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

Summary

Odd Lots Podcast Episode Summary
Title: How You Get and Actually Keep a Job at a Multi-Strat Hedge Fund
Hosts: Joe Weisenthal and Tracy Alloway
Guest: Brian Yelvington, Consultant at Carrington Fox and Former PM at Multiple Multi-Strat Funds
Release Date: July 7, 2025

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Introduction

In this episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve deep into the intricate world of multi-strategy hedge funds. With the help of Brian Yelvington, a seasoned consultant from executive search firm Carrington Fox and a former portfolio manager (PM) at several multi-strat funds, the discussion sheds light on the pathways to securing and maintaining a position within these complex financial institutions.

Understanding Multi-Strategy Hedge Funds

Joe Weisenthal kicks off the conversation by expressing curiosity about the mechanisms behind decision-making in multi-strat hedge funds, highlighting gaps in common understanding despite extensive discussions on compensation, alignment, and risk management.

Tracy Alloway acknowledges the lack of perspective from active PMs and emphasizes the importance of learning from those who have firsthand experience in hiring and retaining talent within these firms.

Path to Becoming a PM at a Multi-Strat

Brian Yelvington [04:52]:

“I’ve been one of the few people who’ve been both a PM and helped bring PMs into a large multi-strat. I’ve seen it from junior analyst to senior PM and the gatekeeping involved.”

Hiring Process:
Brian explains that established PMs are typically recruited through business development (BD) teams or executive search firms. The process is highly selective, often relying on personal networks and proven track records.

Evaluating Talent:
When assessing potential PMs, firms look beyond mere performance metrics. Brian emphasizes the necessity of a well-defined "edge" – a unique strategy or insight that a PM brings to the table. He states:

“Good PMs have boiled down their edge into a concise, elevator pitch because they’ve refined their strategies through years of experience and numerous mistakes.”

Articulating Your Edge

Joe Weisenthal:

“How does someone articulate an edge during an interview? What does that sound like?”

Brian Yelvington [08:12]:

“They should be able to explain their edge in two or three sentences, clearly identifying the alpha they aim to generate. It varies widely – from anticipating monetary policy shifts to understanding niche corporate actions.”

Tracy Alloway [09:28]:
Discusses performance metrics like Sharpe ratios and the difficulty firms face in verifying these numbers due to confidentiality within hedge funds.

Role of Analysts in Multi-Strat Funds

Joe Weisenthal:

“What does an analyst actually do in a multi-strat hedge fund?”

Brian Yelvington [12:17]:

“Analysts are responsible for building surveillance specific to their pod's needs, covering particular markets or industries. Their role involves idea generation and backtesting, tailored to the pod’s strategy – be it macro, quantitative, or other specialized trades.”

Tracy Alloway adds that analysts contribute to generating actionable insights and support PMs in executing their strategies effectively.

Performance Metrics and Due Diligence

Tracy Alloway [09:46]:

“What figures or numbers are available to assess a potential PM’s performance?”

Brian Yelvington:

“Profit and Loss (P&L) data are tightly controlled within firms and rarely shared outside. PMs can provide proof of their achievements, but direct verification is often restricted by employment laws.”

Managing Drawdowns and Risk

Tracy Alloway [25:32]:

“How does a major drawdown impact a PM’s career and confidence?”

Brian Yelvington [30:38]:

“A significant drawdown can lead to job loss, especially if it violates the PM’s own risk guidelines. The aftermath varies – some may receive support or guidance, while others face immediate termination.”

Risk Management Constraints:
Brian explains that PMs are often restricted by drawdown limits, which influence their trading behavior. Exceeding these limits, even with profitable trades, can result in losing their position.

“You might have a stop-out at 7%, but capital reductions can occur much earlier, forcing PMs to become pickier and trade smaller positions.”

Psychological Impact and Trading Behavior

Brian Yelvington [26:51]:

“Experiencing a losing streak can force PMs to either take more risks to recover losses or become overly conservative, leading to underperformance.”

Joe Weisenthal:
Draws parallels between trading discipline and behaviors exhibited in poker, emphasizing the importance of emotional control.

Brian Yelvington [34:58]:

“Great PMs review their performance meticulously, akin to athletes watching game footage, ensuring they learn from every trade regardless of outcome.”

AI and the Future of Analysts

Joe Weisenthal [37:46]:

“Can AI replace analysts in multi-strat hedge funds?”

Brian Yelvington [38:23]:

“While AI can handle many analytical tasks, the nuanced storytelling and strategic insights required in trading necessitate human expertise. AI can augment but not fully replace analysts, especially in creating complex trade narratives.”

Avoiding Groupthink and Ensuring Independent Strategies

Tracy Alloway [40:46]:

“How do multi-strat funds prevent groupthink and ensure that PMs maintain uncorrelated strategies?”

Brian Yelvington [41:36]:

“Firms often limit communication between pods and structurally prevent the sharing of trade ideas. Seasoned PMs focus on their own strategies, resisting the urge to mimic others, ensuring diversification within the fund’s overall strategy.”

Continuous Improvement and Post-Trade Analysis

Brian Yelvington [35:04]:

“Top PMs regularly conduct postmortems on their trades, analyzing both successful and unsuccessful decisions to refine their strategies.”

Joe Weisenthal [34:48]:

Highlights the importance of systematic review processes, drawing analogies to poker solvers used to analyze game play.

Conclusion

The episode concludes with hosts reflecting on the insights shared by Brian Yelvington. They emphasize the complexities involved in both securing a role at a multi-strat hedge fund and sustaining it through disciplined risk management, continuous learning, and maintaining unique, uncorrelated strategies.

Joe Weisenthal:

“Brian Yelvington, thank you for shedding light on how to navigate careers within multi-strat hedge funds.”

Tracy Alloway:
Encourages listeners, especially those aspiring to enter the field, to apply the discussed principles and reach out with further questions.

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Notable Quotes

• Brian Yelvington [04:52]:

  “I’ve been one of the few people who’ve been both a PM and helped bring PMs into a large multi-strat.”

• Brian Yelvington [08:12]:

  “They should be able to explain their edge in two or three sentences, clearly identifying the alpha they aim to generate.”

• Brian Yelvington [34:58]:

  “Great PMs review their performance meticulously, akin to athletes watching game footage, ensuring they learn from every trade regardless of outcome.”

• Brian Yelvington [38:23]:

  “While AI can handle many analytical tasks, the nuanced storytelling and strategic insights required in trading necessitate human expertise.”

• Brian Yelvington [41:36]:

  “Firms often limit communication between pods and structurally prevent the sharing of trade ideas.”

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Final Thoughts

This episode of Odd Lots provides a comprehensive overview of the dynamics within multi-strategy hedge funds, offering valuable insights for both aspiring professionals and those interested in the operational aspects of these financial entities. Through Brian Yelvington’s expertise, listeners gain a deeper understanding of the delicate balance between performance, risk management, and individual strategy that defines the success and longevity of a PM within these competitive environments.

Transcript

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[Joe Weisenthal]

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

[Tracy Alloway]

And I'm Tracy Alloway.

[Joe 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 the pods make good trade.

[Tracy 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.

[Joe Weisenthal]

I have a feeling that avoiding getting fired is a really big part of the story. You want to do well, right? And you want to make money and all that. But I also get the impression that you just want to hang onto 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 onto that seat, avoiding being part of any given call, avoiding having your name show up on Bloomberg in a story that gets Reed spiked about so and so out after losing 260 million or whatever in a trade.

[Tracy 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.

[Joe 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 Ronan 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 gonna continue our journey of learning more about these big.

[Tracy Alloway]

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

[Joe Weisenthal]

Oh, let's put it that way. 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 this, like Joe and Tracy out after, you know, after one month of underperformance on the podcast. Oh, yeah.

[Tracy Alloway]

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?

[Joe 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 bonus. 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. Brian, thank you so much for coming on odd.

[Podcast Announcer]

Lots of thank you for having me. Great to be here. I always enjoy the podcast and enjoy hearing the varied subjects you guys come up with.

[Tracy Alloway]

Oh, thank you.

[Joe Weisenthal]

We love to hear it. We're going to clip that and put it in the mix. Before we go on, why don't you just give us the real brief version of 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.

[Podcast Announcer]

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 in to a large multi strat. I left the risk taking world and went to work in the business development area. Business development is just a badly disguised 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 senior PM to the person who's the necessary, if not sufficient gatekeeper at a hedge fund.

