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Michael Platt started trading at the age of 13. He had a clear idea of what he wanted to do later. Even at that age, with his grandmother who was alert on the subject, he bought shares. He subscribed to a magazine called "Investors Chronicle" and read articles about financial markets, option trading and business analysis. To make his investments, he targeted companies that were going to go public and then sell them quickly. Thanks to this technique, he pocketed £25K. Then, from high school to university, Michael managed his own trading account. But in 1987, he lost 50% of the value of his portfolio due to the 1987 crash. As part of his career, he went to the London School of Economics in 1991 and joined JP Morgan as a trader in bond derivatives. In 2000, he decided to take off by resigning from JP Morgan and creating his Hedge Funds called Blue Crest. In 2012, the company managed $29 billion in assets. What were his best performances? Thanks to which technique did he get these results? Let's look at this in detail.
Unlike many, 2008 was the most successful year for Blue Crest. But despite this, investors were withdrawing their money because they were losing money elsewhere, in other Funds and therefore wanted to recover liquidity. When investors returned after the crisis in 2010, net capital inflows to hedge funds amounted to USD 55 billion. Blue Crest recovered 1/9 of these new entries, or $6.1 billion.
“We were making 500 million dollars a month and for several months we had to pay back up to $1 billion to our customers."
The use of the OIS (Overnight Indexed Swap) index was instrumental in identifying that the market would turn around. The OIS is an interest rate swap. This consists in exchanging (1) the 1-day LIBOR financing rate for (2) a fixed interest rate. Rate 1 is the interbank rate, in other words the rate at which commercial banks lend to each other. Rate 2, which is fixed, is for a 90-day period. The difference between these two rates represents the level of the illiquidity premium. If you borrow money over a 90-day period, it will be more expensive than if you borrow money every day, 90 times over 90 days. Thus, the creditor will charge a higher interest rate if he lends you 90 days because he will no longer have the freedom to enjoy his money, unlike 90 90-day loans, where at the end of each day, the creditor finds his money. In fact, this indicator is a good thermometer of market health. Usually, the LIBOR - OIS result is almost nil because the counterparties trust each other. But when interest rates rise, when liquidity declines and counterparties fail, the spread between these two rates explodes to 200 or 300 basis points. In times of crisis, banks only lend for short periods of time, so 90-day loans are very rare or non-existent. Using this indicator, Michael Platt exited the equity market by liquidating his $9 billion position. More precisely, the aim was to resell all transactions with counterparty risk. Finally, Michael Platt continued in this direction by selling stocks short, being long on fixed-rate sovereign bonds.
Michael Platt's second technique is to divide the tasks and make sure that traders are specialized in a single market.
“I have a specialist on Scandinavian countries' rates, another on short-term rates, a specialist in trading in long bonds in euros, one on inflation..."
All these traders receive a $1.5 billion envelope that they manage as they see fit. If one of them records a loss of 3% on the overall envelope, then he returns half of the envelope. If the same trader loses another 3%, then his positions are liquidated. But for example, if the trader has made a gain of 300 million with 1 billion and his balance is therefore 1.3 billion, he has a margin of error of 300 million + 3% therefore 330 million. All this helps to limit losses and promote unlimited gains as with options. Thus, the second loss of 3% will be made on half of the starting envelope before liquidating the positions.
The third notion that Michael Platt addresses is the psychology of traders. He points to the mentality of people who think they know everything, such as analysts or economists. According to him, their ego is important and therefore cannot be traders. They do not question their primary decision, and this leads to mistakes.
“You are the one who is wrong if you lose money for any reason."
Platt mentions the fact that it is not enough to be intelligent or even gifted in trend analysis. You also need to know how to position yourself and have the right attitude. If you take a position and the price goes the other way, you lose money even if your analysis was good on the fundamentals.
Gifted Trader's advice: "The 2 biggest mistakes traders make is that they don't do enough research and they are a little too casual about risk. "
*Source : Hegde Funds market wizards, Jack Schwager
