Howard avoids life’s risks as much as he avoids market risks, saying he gave up downhill skiing and driving years ago.
“Like all good traders, Alan knows the value of risk, how much risk he can take and the availability of capital,” says Oswald Gruebel, who worked with Howard at Credit Suisse Group AG. “That’s the main differentiation between a good trader and a bad trader, and he was exceptional.”
Howard focus is on finding “asymmetrical outcomes,” describing a “three legged butterfly” (presumably OTM) options trade that had very favorable risk : reward terms.
“Risk aversion colors every facet of Brevan Howard’s operation, from the redundant power systems in its offices to the Master Fund’s early use of multiple prime brokers to spread its risk. And Brevan won’t park cash with investment banks; it deposits its T-bills with custodial banks such as Bank of New York Mellon Corp.”
Howard is a macro trader, personally trades 25% of the $5 billion fund, successfully avoided the credit squeeze in 2008, and trades all major instruments – from interest-rates to currency and commodity price movements. In July 2007, he conducted an audit of all positions and their exposure. “As markets worsened, the firm exited about half of its positions in credit-default swaps — two-party agreements guaranteeing payments of bonds or other securities — to eliminate the risk that one of Brevan’s counterparties would go bankrupt. And it got out of options whose expiration dates were two, three or more years in the future, based on Howard’s belief that the banks that wrote them would become reluctant to trade them, which is what eventually transpired.”
“He gets it right more than he gets it wrong,” says Altedge Capital’s Chris Goekjian. “But the important thing is that when he does get it wrong, he cuts very quickly.”
He keeps a tight leash his traders, ““When he smells danger, and he senses some of his traders haven’t yet, he has no problem laying down the law,” says Zoeb Sachee, A 4% drop in a trader’s portfolio triggers a meeting with risk, 8% a cut in capital and change in mandate, and a 12% drop a “time out.” “If you last two years, you’ve done well.” Howard may ask his traders how their holdings would stand up if under various black swan events, say if “Iran conducted a nuclear weapons test.”
Risk manager Landy and his team of 8 are the overloards, having forced even Howard himself to cut positions. “You put out the small fires very quickly,” Landy says. If a trader resists reducing what looks like a losing position, Landy is direct. “I say, ‘You don’t love your portfolio more than your job, do you?’” he says. “‘So calm down and reduce your portfolio to lengthen your job prospects. That’s a good trade.’”
“It’s basically accepted that you won’t last there,” says one former employee. “Those who generate profits get a slice of them in their paychecks — plus the likelihood of more capital. That means top performers get the lion’s share of assets: Adjusted for risk, 70 percent of Brevan Howard’s money is allocated to the top seven traders.
Previous positions were on a UK Bond sales desks where he got to know Soros, Moore, and Tudor Jones. “Alan would argue with them, he’d disagree with them on the markets, but he wouldn’t go against them. “
I love directional OTM butterfly positions – you can get risk:reward trade structures of 5:1.
Further reading : Schwager’s books
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