[Tracy Alloway]

Hmm. 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 multistrat, 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?

[Podcast Announcer]

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 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.

[Joe 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 what'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 how you actually would identify if Tracy is good at her job.

[Podcast Announcer]

Exactly. Well, first, a caveat. You're never going to know. The reason that past performance is not indicative of future returns is because it's the future and we never know how somebody's going to act. So what I'm going to do during our first conversation, Tracy, is I'm going to ask sort of like you guys did, a little bit about your background. I'm going to 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 going to 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.

[Joe Weisenthal]

Can you pause? Just give me if that's an easy part. What is? Cause 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?

[Podcast Announcer]

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 find. It may be that they really anticipate the, the shifts in monetary policy for a credit fund. It's that maybe they understand 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 thought of it. The bad answers tend to be something that relies on experience. I'll note that there are 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.

[Tracy Alloway]

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

[Podcast Announcer]

It's difficult. And the, 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.

[Tracy Alloway]

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

[Joe Weisenthal]

This is good.

[Podcast Announcer]

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

[Joe Weisenthal]

Okay.

[Tracy Alloway]

All right.

[Podcast Announcer]

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. At others, I would have kind of perfect insight. P and LS 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 past comp or something. They can't ask, but you can certainly say, hey, by the way, here's proof that I did what I did. That's your prerogative.

[Joe Weisenthal]

Wait, why can't they ask?

[Podcast Announcer]

I believe that's an employment law.

[Tracy Alloway]

You're not allowed to ask.

[Podcast Announcer]

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

[Joe Weisenthal]

Tracy, I've brought it up 100 twice. I told you I have talked about the time that I interviewed at a prop trading firm, right?

[Tracy Alloway]

Many, many times.

[Podcast Announcer]

Joe.

[Tracy Alloway]

Yes. Are you going to tell the story again? You can if you want.

[Joe 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 four people who got offered the job, and then for some reason, I didn't take it.

[Tracy Alloway]

Didn't you work at a sandwich shop in the.

[Joe Weisenthal]

And I was making sandwiches at the Wheatsville Food Co Op at the time, and all my friends were working there. And 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 first you gotta Become a pm. What does an analyst do? So a PM has a POD and they have analysts in their podcast. What does an analyst actually do?

[Podcast Announcer]

Just as with the street, you know how they're analysts and function and analysts in rank, if you will. Bods will generally have analysts covering 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 and you're being eyes and ears and you will have specific projects. You know, 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 project, probably pretty busy right now, presumably you.

[Tracy Alloway]

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, there's, you know, there.

[Podcast Announcer]

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 analogs. You know, how has policy responded in the past? If you are in a more quantitatively oriented pod, maybe something that does some form of arbitrage. Yes, lots of back testing, lots of mathematical competency. But it's interesting who I've seen make the jump. I've seen a salesperson who 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 them for us Analysts, public machine analysts. So you 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 of 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.

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[Tracy Alloway]

If I am running a POD shop, what exactly am I looking for in terms of potential pm? So I get 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?

[Podcast Announcer]

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 sure the 2 year versus the 3 year DVO1 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 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.

[Joe 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 multi strategy hedge funds. I would love to get my door in one. What would be like, what should I do to get that first role?

[Podcast Announcer]

There are a few firms that, that hire direct from college, direct from university. Those are very, very small programs. Normally there's 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 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 I no longer just want to make markets, I to trade my own risk.

[Joe 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.

[Podcast Announcer]

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. I think that everybody is kind of concentrated on the. I want to be coming up with ideas that go into the book and you sort of grow into that slowly. But if you're somebody who has read the history or done the work or researched 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 to high yield distress pod. You're not going to get that I've got the con kind of job right away. So you need to be useful in the job you're applying for.

[Tracy Alloway]

And then you kind of touched on this before. But I would love to hear more. What are the pools that multistrats 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 us, maybe get a little bit more experimental and start diversifying into other industries to draw PMs from.

[Podcast Announcer]

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 a definable edge. And we were talking a little bit about the process of interviewing. Part of what somebody is looking for is 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 10x through about 2020 and since then now we're between 14 and 16 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 look at. Fifteen years ago, no multi strat traded munis. Most all of them do. Now there were certain businesses like index rebal, things of that nature, basis type trades that once were the exclusive province of the street. And now because the ability of a lot of these multi strats to effectively use their balance sheet, they can engage in those businesses.

