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endowments - principally through index products. Commodities have been the worst-performing asset class
behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn't highlight that long history
when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years
to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket. I
am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it's going to end
badly. We've seen it play out hundreds of times over the centuries, and this is no different. It's just the nature of a
rip-roaring bull market. Fundamentals might be good for the first third or first 50 or 60 percent of a move, but the
last third of a great bull market is typically a blow-off, whereas the mania runs wild and prices go parabolic.
Should hedge funds be more closely regulated?
I selfishly do not want to be regulated, but I understand the necessity of it.
Louis Bacon
30 Jun 2008
One of the most highly regarded macro traders ever, Louis Moore Bacon is the rare investor who can boast the hat
trick of having made money on Black Monday in October 1987, the dot-com implosion in March 2000 and the
subprime crisis that began in the summer of 2007. Bacon, the founder of the $20 billion Moore Capital
Management - which operates from London and New York - is guided by aggressive risk management and an
interest-rate-driven view of the markets. Since its inception in 1990, Bacon's flagship Moore Global Investments
fund has delivered annualized returns of nearly 22 percent. "If you look at Louis's long-term track record, there is
probably no trader alive who has better risk control on an asset base his size," says Paul Tudor Jones II, a fellow
Hall of Famer. He has been equally ahead of the curve in identifying environmental conservation as a key global
concern through his Moore Charitable Foundation. Bacon, 51, a native of North Carolina, also has ties to Hall of
Famer Julian Robertson Jr., whose sister is married to Bacon's father.
Who has had the biggest influence on your career?
My friend Paul Tudor Jones. We were both Southerners in the big city of New York. Paul got me my first job, with
E.F. Hutton as a runner on the floor of the cotton exchange. That was many moons ago, but I would say that his
real mentorship came when I started trading commodities and launched a CTA fund. I didn't know that it would
turn into a hedge fund, but when I started to raise money for a hedge fund, he was a big supporter with his
investors.
His approach to research and trading had a real impact too. He wasn't worried about small stuff. He taught me to
think in points, not dollars, and he always used to say, "It's just points, it is not money." He gave me an ongoing
tutorial in disassociating oneself from the result of the trade, yet still having passion about it.
Why do you live in London?
Living here gives me broader perspective on a number of different countries. I find it ideal to be based in this time
zone, and I use the time advantage to set up early for the U.S. markets.
How do you decide where to invest?
We tend to make top-down, interest-rate-driven investments. We've been pretty U.S.- and European-centric
throughout most of Moore's history, and we have been pretty closely focused on what happens with the interest
rate cycle and the reactions that it drives around the world. But our focus is shifting now because micromarkets and those can be anything from individual equities to commodities and emerging markets - are becoming more
and more dominant.
What accounts for Moore's success?
Hard work, patience, knowing when to hold 'em, fold 'em or go all in. We have a rigorous risk framework, and
although I do not micromanage every position, my portfolio managers understand the risk format prior to joining
the firm.
Does the label "global macro" reflect your style?
We kind of had the moniker "global macro" thrust upon us. We didn't sign up for it. But I look at it as kind of the
007 license to do whatever we want, and we're in a period now where globally there is no lack of opportunity: in
fixed income and currencies and the distressed and credit markets. We don't have to try and decide to make our
money in any one instrument or strategy - we can invest in private equity, individual equities or arbitrage. We feel
that we are versatile enough that we can move into a number of different strategies, and if doing that means that
we're global macro, then we're not going to argue with the label.
Are there historical precedents to the current turbulence?
You can find similarities, but this situation is shaping up to be a long-term bear market - and it is corresponding
with a secular decline in American financial power. You have to hark back to the '70s to get an equivalent sense of
loss of U.S. control. At that point in time, though, the U.S. had no natural economic rivals. Now there are a number
of emerging markets, like the BRICs - Brazil, Russia, India and China - that are vying for power and showing
economic leadership. They may, in time, rival U.S. global dominance.
How worried are you? Especially about inflation.
The U.S. has gotten out of a number of really difficult economic situations where inflation was a pressing issue, so
there is an expectation that we're going to get out of this crisis, too. But I'm very concerned, given the negative
savings dynamic in the U.S. and the inability of our politicians and people to acknowledge that we have the
financial structure of a third-world economy dependent on leverage and dissaving, coupled with an addiction to
foreign goods and oil. Other competing economies are much more disciplined.
What was your best trade?
I'm lucky enough to have more than one. The first was a complete market malfunction. In the crash of '87, I
happened to be short Nikkei contracts, and as we were finishing up and closing the books late on that Monday
night, the Nikkei futures opened at 4,000 - it had closed the night before at 28,000! I bought shares to close the
short position between 8,000 and 18,000. It was incredible buying the second-largest stock market down by
almost two thirds.
