started to kind of go down a different path, which is really what he's focused on today, which is actually writing books and doing kind of, he kind of, he's gone on this journey of, well, I guess research. So he's written loads of books like the principles are kind of his theme and the changing world order. And he's gone back and kind of analyzed economic history going back over thousands of years with his aim trying to pick out these debt, ultra-long debt cycles, ultra-long cycles of dominant superpowers and their currency becoming the world's reserve currency and then the subsequent decline of the superpower. And he's been banging this drum for about a decade that we are at the end of the cycle, or we're approaching the end of the cycle where the US will cease to be the superpower. And, but the problem is, from a trading point of view, the decline of a superpower and the rise of the next one to begin the next cycle, that transition can last like 20, 30 years. So therein lies your problem. He might be right. But he hasn't been right yet, 10 years into him banging this drum, and he might not be right for another 10 years. Right. So from a trade or an investment point of view, it's very fascinating and interesting stuff, but doesn't necessarily really help you today when you're making your decisions about your portfolio.

Did you— what about Principles then? Did you ever read that book?

I read some of it. I, to be honest, I couldn't get through it. I don't know. I just, so another thing about his fund and a bit like this guy, Bart Deer, who's the new CEO, another quite unique thing about his fund was this culture, which Bart Deer, by the way, is really just, he's kind of doubling down on, but his culture, Ray Dalio's culture was this, you know, radical transparency. Thank you. Radical candor, radical transparency whereby you give feedback, let's call it, to your colleagues, you know, completely no holds barred. And it's a culture where you tell everyone straight away exactly what you think. Now, historically, that meant that generally that was like top-down. So seeing more senior colleagues giving feedback to more junior colleagues. And again, feedback, I mean, I think it was a pretty harsh sort of environment to survive in. But then is that why they became the best? Because we keep coming back to what makes a good trader, and there's that word resilience. We've spoken about this many times on this podcast. And how do you instill resilience into someone? And do they have any resilience? And maybe this was Ray Dalio's way of A, sifting out those who don't, because if you can't take, you know, harsh criticism and feedback and dust yourself off, get back up and perform again, well then maybe you haven't got what it takes out there in the marketplace.

Yeah, I see credit in what you're saying. However, Ray Dalio and his culture was born in 1949. The problem Ray Dalio has with his culture it's now 2024. I think that fundamentally is the problem with that running culture that way. I think probably you're right, there would have been a lot of merit to that way because that would have been the acceptable practice, industry agnostic in terms of everything. It was the way it went in that way. Life was hard. And so I don't think that flies so much nowadays, and that's why it's come undone a little bit more recently. Plus As you said, that financial crisis and nailing it and his ego and his popularity and his fame shooting through the roof probably didn't help things.

Yeah, look, this is a classic Succession, yeah, problem. And as soon as he started going off writing his books, you know, he, he stopped, you know, actively, you know, running the firm. And I think then things started to, you know, cracks started to appear. They had a really bad year in 2022. 2023, they had their worst year ever, or one of the worst years ever. I think they finished down like 8%. They never have down years. They finished down 8%. And this is— and, and the succession plan was Bardia and this other guy were going to be joint CEOs. But at the end of 2022, that Bardia kind of won the battle. The other guy stepped down, so Bardia is now the number one. The way he's changed the culture, he's— I said he's kind of doubled down. He's actually— what he's done is he's— it's still radical candor, but it's more bottom-up. So it's basically him saying to junior staff, give honest feedback to your boss.

And I'm sorry, that's just absolute nonsense. Well, you can't ask a junior— hey, you know, having been a junior and having been a senior, you cannot ask a junior to be brutally honest and say, tell me the truth, because a junior is never going to tell you the truth. Yeah, you're their paymaster.

But at the end of the day, think about the client, right? Ultimately, a hedge fund's there for their client. They're to service their client. They're to deliver outsized returns for their client, right? What does the client primarily care about? Primarily, it's return on investment. Okay. Now I know that in this day and age, it's not just about return and fine, there's an ethical side to, to the whole sort of investment sort of process. But in the end, you know, will his radical candor bottom-up thing, is that relevant? I mean, really, in the end, if they underperform from an investment point of view, doesn't matter what their culture is, they're going to be a declining force.

