Cleaning Up A Hedge Fund Mess

“When you’re a Cleaner, you keep pushing yourself harder when everyone else has had enough.”
-Tim Grover

If you’re a hedge fund manager, don’t get mad at me about writing this note. Get better. Be a Cleaner.

As MJ and Kobe’s Coach, Tim Grover, reminded me in Relentless, when you’re a Cleaner, “you get in the zone, you shut out everything else, and control the uncontrollable.”

“You know exactly who you are. You have a dark side. You’re not intimidated by pressure, you thrive on it. When everyone is hitting the emergency button, they’re all looking for you.” (pg 31)

Back to the Global Macro Grind…

I first learned how to trade for hedge funds in the summer of 1998. My first boss was… drumroll… a hockey player. His name is Tiger Williams. He’s was a visionary creating the 1^st outsourced hedge fund trading platform for… drumroll… Tiger Cubs.

Did I have any idea what I was doing back then? Obviously not. I’m forever grateful to Tiger for giving me that opportunity. Not everyone in this business is lucky to have mentors like I did. Jon Dawson from Dawson Samberg was another big one. 

I learned how to trade, analyze (and short) companies, and do Macro in that order. Dawson and his team taught me how to pick and trade stocks. I had no idea how to do macro back then either. 

For me at least, having no idea on how things are supposed to be done was a good thing. 

Unlike many of the Linear-Econs and market Strategists that I no longer waste precious Cycle Time reading, I learned my #process by doing it. I think that’s why it works. I don’t do what I used to get paid to do. That doesn’t work anymore. 

I’m not going to write about what isn’t working. I don’t want to offend anyone. I just want to help you get better. 

If you’re a Hedge Fund Cleaner who is making money in modern markets that are dominated by not only Quad Shifts (i.e. economic Phase Transitions in GROWTH and INFLATION) but obviously The Machine, here’s what’s working: 

1. Go Anywhere Long/Short Strategies that are Quantamental in their principle orientation
2. Patient but aggressive Trading Strategies that fade Hedge Fund Crowding and Liquidity Factors
3. Flexible Gross & Net Exposure Strategies that use #VASP instead of something like Moving Monkeys or VAR 

There are obviously other strategies that are working. These are just examples of what I see working for my selfish self. Yes, I trade my own capital. No I don’t have a boss, “3-5% drawdown limits”, or a lack of analysts supporting my decision making. 

And yes, I realize that’s not reality for many. But that doesn’t mean that it doesn’t exist. We have a growing number of Family Office (read: some former hedge fund managers) clients who run money the way I do. 

What shouldn’t shock you is that Hedge Fund Managers (and their analysts) who don’t run it the way I do are constantly asking me how to front-run the other players in The Game that have to run it the way they do. 

Having worked on both the Fundamental Long/Short side (Dawson) and the Quant side (Magnetar), I see it differently. 

No, I’m not saying that I’m all that. I’m just trying to explain that when there’s a short-term LEVERAGE and LIQUIDITY mess out there in the marketplace, I’m helping people clean it up. 

Let’s use a super-simple Macro trade as an example - Long Tech (XLK): 

1. XLK was coming off it’s ALL-TIME (all CAPS) closing high of $175 on December 10^th
2. XLK had a very complacent Implied Volatility DISCOUNT of -9% BEFORE yesterday’s correction
3. XLK’s -2.8% daily decline takes it’s #Quad2 in Q4 Full Cycle Return to +13.2% for Q4 to-date 

And the world, on this Factor Exposure, is ending? C’mon man. 

I get that not everyone looks at markets this way. I am grateful for that. The same people having a panic attack about “why, why, why?” on Tech yesterday could have bought XLK with the following ABC setup on December 3^rd: 

1. XLK was at the low-end of my published Risk Range at $165 that day
2. XLK had a petrified Implied Volatility PREMIUM of +60% (vs. 30-day realized vol) that day to capitalize on
3. XLK had a quick +6.1% return from DEC 3 #VASP Buy Signal to DEC 10 where it signaled overbought

When something signals overbought or oversold that means my #VASP (Volatility Adjusted Signaling Process) has it either at the top or bottom-end of my Risk Range™ Signal. 

So instead of reading about viruses or whatever on zero edge, I really don’t care “why” people think things are going up or down. They are where they are. And WHEN you execute matters more than anything else. 

I’ve built and evolved my risk management #process to fade what forced buyers/sellers have to do. I know what they do because I did it. If you see a cleanup order for XLK in Real-Time Alerts today, I’m just doing my job my way. 

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:

UST 10yr Yield 1.37-1.54% (neutral)
UST 2yr Yield 0.59-0.71% (bullish)
SPX 4 (bullish)
NASDAQ 15,017-15,895 (bullish)
Tech (XLK) 166.43-177.08 (bullish)
Housing (ITB) 78.22-84.00 (bullish)
VIX 16.06-25.97 (bearish)
USD 95.72-96.68 (bullish)
Oil (WTI) 66.59-73.07 (bearish)
Nat Gas 3.54-3.99 (bearish)
MSFT 322-345 (bullish)
AAPL 166-182 (bullish)
AMZN 3 (neutral)
FB 315-345 (bullish)
GOOGL 2 (bullish)
NFLX 584-630 (bearish)
TSLA (neutral)
Bitcoin 45,119-52,878 (neutral)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer