[originally published August 9, 2017 on medium]
…and regrettably, I did nothing about it.
Tuesday: I’m the Manager of a small but growing hedge fund that has so far delivered performance to my investors of +58% in the 18 months since inception — after my customary “two and twenty” percent management & performance fees. Rock star returns.
Wednesday: I’m out of business.
It all seemed too easy, and in hindsight it probably was.
After a great run of intraday stock trading during the climb and subsequent burst of the internet stock bubble of 1998–2001, I found it too challenging to make any more consistent money as a hyperactive stocks “day trader.’ I was not alone: the office that I traded in peaked at about 40 full-time traders in early 2000 (coinciding with the bull market top) and now in 2001 it barely populated 10 guys on a good day. It just got too hard. Or maybe, in reality, the stock market really just got back to normal. Maybe we formerly successful daytraders/daydreamers were actually just momentarily (but spectacularly) profitable during a brief speck of an aberration in the expansive timeline of booms and busts in the business cycle of the United States of America. Were we all just the latest sacrificial lambs in the long line of wannabe speculators who had ridden those waves by trying their hand at “Wall Street” since the 1800’s and happened to get temporarily lucky?
I was struggling in 2001, but I certainly was in no mood to throw in the towel on trading and strike off in a new career. Just three years in to this business, I had seen the money that could be made. I had tasted it. And I wanted more.
It was around this time that my trading friend Ted (not his real name) introduced me to the story of Richard Dennis’ famous “Turtle Traders” experiment. If you aren’t familiar with it, google it. The crux of it is: Richard Dennis hand-picked a group of individuals in the 1980’s with little to no trading experience and taught them an incredibly simple system to trade commodity futures. These nobodies took the ball and ran further down the field that any skeptic thought possible — earning hundreds of millions of dollars for Dennis and themselves. Needless to say, I was captivated and wanted to learn everything I could about how they traded.
What followed was about a year of full immersion into the methods and philosophies that drove the success of these “Turtle Traders.” In 2001, the stories of this experiment weren’t as widely spread on the internet as they are now. But if you dug hard enough, you’d find occasional stories with interviews of past “Turtles”, as well as a handful of opportunists in the business of marketing the “Turtle Trader rules.” Ted and I met regularly for Cuban sandwiches at a great little South Tampa neighborhood dive to discuss our growing encyclopedic knowledge of the Turtles’ backstory and their trading “rules,” and we both began to paper trade the system to build a track record with it.
About 6 months into promising paper trading results, Ted decided to try putting his own money on the line. I wanted to go bigger. To me, I viewed this as a business opportunity. This style of trading was something scalable. Investor friendly. Perhaps I was too young and naive to feel any differently, but I felt in my bones that this was my opportunity to enter the Big Leagues and strike out on my own in the Hedge Fund world. But as a Wall Street outsider, I certainly wasn’t just going to walk down the streets of lower Manhattan with my six month paper-trading track record and be showered with millions to manage. Doesn’t work that way. Not for me, anyway. Nope, I was going to have to bootstrap it.
Luckily, serendipity found a quick champion for me — a guy who trusted my trading abilities. Not surprisingly, it was because he knew my performance better than just about anybody — my accountant. In a casual conversation about my latest tax return, we got to talking about my future plans and I had mentioned I was looking to branch into futures trading and was going to start putting a plan together to somehow start attracting investors. I asked him for any advice he might have and if he would be able to help prepare any official documents I might need? To my surprise he did me one better — he liked the idea so much and he just so happened to have a client who was looking to seed “a young upstart” in the business of speculation. He proposed I start a small fund now with his guy and with small investments of our own. Obviously, I was overjoyed with my good fortune and couldn’t wait to get started.
The plan was simple: the investor would fund me with enough capital to properly execute my strategy and build a suitable track record over three years so that I could then start soliciting investments from the bigger dollar investors out in the world. A slow and steady build. Perfect.
I spent the next month cutting and pasting (er, plagiarizing) paragraphs and templates from various Operating Agreements, Disclosure Documents, and Strategy docs that I could find on the web from a handful of hedge funds and commodity trading advisors (CTAs) that executed similar strategies to what I planned to embark in. With my budget, it was better to pay a lawyer friend of mine $1,000 to sign off on these self-created documents that I prepared, than instead tasking another traditional law firm to build the docs for me “from scratch” and charge me $20–25K for their “hard work” of basically copying and pasting from their own internal templates. What a racket.
