Monday, October 10, 2011


John Paulson’s lost advantage

Hedge fund titan John Paulson has a shrinkage problem.

The billionaire manager’s flagship Paulson Advantage funds are quickly losing altitude after peaking with $19.1 billion in assets under management in March. As of the other day, the combined AUM of the Paulson Advantage and Advantage Plus funds had fallen to $15.7 billion, according to investor sources.
The news has been coming out that one of the all time great traders has hit a tough patch. I just googled and found this as one of many long articles about it. I have no idea who the guy is who wrote this, it is one of many articles. This type of thing really irks me. It is things like this that have kept me out of the money management business. He has made billions of dollars of profits for clients, now he hits a losing streak and it is the all time pile on by one scrub after another who never hit a ball out of the infield. Trading is not a one way street. I do not care who you are, there are periods of time where you get your butt kicked. This is true in any sales job as well, or sports for that matter. How about the self titled "Dream Team" the Philadelphia Eagles. They can't beat anybody.
What people do is seek out the hottest streak, then put their money with that person. They place the money right at the peak of fame and fortune the manager enjoys. Of course they hit a drawdown, that is virtually a mathematical certainty. Next these people get discontented, flee and bad mouth the manager, maybe even sue him. Complicating matters more for high profile big hitters is the problem of trading size. The larger the amount you trade, the fewer places you can go and the harder it is to hide what you are doing. There are people who will front run you, fade you, take the same trades effecting fills, etc.. This makes it tough at times to act on the best ideas effectively.  It is much harder to make a large % return on a large amount than it is a small one.
The most prudent approach to selecting a manager in my opinion, would be to pick one you want to use, then wait for that person to have a bad period. If they stay true to form, and return to their historical norms, you will have a home run. This is no different than waiting for all these "confirmations" when chasing a stock market run. When all of the confirmations finally are there, the last person to buy that would support your trade has already done so, then an immediate retracement occurs. I had a bad period last year, I had a 19% drawdown, my largest ever. Had I been managing money then, I am sure people would have left me. They would have missed the fantastic run that followed. OF COURSE! I would have been a bum, a con artist, who knows what. I can tell you that having a career worst drawdown of only that amount is pretty remarkable. It probably is a sign that I don't trade aggressively enough. Yet had I been managing money and someone had signed on right at the top, they would have had a 19% drawdown at one point. At the time it happened it felt pretty bad, it was quite a bit of money.
Of course it is rough if you just placed money with someone, and you find yourself down almost 50% as some of those with Paulson have experienced. However, you used bad timing placing the money. It is your fault on some level. These folks make the big money on incentive fees, so they do not take losses intentionally just to piss you off.  When redemption requests hit, they further hurt the returns, because the funds have to liquidate good positions to raise the money to refund it, cutting off big winners in the process.
The moral of the story is, I hate to see this happen to anyone, and I feel for the people who are being hurt. However, this is part of the risk you take in trading. Some trades just don't work. What else can I say?  Sometimes you lose.
With that off my chest, time to get to work. We have had a spectacular rally off that trap low. It does not really matter, if it was and is the PPT, short covering, or something else. The fact of the matter is price rules. We are now close to the weekly sell resistance area of 1198 I have determined should be a place to look for sell signals. I have no idea at this point whether or not we hold there, then go back down, or just blow through. We never know that when a retracement in a trend is taking place, whether the trend is changing or just setting up a continuation trade. For me the first look is always with the trend until it changes. Therefore, it should be sells up above 1200 or so until we blow decisively through there.

Here is the weekly chart with a few things labeled. First, the 1198 area which is where my band for selling comes in. The way it looks right now if we consider the strong seasonal and cyclical influences that should be coming into play this month,  is that we should be looking to buy dips that come if any do. The trend is still down even though we have had a moonshot here the last several days. I am hesitant to get too aggressively long until the trend reverses back to the upside. In a situation like this it probably means I won't get in as close to the low as I was hoping to.  That is really more ego than anything else. The easiest trades to do are the first pullbacks after a trend change occurs. At times the market turns on a dime called a V top or bottom, and we don't get a first pullback. That is ok by me, I play the probabilities for the best trades, and guess what, I miss some! I am more worried about what happens with the ones I take than the ones I miss even though it does tick me off at times when I miss certain things.

The other thing worth mentioning here is that the POIV may have had an exhaustion move when it went way below the similar levels it had before and prior got nowhwere near as low. This can be argued either way, it could be telling us we are still coming back down as well.

So in summary, I am not long yet, but am looking to get that way on a pullback assuming other trend change items are in place when a pullback occurs. Since we have had no pullback at all now, and the weekly trend is still down, I am looking to short this not buy it at the moment. However, I don't see a trade in either direction at the moment.

I have been talking about Sugar recently, and here is that trade. It is doing ok so far, but it has not moved much, so could still wind up being lousy. This market is to me setup for a rally on the weekly chart very well from sentiment, to trend, to commercial buying to open interest, seasonals, cycles etcc. This does not mean it will work but it does mean it is a market I need to be looking for buy signals in. There is one possibility that we have to consider. The monster stock rally is pushing up everything else and bonds and the dollar down. If the stock rally fizzles, many of the commodity moves might also do so. This is what stops are for. They allow us to park dumb opinions like that on the sidelines and trade the fundamentals we study.

You can see I did something here that I do at times depending on how I feel about the trade, I added up to my full position on a pullback. Why did I do that? It was my judgement that we had been in a pretty good down trend, and even though we had a pretty clear trend line that broke, I felt that the strength of the trend was such that it would retrace a little no matter what. It did but not much. I had the order to add 20 ticks under the original stop entry, so I barely got filled. I suppose it was lucky, but who is to say, we don't know how the trade will turn out. It still could be that I will wish I had not done it if we go back down.

The life of a trader is rarely a contented one. You have to just stay true to what you know to do, and live with what happens. Most of the time I enter all in and all out at the same price, this was a bit unusual for me.

Good Trading


Alain said...


true, RB has strong seasonals. See this as a trade may be for a few days more. If it not falls hard after, it will be a hint for a strong rally later on.

Covered Soybean yesterday only. Looking now for long entry. Seasonals up into 2012.

Before shorting $, like to see an other minor move to the upside as a non confirmation of the trend.

Other markets I look to for longs: coffee, natgas. Sure, gold, SwissF etc. but that we all know by now. In gold there is a very nice 3 years channel.

T-Bonds maybe ok for a trade i.e. next week. One of my jobs will be to refine my bond parameters. Remember LW was teaching about it somewhere...

Whatever view is correct - a pullback evtl. later this week but sure during next week's option expiration.

congrat for SB



Chris Johnston said...

good comments as yours always are

Anonymous said...

If it is not proprietary info, how do you calculate profit targets as you did on the SB chart?
Thanks, Don

Chris Johnston said...

Don that is just Larry Williams target shooter tool, which is a standard indicator in genesis