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How Do the Famed Macro Hedge Funds Really Trade?

How does Ray Dalio, George Soros and Paul Tudor Jones trade? The other big macro traders you read about in the books? How do they make their money? They are all fundamental guys who have big opinions about the directions of major markets (currencies, bonds, stocks, metals, energies, etc.) and use all of their intelligence to make the right bets year after year decade after decade? That’s their process?

Hold that thought.

How do trend followers trade? That answer is the foundation of my books. How can you be sure how trend followers trade? Their performance data for starters. You can see their performance data. You can look at the markets moving and see where the profits originated. And over the years the performance of trend following traders can also be compared to other trend followers where you can see the correlation of their performance. So not only does the story of what trend followers do to make money make sense, you can see the proof.

Confidence builder 101.

Now back to the big macro traders (many of which are positioned as fundamental traders; Dalio, for example, says he is 100% systematic using only fundamentals) that don’t hold themselves out as trend followers, but seem to trade the same markets making money off the big moves across all markets (just like trend following traders). Traders like Dalio, Soros, Simons, etc. are harder to analyze as their performance numbers are not as public (like trend following traders). Plus, even when the big macro traders give hints of what they do–are their words believable? You mean I should just accept that the big macro funds trade using fundamentals? Trust the media accounts? Trust the press releases?

Think about it this way. Consider “Argo” the winner of 2013 Oscar for Best Film.

What did Roger Ebert say about the film?

The craft in this film is rare. It is so easy to manufacture a thriller from chases and gunfire, and so very hard to fine-tune it out of exquisite timing and a plot that’s so clear to us we wonder why it isn’t obvious to the Iranians. After all, who in their right mind would believe a space opera was being filmed in Iran during the hostage crisis?

After all, who in their right mind would believe the most famous macro hedge funds promoted for decades as fundamentally-based are really classic technical trend followers? Look at it this way: If the American government in the late 1970s could pull off the Canadian Caper (the basis of the film Argo) with fantastic subterfuge, isn’t it possible that some of the richest men on the planet could disguise their trading technique to sell a story to investors? Do I know this to be 100% true? No, but draw your own conclusions, do your own homework and try hard to not blindly accept press accounts.

Dave Ramsey, Rick Edelman & the Anal Probing of Investors

A reader writes:

Hey Mike. Davie [name] Here. You know Mike, there is something that I keep hearing from two of the most prominent financial advisers in the country and it drives me crazy every time I hear it. I can’t understand how two men who are obvious very intelligent and gifted can be so ignorant of the truth. The two men are Dave Ramsey, and Rick Edelman. I have heard them both on more than one occasion in which they were promoting their buy and hold philosophies that there are no “market timers in the forbes 400 wealthiest list”. Then they go on they point out that “however, the number 2 guy on the list, Warren Buffet is a long term buy and hold guy”. This just drives me crazy Mike because it simply isn’t true and two men who are “experts” in money ought to know better. Sure there is one guy who claims to be a buy and holder on the list named Warren Buffet though as you have pointed out, he really may not have built the bulk of that wealth through classic buy and hold strategies. But that’s beside the point. The point is that of course there are many many more than that one guy who are on that same list who are indeed market timers which is just a fancy word for trader. What is it with Ramsey and Edelman Mike? Have they not heard of George Soros, or Ray Dalio, or T Boone Pickens, Stevie Cohen, James Simons, Paul Tudor Jones, Stephen Feinberg, Bruce Kovner, Eddie Lampert, David Shaw, Louis Bacon, Jeffrey Gendell, Stephen Mandel, Israel Englander, Richard Perry, David Tepper, Stanley Drunkenmiller, William Von Mueffling, John Arnold, John Paulson, or Julian Robertson??? I could go on. All of these guys to my knowledge are billionaires whose net worth is high enough to be qualify for the Forbes 400 list. And that’s not to mention the hoards of “market timers” who may not be wealthy enough to be on the list but certainly are among the top one tenth of one percent of the world wealthiest individuals. Men such as Boaz Weinstein, or Bill Dunn. You know Mike, I can name a heck of a lot more super wealthy “market timers” than I can long term buy and holders. The only super wealthy buy and holders I can name are Warren Buffet and Peter Lynch. It really annoys me that Dave Ramsey and Rick Edelman continue to claim that no one can make any money by trading. It simply isn’t true. I was the guy who sent you the article from yahoo news about the guy who lost in faith in the market. If you read that article, you would have noticed that near the end of the article, they pointed out that the man they highlighted in the article had lost about 90% of his money and only had $800K left. Unbelievable Mike! You talk about taking a 50% draw down with buy and hold! This guy was a multimillionaire with about $8 million in his retirement account, and his buy and hold strategy combined with obvious additional poor choices resulted in him losing about $7.2 million dollars! Meanwhile, these “market timers” I mentioned above had their net worths rise and rise and rise through the past few years. I know this because, I remember reading about many of them in trader monthly magazine back in 2006 and many of them had not even accumulated a billion dollar net worth by then and now most of them are multi billionaires. I really wish Ramsey and Edelman would educate themselves more on this issue before they speak. There! I’m done ranting! I love ya man!

Thanks Davie, but Ramsey and Edelman do what they do on purpose. Very much on purpose. It’s up to everyone out there to figure out their motivations for misleading. Hints for their “why” can be found here: Dave Ramsey 5 foundations.

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