If you have not read Steven Drobny's "Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets," (the newly revised and updated version from 2013) it is one book you should definitely add to your "must read" list. It does not matter if you are a “global macro” trader or not. I am an equity investor, but this book was very influential in how I thought about risk and the interconnectedness of markets.
This book should be a required reading for anyone genuinely interested in global markets. It can be considered a modern-day version of the classic "Market Wizards" books.
“Global macro,” an approach to investing used by many hedge funds, is not defined by any one strategy, and this is clearly demonstrated during Drobny’s fascinating interviews with 13 highly successful practitioners – some well known, others less so. We learn how these thoughtful and intelligent managers think about risk, portfolio construction, history, politics, economics, central banks, globalization, different trading and investing styles, competition, their investors and the evolution and future of the hedge fund business.
The best thing about this book is that since the author has much experience working with hedge funds, he understands the industry well and so is able to ask good, focused questions on such things as the rationale behind different trades or investments, the processes of trade idea generation and implementation and risk-reward tradeoffs. To help color and clarify the situations described in the interviews, the use of charts and anecdotal information are beneficial to the reader.
An example of one interesting topic that came up several times was global macro, which is generally thought of as a top-down approach, actually often encompasses a “global micro” strategy when traditional macro instruments are not available or just not suitable to extract specific risk premia.
The majority of this book was written in between 2004 and 2006, with the updates covering 2006 to 2008 and then a post-global financial crisis commentary. Many of the original predictions regarding housing, credit and equities amongst others fared well, so it will be interesting to see how the longer-term scenarios analyzed within these pages play out going forward.
It is also interesting to see how successful hedge fund managers use information. One only needs his trading terminal to see charts; one just needs to read The Economist magazine to see the global big picture. Another just steals the best ideas from brokers and other market participants. Legendary investor Jim Rogers, who was also interviewed in the book, said, "The way of the successful investor is normally to do nothing - not until you see money lying there, somewhere over in the corner, and all that is left for you to do is go over and pick it up."
Dwight Anderson quotes legendary stock picker Julian Robertson (Trades, Portfolio) as hating the expression, "The market is telling me," and retorting, "The market isn't telling you anything - how come it's never talked to me?"
The question regarding what makes a great trader is wrong
One fund manager interviewed, Dr. John Porter, says a better question to ask expert traders and investors is: “How does one embody the qualities to become a great trader?”
His answer to that question is as follows:
"The most important quality of a trader is discipline. That is a sine qua non of trading: one must have discipline. It is even more important than idea generation. The key over time is to have the discipline to capitalize on your successes and minimize your mistakes because, ultimately, the game is about preservation of capital.:
You can be right in life, but in trading and investing, we should be more concerned with preserving our capital.