Well, as the culture officer of AmplifyMe, I strongly disagree with what you're saying. I, I think you, you said earlier that this hedge fund situation we're in now, it's a war for talent.

Yeah.

And I think that the, I think that the, we'll discuss, you know, hedge funds have different strategies they deploy, but what's becoming increasingly more influential is quant strategies, and they require a certain type of personality. I think Ray Dalio is a dead dinosaur, and his culture's dead dinosaur. It's like, yeah, that's why Citadel is now bigger, more profitable. And I just think that it's just a hedge fund that had its day and you know, it's time to move over for the Renaissance and the, the, the other big more tech-oriented players.

So, so if it's, if it, if it's that obvious, why is Barr there? Why is he saying all these things? I mean, if he's still talking about—

one of the things he said was everything has to get rewired.

Yeah.

It's like taking a brain and a heart out of a human and then planting a new brain and a new heart. So to me, this is a war for talent for that. I mean, you're right, who's he saying that for? Because it's definitely not saying that for the client, because if I was the client, I'd go, what the hell are you talking about? Turn that 8% into 18% positive, mate. I don't care about that. But what he's saying is that that book that's come out that's absolutely like been very bad PR for Ray Dalio and consequently Bridgewater. You know, young people are reading this book, getting to know Bridgewater for the first time, who haven't been part of the financial crisis. Yeah, don't forget, you and I look back at the financial crisis and it's like, oh yeah, it happened yesterday because we lived it. Yeah, that was a long time ago, and the new talent was not part of that. And so they didn't hear the great calls and all this sort of stuff. All they hear is it's a bad place to work and I don't want to work there. And I get paid better with a better culture somewhere else. Somewhere like James, for example, would be the absolute opposite.

Yeah. No, it's a fair point. I'll take, I'll take your point. Okay. Well, let's see how he gets on. Um, and they're doing well this year. Because they're up 20% year to date, actually. So something, maybe a corner has turned and they've managed to finally get off the Ray Dalio bandwagon and reinvent themselves. Time will tell.

Well, I mean, if you— there is a book, it's called The Fund. So if anyone's interested in having a read about that, I think the author's got his first name Copeland, is the surname. But yes, worth the read for some of the behind-the-curtain situations that have happened at that hedge fund. But let's move on and let's talk a little bit then about the, the different types of strategies, because even with Bridgewater, I know two of their biggest funds were the Pure Alpha and the All-Weather Fund, which in themselves are quite different in terms of their thesis, I guess, from an investment philosophy. But let's talk about some of these other areas then, because I've got this really cool graphic and it kind of divides the hedge fund industry into strategy. And there's equity, long, long-short, multi, credit, macro, quant, and event-driven. So where do you want to start?

Well, yeah, there's lots of— I mean, I guess, where do I want to start? Let's say you've got some cash and your client's giving you some cash. You've got some capital, right? I need to invest it. And it's like, okay, what do I do? And, and the problem is, um, I actually don't know how many assets there are, but I know that there's something like 50,000 different assets, financial instruments that you could buy or sell, right? 50,000. And it's like, well, where the hell do I even begin? And so hedge fund will define itself by choosing normally one of these strategies, and there'll be a specialist in a, in a certain strategy. That's normally because the person who's set up that fund has come from another fund who specializes in that strategy, and that's how they've grown up in the industry, and that's where their experience lies. And more importantly, that's where their track record sits. And so when they come and set up their fund, their track record is born on this strategy, so they continue with it. So the most popular— and the original was long-short, equity long-short. And this is simply where you're basically scanning the equity horizon, you're doing all the analysis, and sometimes you might be sector-specific, sometimes not. But you're going to buy and go long stocks that you like, that you think are going to go up and outperform, and you're going to sell and go short those that you think will underperform. Okay, that's it. It's pretty simple. We said that that means you're hedged, and that's where the word hedge fund comes from. So that was the original strategy. I'd say the next kind of most popular is global macro. So this is then thinking about, well, and this is really where Ray Dalio comes in to a degree, right? This is thinking about the economics of it all. It's thinking about, right, how are economies performing? How's the global economy performing? How are the different individual economies within that global system performing? How's it all interconnected? And then there's this thing we, we know from history that the economy kind of, it doesn't grow in a nice stable linear way. There's the boom and bust cycle.

All right.

We call it the economic cycle. So you have booms and recessions, and this is where the speed at which the economy is growing or shrinking will vary. And then you need to throw in on top, right? What are the policy setters doing about the current economic situation? What's the government doing? What's the central bank doing? Because their job is to try and smooth out this cycle. They're trying to achieve slow, steady, stable growth, right? But they fail because there's human beings involved. So the global macro strategy is about, right, where are we in the cycle? And you basically go back and analyze all the previous cycles. And you have a look at how different assets behaved at this part in the cycle, or more importantly, I should say, how did assets behave? Yeah, in the next part of the cycle. And so, right, how did equities behave within the equity space? How did the different sectors perform? Which ones outperformed? Which underperformed? And ultimately you're saying the pattern's going to repeat. So I'll base my strategy today based off that historic analysis of cycles and how assets performed.

So surely that strategy though is increasingly more difficult. A, going back in the last decade, the invention of new monetary policy tactics, i.e., negative rates, QE, so on. And then B, you have something like COVID, which has never really happened in the modern market since. And so the cycle, the same, different, does the historical analysis now pay the same dividend it used to in that sense?

No, because we have just been through the weirdest economic cycle, certainly in living memory. You've probably got to go back to the, probably the Second World War to find another scenario that meant the economy just went off on a you know, weird pattern. So we've had the, the strangest economic cycle in living memory. And so yes, that's why most hedge funds have performed really poorly over the last couple of years. Um, it's just not panning out the way it normally does. Um, so yeah, global macros had a tough time of it for sure. Um, But look, it's historically one of the most popular strategies. Yeah, bad phase, but look, this cycle will normalize, right? And as COVID gets further in the rearview mirror, well, you would have thought it will normalize and go back to a more normal pattern. Well, we'll obviously have to wait and see.

From a characteristic of the hedge fund manager, is macro then more intellectually challenging against a long-short strategy?

I would— well, oof, got to be careful about how I answer that. I think it's a different type of intellect.

Right.

I would say, look, George Soros, we can't do a hedge funds kind of podcast without just at least briefly mentioning George Soros because in a way, He made macro sexy. And like talking about the best trades in history.

Oh, is this the pound one?

Yeah, he's kind of credited with the best trade in history.

Oh, you can't, you can't tee it up like that and not give it to us. So what was the best trade in history then?

Take yourself back to 1992. Okay. So how old were you in 1992?

9.

Okay. So you were obviously all over this then because you were following the front page of the FT and my little brokerage account. Basically, the UK had joined something called the European Exchange Rate Mechanism, which is basically the Eurozone version 1. Um, and the UK were in it. Okay. The problem was that, uh, the UK wasn't performing very well. Let's just say, and we were called the sick man of Europe. Our economy was underperforming, particularly Germany. Germany was booming and we were stuck in this fixed exchange rate mechanism like the Eurozone. We had our own currencies still. This was version 1, but all the currency exchange rates were fixed. Okay. Now, that's a big problem. If your economy is significantly underperforming the other economies in this system. Because one of the ways of— if your economy is underperforming, one of the ways of trying to get out of that is to cut interest rates, is to stimulate the economy. That tends to lead to your currency's value dropping, which is a good thing as long as it doesn't happen too quickly. it can give you a competitive advantage. Um, but if you're in a fixed rate system, you can't do that. You lose that, that kind of weapon to kind of get yourself out of trouble, right? And so George Soros, um, made a big, big, big bet because at the time the Bank of England was saying, we are not leaving this exchange rate mechanism, we are sticking with it. And they were trying to raise interest rates aggressively. To try and prop up the whole situation. It became a bit of a mess. But George Soros said, I don't believe you. Or he actually said, you're wrong. You might think you want to stay in it, but this is unsustainable. I bet that you, the UK, are forced to step out of the exchange rate mechanism. And I bet as you do that, your currency's value will collapse. Well, collapse is a bit strong. but go down really sharply. It will recorrect to where it should be, which is much lower. And the UK government were going, no, we're not. We're staying in. We're staying in. We're staying in. And George Soros said, don't believe you. Adding more to the bet. More to the bet. He was shorting the pound, built up this huge short position. Ultimately, he was right and it became unbearable and untenable. The UK stepped out. They were forced out. They had to exit. The pound's value dropped sharply and George Soros made $1 billion profit in a single day. Yeah, this is in 1992. A billion dollars in '92, that, I mean, I don't even know what the equivalent amount is in today's money, but he made a billion dollars in one day and he, and the story goes he broke the Bank of England. Yeah, right. And so very famous trade. And this is, this is kind of, in a way, it's a bit like, I'd say this is a hybrid between two strategies. It's macro where you're saying, right, I'm looking at the differential between two different countries and I'm making a bet that the exchange rate between the two currencies is incorrectly valued and I think it's going to move, right? You could also argue it's a bit of an event-driven strategy in a sense. So I'm kind of just briefly coming onto a different strategy here. Event-driven typically is about buying assets that you think are mispriced, where there's an event that's about to happen where you think the value of that asset is now going to correct and change. The typical stuff is like around M&A deals where if, I don't know, let's say for example, off the back of you and Stephen's Deal Room podcast talking about BHP bidding for Anglo America. So you might get a fund, a hedge fund might take a stance here. So they'll— so basically at the moment that first offer is— has been rejected by Anglo America, right? So what do you do here as a hedge fund? Do you buy Anglo America shares because you think there'll be an improved offer tabled at some point in the future, which will mean that the share price goes up even further? That's one event-driven play. You could think the opposite. Because look, Anglo's share price has gone up a bit here to price in some kind of potential deal. You might think that actually the deal will never happen, in which case this bump up in the share price is misvalued, and you might be going short, right? So there are actually two opposite trades in this same event situation, but both are event-driven trades, right? George Soros, in a way, it was an event-driven where he thought there's a mispricing. An event is going to happen that will see the price recorrect, and I want to profit from that correction.

Yeah. Within that event category, I was just looking, there's activist, opportunistic, and merger.

Right.

Kind of fits in as you described.

Yeah. Okay. Activist. That's an interesting— so talking about activist investors who will take up a large stake in a company, then they will kind of go on, get a seat on the board, actively trying to turn that business around, and therefore have a more hands-on role in lifting the, the asset's value higher. Yeah. Okay. Um, another strategy then, market neutral, or sometimes called relative value, but market neutral is a bit like long-short but with a difference. So market neutral is where you are taking up long and short positions Normally you're here, you're sticking— let's talk about equities. Normally you're talking about one sector. Now you're within a sector, um, and you know, your long Apple and short Nokia would be one of the best sort of kind of market neutral trades in my lifetime. So if you go back to the early noughties when Nokia were booming and dominant in terms of the hand— handset, um, telephone handset industry, but then Apple's iPhone came along and just steamrolled them out of business almost, right? So you would be short Nokia, long Apple, mid-'00s. That would be your market neutral play. Now, market neutral means it has to— your net— you need to be long the same amount of Apple as you are short, uh, Nokia, basically. So your net market exposure is zero. So this is a market-neutral strategy. Others, maybe we only need to do one more, to be honest. Well, maybe some others, but then there's quant, which has of course now become a dominant thing. And what I would say about quantitative strategies, quant really, to be honest, has fed into all of these strategies. So whilst you could argue it's one single strategy on its own, which it is when you consider things like high-frequency trading, That's kind of within the quant sphere, um, which is really about speed. And actually, I remember when I was trading— this goes way back— when I was trading in like 2004, I remember the firm I was trading for decided to try and set up a high-frequency trading team. And basically, they took the head of IT So that was the guy who was in charge of the, the computers, like literally, and put him in charge, said, right, build us an IT infrastructure, hire some PhD students, and let's go. We're gonna have a go at this high frequency game. Poured a huge amount, like millions into this initiative, ultimately failed and disbanded the group, you know, 2, 3 years later. But look, high frequency goes back to, yeah, that was like 2004. So it's been around for a long time, but that's more of a speed game, speed of execution.

Okay.

But quant. Yeah. I mean, look, and, and AI, let's just say, and actually, Bridgewater are trialing a new strategy, which is purely using AI. Now they've given no more detail than that. So what that even means, I don't know, but they're basically saying 100% of the decision-making for this small spin-off experimental fund, 100% of the decision-making will be made by non-humans, and it'll be AI entirely. So they're experimenting with whatever that means. But quant, like, you know, the whole industry, in fact, the whole world, right? Quantitative methods are coming in to improve and optimize our analysis techniques and ultimately make better investment decisions.

