How Hedge Funds Discover the Next Superstar Trader

Joe Weisenthal (0:03)

Bloomberg Audio Studios.

Tracy Alloway (0:05)

Podcasts, radio, news.

Joe Weisenthal (0:20)

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

Tracy Alloway (0:25)

And I'm Tracy Alloway.

Joe Weisenthal (0:26)

Tracy, do you know, sometimes I wonder, like, you know, one in the morning, if I can't sleep, I think to myself, in a different life, could I have been the next Steve Cohen? No, for real, though, and I don't, you know, need to talk about it. There's a lot, and I've brought it up before. You know, I did get an offer at a prop trading shop right after college to be a stock trader at this place where they were going to let you do your capital. And I think Steve Cohen started off like as a prop trader at some shop before being one of the great hedge funders of all time. And I didn't take that job for reasons that I still can't explain to myself 25 years later. But I was wondering whether could I have cut it? Maybe I could have been a good trader. I don't know.

Tracy Alloway (1:07)

It's good you have a healthy level of self-confidence, Joe. When I lay awake at night, I think like, oh, shoot, what? Did I say something stupid on the podcast? And that's what keeps me up. But yes, good for you, Joe.

Joe Weisenthal (1:19)

No, I don't really think I could have. And I actually do not think I would have been a good trader. I don't think like that. I'm not that good at poker or other things. I'm not a natural better. I don't do like sports betting. I don't think that. But I do sort of, you know, wonder about what my life had been different if I had said yes to that.

Tracy Alloway (1:38)

Yeah, fair enough. I mean, we know we know from multiple episodes of the podcast this year alone. Yes, like there are a lot of hedge fund traders out there, especially in multi-stratts, who seem to be making a lot of money. And everyone's sort of talking about them up until recently, maybe. I should say we're recording this on August 7th. So maybe those bonuses look a little bit less this year given the market sell off. But up until this month, people seem to have been doing relatively well. And there was all this intrigue and interest in the world of traders. And I'm sort of curious. This has come up a couple of times now. But what makes a good trader? And how are traders actually evaluated? Because my impression was always like, okay, well, it depends on how much money you make. But what's the time frame for making that money? And then also, what about people who are working in, for instance, these particular pods who are doing one specific thing? Like, what is the benchmark against which they are judged?

Joe Weisenthal (2:40)

You mentioned that maybe they're not making so much money this week or this month. But Tracy, I think we're told all the time, they're so neutral on everything. They're market neutral, they're beta neutral, they're neutral every factor you can think of. Why should they be losing money right now? They're supposed to be neutral all of this stuff.

Tracy Alloway (2:56)

Yeah, I'm sure they're making loads, Joe. I'm absolutely sure.

Joe Weisenthal (2:59)

No, but you're right. And look, we've been doing a lot on hedge fund structure, and we did that episode with Giuseppe Pagliolago, and we did that episode with Rich Falk Wallace, various aspects of how hedge funds measure risk and try to isolate alpha and all this stuff. But there are just so many questions in my mind. I feel like we're just scratching the surface because we haven't even really talked about idea generation. So it's one thing to talk about, like, okay, here's how you factor out all these exposures that you don't want to have, like market beta, et cetera. It's another thing to talk about, like, okay, but how do you pick the stocks to buy or go short?

Tracy Alloway (3:37)

Well, we have gotten into this a little bit, but you're right, there's more we could do. There are all these questions about, like, how do you size your positions? And if you're convinced that one thing is going to be the next big thing, then why don't you just have, like, 100 percent position in it, right?

Joe Weisenthal (3:51)

How do you make money if you can't just go 100 percent leverage long in video?

Tracy Alloway (3:54)

In video, yeah.

Joe Weisenthal (3:55)

Anyway, so there's a lot more we can do. But to my original very egotistical start to this episode, I do wonder like-