How Does one Remunerate a Hedge Fund Team?

My colleague and I today spent a long time analyzing the best way to incentivize a new member of our team.

Do we all share equally in the bonus pool (me included = CEO), or do we maintain a hierarchy, and furthermore do we introduce a meritocracy system?

The problem with meritocricy is the element of discretion as a research analyst is not always able to quantify the $ value they have brought to the company.

The system that I have in mind is as follows: an agreed % of the bonus pool is decided. It then remains for senior management to decide whether the party concerned in fact qualifies for the bonus. The actual amount then falls subject to a formulae. The only negotiation revolves around the predetermined % of the bonus pool, and the discretion of the manager to determine whether the merit is in fact in place.

To protect staff from bonus pool abuse, if management are not happy with the staff member they need to follow a set of rules to document a trail of measures to ensure the staff member stays on track for bonus recognition.

In the event that the staff member continues to underperform a system of demerits is to be put in place that will 1st see the staff member reduced to 50% of their original bonus participation. A further demerit will result in no bonus and the discussion of either cutting ties or agreeing for the employment contract to be reinstated.

What is Economics ?

Economics is not a science, no matter how many algebraic formulae's you design, it remains an art!

My insight into economics is that its flavour depends on the mood of the day. In other words it is an art but expressed as a science, and represents the collective mood of the people at a particular time.

It is for this reason that demand and supply have always stayed constant, it is just these mainstays of the science, develop a cloak of emotion that is drawn from the collective mood of the day.

At the end of a period of growth certain characteristics are common place within the society of the day, it is these emotions that popularize the theory of the day.

What I am therefore in essence saying, that the theories that have been developed through the centuries are nothing more than a reflection of the "demand" & "supply" of the people at that time.

I therefore think that in order to be a successful economist, one has to first understand the history of the art, and then try and apply the benefits learnt through the ages to fit in with the mood and expectations of the collective society of the day.

Economics, politics, sociology, maths & history are inextricably linked one has to understand them all in order to be a successful economist.

A Contrarian point of view is it Nautre or Nurture?

I speak from experience on this subject, after all I am an unabashed Contrarian.

The question I wish to pose is as follows:

Is the fact that I am a contrarian something I learnt growing up, or is it something I was born with.

The first thing I need to identify is whether I am a contrarian in every aspect of my life, or does it refer only to trading. My answer on this is that I believe I really am only a contrarian when people speak of a sure thing. In other words when there is such conviction by a group of people I find that I have an automatic response to go for the other side.

It possibly stems from the fact that I absolutely hate it when people are so full of themselves or their analysis that they are not prepared to consider an alternative possibility.

Coming back to the isse of nature vs nuture.

I don't believe my upbringing was one to confront the establishment and to intellectualise all analysis. I don't believe my sister is a contrarian. Having possibly refuted both the nature and nuture argument.

I am leaning to the belief that my contrarian disposition is part of my psychological makeup which is part nature part nurture. To be a contrarian you need to have broad shoulders so you need to be prepared to take on the establishment. Surprisingly you don't need to enjoy conflict which I don't on one hand and do on another.

Can a contrarian be trained, and what gives me the right to call myself a contrarian?

The above questions need to be analyzed and for now I wanted to capture the essence of the question, ignoring whether I may or may not have made any sense.

I will conclude with a last observation. Being a contrarian requires a pretty sizeable ego. Being a good trading contrarian requires an insight and control of ones ego.

The Time is Nigh

You may be saying what is this bloke smoking, but every now and again a trader gets that gut feeling that things are about to work out the way you "feel".

Tonight is one such moment. I am sitting in the same study I was in on the 10th January feeling "confused" but bearish. Tonight I sit less confused but bearish.

Let me try and place things in perspective I made the following post on the 10/1/2006:

have just come back from vacation, it is the start of a new year, I have a brand new fund that needs to be invested, I am sitting in my study watching the markets and I haven't a clue as what to do.

The greatest minds in the world tell us that the US is sick, and by sick I don't mean the flu. The US is infected with a terminal disease that can only be cured with painfull surgery, and strict observance of a health programme, anything else will lead to death.

Let us not blame this on the Americans alone, a culture of spending all of tomorrows earnings today has pervaded most of the western world, and this increases the chance of major "illness" spreading across the globe in an epidemic the like the world has never seen before.

It is against this backdrop that I ponder the weightings and directional balance of the virgin fund I have been blessed to consumate.

I will end tonights session by saying that I have maintained a bearish view on the markets for over 3 years in the face of a bear market rally, the "pain" has been severe and the error humbling. However, I stand tall and steadfast in my view that we are indeed in a bear market rally, and the time is nigh for a monumental correction in the markets that although painfull and devestating for the world should provide bountiful profits for our new fund.

"Stay the Course"

So why am I so confident this time.

Firstly, I believe nothing has changed from my observations back then, secondly the market having gone up probably makes my argument back then stronger. Finally, I am a strong believer in the Elloitt Wave Principle and the setups across so many markets are perfect. Something that hasn't "really" been the case. I say this because all the previous setups were never classic and were chased out of fear of missing "all the move".

I am a lot wiser than I was at the beginning of the year, although I must say I have a long way still to go.

Just to conclude with a personal note.

To be a trader / hedge fund manager requires nothing less than committment, passion, resolve, insight and all the above again.