Yeah, so on that exact point, two of the biggest areas, subsets within quant, one is quant macro trading. So you mentioned before about looking at GDP, inflation, right, to predict economies. The idea on the quantitative addition into this is that then you can just kind of look at massive datasets to try and find, and using mathematical modeling to predict these macroeconomic trends. So it's kind of like putting your macro analysis on steroids using technology and data. And then the second biggest area is something called CTA, which is commodity trading advisor. And the difference between quant macro This is looking at, as I said, the macroeconomy, using information to enhance that decision-making. CTA is more about quant analysis, statistical modeling, and this is all to create algorithms to make trading decisions. Yeah, that's actually the biggest quant area. So if we were looking at the year-to-date performance, just having a quick look on 2024, So overall, AUM for quant is just shy of $400 billion, and CTA is $121 billion. So a significant portion of that. Second is Quant Macro of $106 billion. So yeah, between those two strategies sat within quant, they dominate really. But it's interesting because I was looking at the global macro compared to Quant Macro. Year-to-date percentage performance. So traditional global macro is up 2.9%. Quant macro is up 12.1%.

Wow.

It's interesting, isn't it? Because you think about what's happened so far this year. There's been this real big behavioral shift from we're going to cut 7 times, we're going to cut once. And there's this big kind of shift and the behavioral nature of us as investors leaning too far in, pulling too far out in terms of our perception of this change. Whereas I guess the benefit of the addition of quantitative methods is to stabilize some of that normal behavioral, I guess, impulse. Yeah.

And I think the human has failed here because again, it's back to that point. We look back at previous cycles, right? And our just, our nature is to assume these cycles repeat. And so here we were at the end of 2023 going, well, look, look at the data. Last time it was all like this, we, we basically had a recession. So a recession's coming. Look, the Fed are gonna have to cut. Look, the Fed told us they were going to cut as well, by the way. Um, and obviously that's all been fantasy land and, and not reality. And, and it looks like these quant models who don't care about the history as much, and they're not— obviously the behavioral side's not there, so they're just spewing out the data, and the data says no. The data says, hang on, we're not in a recession, we're not going to have a recession. And so they were, yeah, better placed to, I guess, call, predict this development where we've got a much stronger US economy than anybody, than any human was expecting.

Okay, one more then before we talk about the Korea side. Yeah. Have we talked about Multistrap, which is actually the second biggest on AUM? In the hedge fund industry.

Yeah. And this is so multi-strat. And I guess here we have to talk about Citadel, of course, because unfortunately for Bridgewater, Citadel have now overtaken them and actually by a huge distance, to be honest, and are now the biggest hedge fund in the world. So Ray Dalio has been superseded by Ken Griffin. So Griffin, he started his Citadel fund in 1987, or sorry, well, he started trading out of his dorm room as a 19-year-old at Harvard University. So he's kind of started his own brokerage account, but he actually founded Citadel, the business, the hedge fund in 1990. Anyway, he's grown it and it's now, so he, and my data's slightly out of date. I couldn't get anything. Anthony Cheung, you might be able to help here, but I know that in 2023, um, Citadel's assets under management were about $340 billion, making them the number one, the biggest hedge fund on the planet. Bridgewater is still number two, but they're at $200 billion. So not only has Citadel overtaken them, they've now just become miles ahead as the, as the leader. Um, but They've brought to the fore this multi-strategy idea. You've got others on their coattails trying to replicate it, like Millennium, for example. But this multi-strategy is kind of basically, let's not be specialists in one strategy. Let's basically do what? Do everything. And the idea here is that it's more, you've got a, therefore, a more diversified set of strategies that you are running. So that you're not vulnerable in any one particular year. Like, let's say in 2023, if you were running a macro, global macro fund, almost impossible to make any money because it was so hard to pick. And there were some ups and downs and pivots, and that's why Bridgewater's, you know, Pure Fund ultimately failed, right? So 2022 and 2023, really difficult for macro, but it's fine. Yes, Citadel do macro.

They do.

But then they do long-short, and they do market neutral, and they do event-driven, and they're doing all different asset classes. And so it's a more diversified set of approaches. I'd say Citadel, particularly within their multi-strategy, you'd probably say relative value and macro are probably the two dominant, but also with a big strong overlaid theme of quant, you know, being the driving force behind everything that they do. Um, yeah, that's really come to the fore as now one of the biggest, if not the biggest category.