[Joe Weisenthal]

Right. This is one of the themes that's come up is this 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. 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.

[Podcast Announcer]

You can essentially think of working for a multi strat as you're running your own business, you're 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 two terms. You'll often hear the term capital thrown around. Tracy manages 700 million at XYZ and Joe has 50 million at ABC. That sort of thing. The truth is those aren't really easily comparable numbers. 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 3 or 4 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 5 if you give back. Suppose your stop is 7. If you give back 7, 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 beat up money on the year when it happens you just gave back too much of your sort of new money.

[Joe Weisenthal]

So actually explain that further A. Why would you fire someone who's manage 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 losing money happens, if the person has talent, why the quick fires?

[Podcast Announcer]

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 fund by fund basis. In other words, 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 to trough number. They're perfectly aware aware of it. Or perhaps there's another opportunity in the market to replace them with someone better. They're always looking to optimize their portfolio of risk takers. 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 just don't want to be that person who experiences that 5% of the time drawdown in your first few months in a new font.

[Tracy 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 year six or something, maybe it doesn't matter. So much. But how embarrassed am I when that happened? And am I publicly shamed within the organization for this happening or how does it work exactly?

[Podcast Announcer]

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 as the marketplace views it. It's going to feel awful to the pm, right? You never want to be on the screen for a But whenever you see somebody up there with $100 million loss, that means they had 100 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.

[Joe Weisenthal]

This goes fits with something one of my beliefs that a billionaire is someone who either has is positive $1 billion in net worth or negative 1 billion in 1 billion in debt. Cuz you have to be like 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 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?

[Podcast Announcer]

I hate to do it depends, but it sort of depends on where you're at. Because even though common drawdown for limits are usually somewhere between 7 and 10% for what's called a stop out, you might end up getting your capital reduced well before that at three and a half or five. And that makes it really, really hard to come back. The key is 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. There are a lot of funds that have internal coaches, psychologists, that's Wendy Rhodes, people who do real things and certain firms will sit you down and talk to you or they'll make you take a time out. 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 really impacts your risk taking tolerance. I think one of the best things that 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. 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. Over trading is really common. I'll give you, for example, people coming from the sell side almost always over trade 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. Not only that, but facilitation desk on the sell side. They lose money if volume 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 tell me about your biggest drawdown. What did happen? H when was it? What was going on, what happened, what you do? And the sell side traders 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.

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Us in Atlanta or via livestream on Aug. 12 for Bloomberg's Business Value of AI event and networking reception. This event will gather business and technology executives to share their experiences and provide insight into how to best use data to optimize the customer experience. You'll also learn how customers companies have successfully implemented AI agents that have led to improved productivity and profitability. This program is proudly sponsored by IBM. [e-mail] AI Atlanta Brian, tell me about.

[Tracy Alloway]

Your biggest drawdown and what it was and what you did.

[Podcast Announcer]

Oh well, my biggest drawdown was losing my job. I can't name numbers, but essentially I violated my own risk. I usually never speculated on outright volume, and I had a long volume 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 volume and therefore didn't make much money. Got hit on volatility at 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. Of verifiable information out there that always sounds very suspect to people. I wish I could be more colorful for that.

[Tracy 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?

[Podcast Announcer]

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 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 100 million bucks. Other than those two situations, don't ask for things.

[Joe 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, do they know it? Do they feel differently? Do they get some sort of acidic taste in their mouth? When I go on tilt, when I play poker, I always sort of know it, but I can't help myself anyway. I just do it and I go all in and I know. And then I have to embarrassingly walk out of the table. What does that feel like? Talk about what's going on in someone's brain when they're taking these risks that on paper they shouldn't be.

[Podcast Announcer]

Well, usually you only recognize it in the rear view. If you slow down and think through the trade, you sort of 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 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. But it isn't 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 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.

[Joe 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?

[Podcast Announcer]

100%, as a matter of fact, if you guys have never had Brent Donnelly on, he wrote a book called Alpha Trader and I've probably never seen that information written down in one place before.