Had I not been in the office during those 15 minutes after the market opened, I would have missed it. The lesson
was that a good part of success is predicated on showing up and putting in time.
The second great trade, or a great exit, was in the last week of the Nasdaq rally in March 2000. We were really
worried about what the Fed was going to say, so we sold close to $2 billion of Nasdaq futures just before the
bottom fell out. Now that sounds great, but I had told my head trader earlier in the week to get rid of all of our
technology longs we had been riding for months. But he didn't sell anything that week, so we ended up with a lot
of dot-com equity on our balance sheet. Not executing the entire trade cost us dearly, however beneficial selling
at the peak of the market. The lesson was, Don't rely on others when you are really sure.
The last one, last year, was probably where we made the most absolute money, and that was in subprime. We
traded around the position very poorly and yet made a ton of money. The lesson was that picking the right
investment will trump any lousy trading around it.
Worst trade?
I have probably blanked them out of my mind - not enough memory for them.
What's it like to work for you?
We run a laissez-faire, entrepreneurial shop. I started my career in futures, and the rallying cry was always free
markets for free men, so I've tried to create an open architecture here for traders to test their ideas and thrive. I
think that we have a good understanding of risk, but we take a different approach to it. We prefer to see what our
traders want to have as their individual risk profiles, and then we fit our assets around those to modify our net
exposure.
Should hedge fund managers give back?
They should, and they do, probably more so than other pockets of wealth, perhaps because after mastering the
markets on their wits, they believe their wealth is replicable. In 1992 we founded the Moore Charitable
Foundation, which aims to conserve and protect our natural resources. Conservation remains underfunded
relative to other charitable causes, and the organizations we support are working to slow the loss of Earth's
resources.
markets become arbitraged out. The excess return in them goes away. One of the most important skills you need
is to constantly reinvent where you put resources. Commodities markets were quiet for years. Now they're very
strong.
Does this mean that you must constantly make a macro judgment?
The view I started with and embodied in Caxton's fund was that business cycles were very important and that
they occurred all over the world, and it was useful to observe them and to take advantage of the opportunities
across four different asset classes.
Which four asset classes?
Equities, fixed income, commodities and currencies. The raison d'etre of the company is to observe the nature of
the macro cycle across multiple economic and political zones and to take advantage of the character of each
business cycle so that we would have multiple business cycles to trade. We trade Asia differently than we trade
Europe or the U.S. And we could be long or short across multiple asset classes and regions. Until the late '90s,
this was not widely done.
Does the tremendous amount of money in hedge funds now make it more difficult than ever to exploit
inefficiencies?
Yes. The crowded nature of the hedge fund community has changed the character of trading so that you can see
waves of risk-taking and derisking coming from the hedge funds themselves. When there were ten or 15 very
active hedge funds, it didn't matter what they did. When there are 10,000 hedge funds, it does matter. They move
the markets. In addition, market opportunities get arbitraged out somewhat. Fifteen years ago, I might have traded
some things that we don't trade at all now.
Like what?
I don't try to outguess the employment statistics on the first Friday of every month, because everyone is watching
the numbers coming out. So now you must seek out undiscovered information somewhere else.
Outside the U.S.?
We've always looked outside the U.S., but in the past decade non-U.S. markets have become so much more
liquid. There are many more opportunities in emerging markets. But we also find plenty of opportunities in U.S.
and developed markets. U.S. markets are still more liquid than almost any other market, and that opens up
opportunities.
What role have hedge funds played in the rapid run-up in oil prices?
Hedge fund participation in the oil price rise has been somewhat smaller than I would have expected. The price of
oil is elevated for reasons that have much more to do with fundamental demand out of China and India and other
places. The weak dollar has added to it.
Are hedge funds beaten up on too much?
I think so. Hedge funds are part of the demonization of financial markets. I think it's a tradition in American politics
to blame the banking community. This tendency goes all the way back to the famous William Jennings Bryan
speech that ended "you shall not crucify mankind upon a cross of gold." This was essentially an anti-inflation
policy that was thought to benefit bankers against the interest of the average man - the gold standard policy. And
now in the present period of extreme tension on financial matters, it's hardly a surprise that people blame the
participants in the financial markets. Hedge fund managers often get blamed because their profits are seen to be
large. It's easy to confuse public policy problems such as a collapse in the credit markets with ad hominem
complaints about hedge fund managers who have made correct market bets. But in reality, the hedge fund
manager didn't cause the problem.
Politicians are looking closely at the taxes that hedge fund managers pay - or don't pay.
I think it's an absolutely legitimate public policy question: What's the right tax policy? It's a good thing to have a
public debate on that. No single policy will make everyone happy. I can't say I like writing large checks to the IRS,
but I am very happy that good trading has put me in a position to do that. The best policy would probably be to
have an extremely simple tax rate for all income. But our tax code is tens of thousands of pages long, and it
creates a lot of problems.