So let's talk about Citadel a little bit more because that is someone that we work with quite closely and we know their kind of hiring and training of their interns and new, new starters. So talk through then, what, what would be the different type of streams that students could go into at somewhere like Citadel?

Yeah. So Citadel, well, so they're the biggest hedge fund, right? So they are therefore really by definition the biggest employer at a graduate level. And so they do run this thing called Discover programs, which is basically a spring week. The, the banks might call it a spring week or they'll call it Discover, which is like a couple of days when you're in your first or second year at university, all right, which is your, it's your first dip your toe in, come and meet us. You've got to apply for this, right? So Citadel will be screening all the CVs and whatever, and they'll choose what they think are the best candidates. And then they'll invite like 100 of them to the New York office, 100, right? Come on down to the London office, wherever, whichever region, right? So really Citadel are employing in New York, they're employing in Chicago, They're employing a bit more in Miami specifically now. And then it's London, it's Hong Kong, it's Sydney. Then we're getting a bit more now in Paris, for example. So they're branching out a little bit, but they run these Discover 2-day events in your first year or second year. Then if you do well there, or if you separately apply, they'll run a summer intern program. So we're going out to Miami in, well, start of June actually. For the start of the US's summer intern program. Well, on the Citadel, the hedge fund side, because there's Citadel Securities as well, which is also owned by Ken Griffin, which is actually, that's not a hedge fund, that's a market maker. So that's entirely separate here. Just Citadel, the hedge fund, they'll have about 150 summer interns, um, begin their program. And typically they're across 5 different streams. So you'll have software engineers. So they're your computer science students, your coders, your programmers. You'll have quant research. So that's more your kind of math whiz kids, um, building models, taking in data, you know, conceptually coming up with the the methodology, then the software engineers will go away and code it all and build the model and the system, right? So that's the kind of techie stuff. Then you'll have the more traditional equity traders, or they have this division called GFI, which is Global Fixed Income, which actually don't just trade fixed income, believe it or not, but there they trade relative value strategies where they're long and short different bond durations and so on. So that's more a bit more traditional where they're looking for people who have maybe done finance and economics and, you know, are really on top of the global macro situation and they're more kind of human traders, if you like. And then finally, they have this enterprise stream, which is everything else, support functions. So it's risk management, you know, it's whatever, it's HR, it's operations, that kind of stuff. So they are recruiting and there's a space, there's about 25 of them on the summer intern program for the support functions. So that's the system. But the issue is that's the biggest player. I'm fine. They're akin, equivalent to an investment bank, the big investment banks in terms of the number of people they're employing. The issue is that the size of these firms, you know, they do drop quite sharply once you start going down the list. I mean, Citadel at, well, it'll be more than $340 billion now. That was the 2023 figure. Bridgewater, $200 billion. Then you've got someone called AQR Capital Management, $120 billion. DE Shaw, $109 billion. You got Renaissance Technologies, Jim Simmons. I mean, he launched in 1982 and he was a mathematician, so he was kind of very much I guess a trailblazer for the kind of mathematical quant style of, of doing things. You got Two Sigma at $70 billion and so on, right? But my point is that as you go down this list, they become much smaller. Therefore, they're hiring a lot less people. So it is, I guess, this, the number of jobs available at a grad level within the hedge fund space is dramatically lower. Than the number of jobs available at a grad level in the investment banking space or the accounting Big Four, or, you know.

Just having a quick look. So Citadel has, as of 2022, so it's probably gone up, circa 3,000 employees. I think J— well, I know JP Morgan has 45,000 people who just work in their technology division. And Renaissance Technologies, who's one of the biggest hedge funds in terms of AUM and performance. Yeah, sophistication. They have 310 employees.

Yep. So they were all about the sort of quant and sort of computer-led strategy right from the beginning, day one. Yeah.

So here, here is fundamentally for those who are completely new to this, the big difference, whereas on a You go onto a, a Citi trading floor, i.e., Citigroup, and there'll be a trading floor of 250 salespeople, essentially traders who are on the phone talking to clients, facilitating flow, getting a little clip on each trade. Whereas at Renaissance, they're doing huge sums of money here, but it's almost entirely automated.