[Joe Weisenthal]

But we should have him back on or something to talk about. Just that. But tell us more about it from your perspective.

[Podcast Announcer]

Yes, and that is part of the other process, like we mentioned edge, but 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 tape 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.

[Joe Weisenthal]

Hmm.

[Tracy Alloway]

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

[Joe Weisenthal]

A better better.

[Tracy 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?

[Joe Weisenthal]

Yeah, they love this stuff.

[Tracy Alloway]

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

[Podcast Announcer]

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 most people call probabilistic terms or thinking 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.

[Joe Weisenthal]

I just have one last question and it goes back to the role of the analyst. And you mentioned, oh, maybe an analyst could be valuable if they really know the history of what happens if they're X or Y. I can just look that up on 03, on ChatGPT or perplexity these days. How realistic is it in your view that 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.

[Podcast Announcer]

I think there's lots of things they can do and obviously 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 what did the dollar yen do the last time the Fed hiked? It might be something more like what was a red screens puts puts steepener doing the last time the Fed hiked, which you're going to require a lot of modifications to those AI models. 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.

[Joe Weisenthal]

Oh yeah, that's true. And a lot of them also sell cardboard boxes and so they benefited from E commerce. Those same companies actually.

[Podcast Announcer]

Absolutely. Georgia Pacific is probably huge 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. 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 street porn, which is the market wizards books or any of those types of things. 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 one of these AI models market questions, and that person is going to get built up. We're already seeing increase for heads of AI at several different funds, and I think that that's going to continue as they explore more and more what they can actually do with it. They have no problem spending money on either the AI or the human being. It will ultimately come up to who can perform.

[Tracy Alloway]

So how do you avoid, I guess, groupthink 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, 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, yeah, how do people avoid that group think aspect and make sure that everyone's doing, you know, new stuff kind of independently?

[Podcast Announcer]

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 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, 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 bank is not as prevalent as you would think because it's structurally prohibited in some places. In 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 the other part of it is on the fact that they don't want to be seen as copying the next guys trades.

[Joe 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?

[Podcast Announcer]

Yeah. A former boss of mine used to say there's never been a risk management framework that a smart trader couldn't outwit.

[Joe 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?

[Podcast Announcer]

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, 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.

[Joe Weisenthal]

Okay.

[Podcast Announcer]

So you can't really deviate from your mandate too much.

[Joe Weisenthal]

It's kind of a. I'll just find a credit spread that's correlated with the rail. Seriously? Yeah.

[Podcast Announcer]

Or, or you know, there are a lot of ETFs that basically contain macro trades.

[Joe Weisenthal]

Yeah.

[Podcast Announcer]

If you will. And I have often wondered, you know, are those there so that mut 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 people are going to hear about it.

[Joe Weisenthal]

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

[Podcast Announcer]

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

[Joe Weisenthal]

Tracy, If I were like young, I think I. 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.

[Tracy Alloway]

There'd be no odd lots.

[Joe Weisenthal]

Yeah.

[Tracy Alloway]

That's so sad.

[Joe Weisenthal]

It'd be a different part, you know, Like, I feel like 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. You know, 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. I used to work at a multi strategy hedge fund. Yeah, yeah, yeah, Well, I used to be a trader. Anyway, sorry, keep going.

[Tracy Alloway]

Joe, how many times have you brought up that interview with the trading company? On this note? Yeah, okay, 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 a bunch of multi strats survived April pretty well. So I guess we'll see.

[Joe 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 trade is secretly this person's trade in disguise, if their return profile looks too similar, that probably sets off some red flags.

[Tracy Alloway]

We gotta talk to a risk manager, don't we? Yeah, we should do that.

[Joe 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.

[Tracy Alloway]

All right, shall we leave it there?

[Joe Weisenthal]

Let's leave it there.

[Tracy Alloway]

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

[Joe Weisenthal]

And I'm Jill Wiesenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez, Erminarmond, Dashiell Bennett at dashbot and Cale Brooks at Kale Brooks. For more Odd Lots content, go to bloomberg.com oddlots where we have a daily newsletter and all of our episodes episodes and you can chat about all of these topics 24. 7 in our Discord Discord GG oddlots.

[Tracy 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.

[Podcast Announcer]

This is an I heart podcast.