Anyway, with all my docs in place, signatures on the appropriate dotted lines, and a six-figures wire transfer into my newly created business account at Bank of America expressly for this purpose, I was off to the races.
And what a race it became! I was profitable right out of the gate. Surely, a fortuitous luck of timing had been a big factor, but there was enough proof in the pudding to validate what I was doing would work. Now it was only a matter of letting time and the magic of compounding do its work. After three years of gorgeous equity curve construction, investors would be pounding down my door to get a piece of my action.
This business became everything to me. I was proud of what I had built from nothing into something. I was full of pride to call myself a “hedge fund manager” — even though my assets under management barely qualified as a rounding error compared to my peers in the industry. But that didn’t matter. If I kept up the performance, investor dollars would flow as surely as the sun rises in the east. I even moved to Chicago to be “closer to the action” and eventually moved my business to a Chicago Board of Trade clearing firm that offered me free office space in the building with a sweet view straight down LaSalle Street simply for moving my fund’s account to them. Life as a rising Hedge Fund Star was grand.
And then I got the fax…
I’ll never forget it. Late after the close on a Tuesday I got a suspicious call from my accountant’s secretary. She wanted to know my fax number. I didn’t know it. I asked if whatever she needed to send could be emailed? She said no, it was no big deal, but it had to be sent via fax. Weird. So after scrambling to locate the office manager of my clearing firm, I was able to relay the fax number. I then headed home.
The next morning when I arrived at my desk in the Chicago Board of Trade building, there it was. The “no big deal” fax sat — exposed for any passerby to see — upon my desk like an obituary in neon lights:
Joe Smith (not his real name) wishes to redeem the full value of his investment in [our limited partnership]. Please advise when we can expect the full value to be wired into his account.
Thank you for your business,
[my accountant’s signature]
No thank you for fantastic returns in 18 months. No can we discuss a withdrawal? No warning whatsoever. Simply, give me back my money.
But as bad as this was, here is where my greatest regret lies: I didn’t put up a fight. I didn’t stand up for myself. Nope. I didn’t call. I didn’t write. I didn’t question. I didn’t bring attention to the fantastic job I’d done so far and the future returns I saw on the immediate horizon for our fund (I had on a crude oil futures position that was just starting to take off, and in fact would have easily added 700–800 basis points of return over the ensuing weeks had I been able to keep the position on).
I was simply too shocked to offer up any kind of rebuttal. My immediate response was to simply roll over, close all the positions, and wire him his money as soon as humanly possible because in my mind I felt this was some kind of test of my trustworthy-ness. This was the first withdrawal request I’d ever received in this fledgling new enterprise. I needed to pass this gut-check to prove that I was worthy of my investor’s trust. And once I passed, there would be even more money coming back to me. That was naivety for you.
Unfortunately, the reality is that it was curtains for me and my show. Without this investor’s money, the remaining capital wasn’t enough for me to manage portfolio risk prudently. And as far as I could tell, there was no money coming back my way. The investor apparently wanted to move on and do other things. The reason for the withdrawal was never explained to me and I only heard half-explanations from other friends in the business years later who “heard things” through the grapevine.
It might not have done any good, but years later I harbor deep regrets for simply rolling over and not fighting for my business. I put so much time and effort into building a solid strategy and putting myself in a position to succeed. I simply refused to accept that bad things can happen to good people and good performers.
And as I write this, I’m beginning to think perhaps this episode is a genesis of another bad self-taught lesson that has haunted my trading career ever since: because I didn’t stand up for myself, because I simply gave up without a fight, I “learned” to Never give up! Don’t roll over! Fight! Fight! Fight! If it doesn’t work out, at least I can feel at peace with the effort.
And this is probably why I’m 19 years in to this business, struggling to make ends meet, but refusing to go away…
Don’t give up. Don’t roll over. Fight for what you’ve built. But the real magic in this motto is recognizing when it might be leading you into an un-winnable war — against yourself…and having your surrender flag and a back-up plan at the ready just in case.