It depends what you want to do as a business strategy, right? I think Jim Simmons purposely has run a very lean ship. What that means is his assets under management has grown at a slower rate than Citadel's. So what do you want? Do you want more and more and more assets under management? That's your play. That's your strategy. Well, fine. You're going to have to build out a workforce that can get out there and market and sales and all the rest of it. Or are you content running only $100 billion? And actually, the guy, back to where we started with Bridgewater, interestingly, so the new CEO, Bardia, he did actually say, and I've got a quote here, which I'm going to dig out quickly, with the Pure Alpha fund, he basically said, look, it's got a bit too big in terms of because I think it was a $90 billion at one point. It's— oh, sorry, it was $80 billion, right? And he said, look, it's got a bit too big and unwieldy. So he said that we are specifically going to now cut that down to $50 or to $60 billion. And his quote was, we want to be the best, not the biggest.

That's because you can't be the biggest anymore, mate. That is such— that's laughable. See ya. I like Ken Griffin sitting there sucking his like coconut on his Miami beachfront house.

So look, back to the— look, if you want a job in the hedge fund space, they mainly recruit computer science and like maths and STEM students or specifically PhDs, right? Then there are less, but they exist, but less roles available if you're just a, you know, finance, economics, you know, the macro guy, you know, they are available, but there's a lot less of them. So it's hard to get in at a grad level to these firms.

So at a non-grad level, let's say I've been an analyst for 3 years, 2 years, I'm now an associate working at a US bulge bracket bank in a trading seat. That used to be quite a traditional pivot, going from that into a hedge fund. Does that still exist to your knowledge?

It does. So yes, a lot of hedge funds— not, not the Citadels, I don't think, So more about the quant, or maybe I'm wrong, I don't know. But normally the pathway into a hedge fund would be, right, go and get some experience on the sell side. And I had a friend, good friend of mine who was an equity research analyst at UBS. So there you're learning about obviously deep dive analyzing companies, modeling out their valuations and then saying, right, hang on, I think this company is worth X, but its share price is currently undervaluing it in my opinion. Therefore, I'm going to issue a buy recommendation and that research gets packaged and sold to the buy side. Okay. Well, you've basically, there's only one more step needed as a hedge fund trader. That's to then actually buy the shares, right? So they'll poach these equity research analysts, come and sit on our trading desk. Do exactly the same procedure, you're analyzing businesses, finding companies that are undervalued, but then actually just go ahead and take the risk as well. So go ahead and buy the shares. So that would be historically a typical way into the hedge fund side.

And I think that does still exist, but wasn't it MiFID that changed the rules around the way that sell-side research was distributed? Because it used to just fly around desks quite openly and freely, as I would, pitching for business. Whereas the new regulation in recent years is you have to pay for what you see and the conversations you have from buy side to sell side. So an obvious step is I'll just take your friend at UBS with his colleagues in that entire equity research team and I'll just plug them in to the long-short equity process of my hedge fund, and that just houses them. What is basically taking one team, just parking them into your infrastructure.

Yeah, exactly.

Cool. All right, well, look, what I'll do is there's a couple of things that if you did enjoy this kind of subject, I don't want to bash Ray Dalio too much because there is a video but if you're new to finance, if you just go onto Google and search 'How the Economic Machine Works,' it's very good. So, you know, I did a business management degree when I think back to university, so economics was very lightly touched upon in my, my academic career. I thought that 3 or 30-minute video did a better job probably than explaining a lot than those modules that I did at university, to be fair.

Yeah.

And it's all done in an animated cartoon, so it's super digestible and really easy to understand. It's actually really good. And he's got a little series because this is obviously what Ray does now.

Uh, it's a content producer. Yeah.

I don't like his books for the same reason you don't, but the cartoon explained of how the economy works, they're all really fantastic. The other thing I'd recommend is there's a multi-strat fund that we didn't mention called Point72. Yes, Point72 do discretionary long-short, macro, systematic strategies, so lots of different ones. They have a really good podcast actually called, um, How to Become a Hedge Fund Analyst.

Yes.

So after you listen to our show, I would recommend you go and check that out because there's some really interesting conversations and they, they talk you through it. And really that's part of their sales pitch because Point72 do employ also grads. They have something called the Academy that they run, which they hire into. I think it's mainly North America, but yeah, if you're in the States, that's also worth checking out. Cool. Piers, thanks very much for your time and have a good weekend.

No worries. Have a good weekend.