“Macro, Macro Man”, by Riva Atlas:
Today [Louis] Bacon reigns over not only Moore Capital but over the most visible, most high-octane area of money management–macro investing. He gained the throne by default, and at a time when the future of the realm is increasingly in doubt. After sharp reversals, Julian Robertson in March shut down Tiger Management; in April it was George Soros’ turn to slash the size and scope of his funds. With $9.4 billion under management–and $7.6 billion in macro partnerships–Bacon is by far the biggest of the daredevil managers who are still placing big directional bets on stocks, bonds, currencies and commodities at a time when such bold trading has come under withering scrutiny. But he, too, is struggling this year, and many skeptics wonder whether the days are numbered for this high-wire investing style.
Like his bigger, better-known rivals, Bacon has racked up a stunning long-term record. His flagship fund, Moore Global Investments–at $6 billion by far his largest–has returned 31 percent annually after fees since its inception in 1990. Last year the fund was up 26 percent.
But Bacon’s hallmark has been consistency: He delivered these returns with low volatility and relatively little correlation to the stock market. From 1995 through 1999, his annual returns ranged from 23 percent to 32 percent (see graph). By contrast, Soros’ flagship Quantum Fund zigzagged between 39 percent and -1.5 percent, while Robertson’s Jaguar Fund whipsawed from 57.2 percent to -18.1 percent. Moore’s funds recorded a Sharpe ratio–which measures risk-adjusted investment returns (the higher the number, the better)–of 1.77, compared with 0.69 for Quantum and 0.45 for Jaguar over those five years. The Standard & Poor’s 500 index logged a 1.54.
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, a close friend of Bacon’s who runs Tudor Investment Corp. Jones wrote the book on capital preservation. Leveraging up and chasing any investment opportunity anywhere in the world–for a macro trader to be guilty of style drift, he would have to leave the planet. These swashbuckling bettors captured headlines, investors’ imaginations, and their funds. The most notorious exploit was Soros’ $10 billion bet against the British pound, which earned him the sobriquet of the Man Who Broke the Bank of England. Always volatile, macro trading became increasingly difficult as more players crowded into the arena. A variety of factors, including the development of a single European currency, have eliminated many of the massive global bond and currency trades by which macro traders earned their handsome livings. Since the 1998 blowup of Long-Term Capital Management–technically an arbitrage operation that made huge macro bets–credit for macro traders has been tight.
Indeed, even before this year’s woes, many famous players–Michael Steinhardt of Steinhardt Partners and Leon Levy and Jack Nash of Odyssey Partners among them–quit the business. A handful of practitioners remain. Besides Bacon, the most prominent include Jones, Bruce Kovner of Caxton Associates, and Monroe Trout of Trout Trading. Sources in the hedge fund community say that Druckenmiller will be coming off the sidelines in September, to take active control again of his Duquesne Capital Management. For a man of his influence and wealth–perhaps $1 billion of his net worth is said to be tied up in his own hedge funds–Bacon maintains a remarkably low profile. No gala charity benefits à la Paul Tudor Jones, whose annual fundraisers for the Robin Hood Foundation regularly grace newspapers’ society pages; no Sorosian campaigns to urge Eastern European political reforms or the legalization of marijuana for medicinal purposes. Bacon’s incessant trading generates huge commissions, but not many on Wall Street know what he looks like. (Six feet tall, he sports a beard that comes and goes at whim.)
As with life, so with trading: Few know what Bacon is doing at any given time, and he prefers it that way. At a time when hedge fund performance data is freely available on the Internet, Bacon tries to keep his results secret and is even wary of having historical returns for his funds published. Bacon grew up in Raleigh, North Carolina, and counts among his ancestors Nathaniel Bacon, a rogue colonist who, in 1676, launched an unauthorized attack on Indians that briefly led to his controlling most of Virginia. Bacon’s father, Zachary Bacon Jr., ran the North Carolina real estate operations of both Prudential and later Merrill Lynch & Co. Bacon’s mother died in 1983. When his father eventually remarried, it was to the sister of a man who was fast becoming a Wall Street legend: Julian Robertson. Bacon is the middle of three sons. His brothers, Zachary III and Bart, graduated from local public schools, but Louis, in his junior year, ventured out of town to Alexandria, Virginia, enrolling in preppy Episcopal High School, by coincidence Robertson’s alma mater. Students at Episcopal were expected to work hard and had to sit in study hall during free periods and evenings. Only in the afternoon did they get a few hours outdoors, to play football or other sports. Bacon didn’t seem to mind. One afternoon I passed through study hall, and there was Louis, grinding away, recalls Lee Ainslie Jr., the former Episcopal headmaster and father of Lee Ainslie III, manager of the $4.5 billion Maverick Capital hedge funds. Most other boys would have been happy to be outdoors playing.
For college, Bacon traveled north to Middlebury College, where he majored in American literature. A favorite professor, Horace Beck, says he saw no signs of the budding financial genius. I tried to get him interested in folklore, he recalls. But really, I had no idea what he was going to do. An aficionado of Ernest Hemingway and Nathaniel Hawthorne, Bacon cultivated his love of the outdoors in the bucolic surroundings of Vermont. Southerners at Middlebury stuck out like sore thumbs, recalls classmate Christopher Brady, who heads money management and advisory firm Chart Group and is the son of former Treasury secretary Nicholas Brady. He hunted a lot, skiied incessantly and studied. Still, there were some early signs of the future financier: During the summers following his sophomore and junior years, Bacon worked as a clerk for New York Stock Exchange specialist Walter N. Frank & Co. The enterprising Bacon met Frank after working on his deep-sea charter fishing boat off Montauk, Long Island, during the summer of 1976.
From college, Bacon headed to Wall Street, landing a job as a clerk on the New York Coffee, Cocoa and Sugar exchanges. A lot of the great traders on Wall Street are from the South, and many got their start in commodities, explains Brady. An early influence was Paul Tudor Jones, who was sharing an apartment with Charles Johnson, a former roommate of Zack Bacon’s at the University of North Carolina. Jones, who had started out as a cotton trader, was then working as a commodities broker with E.F. Hutton. Bacon soon headed off to get his MBA at Columbia University, where he used his student loan as capital to continue to trade. To his chagrin, he lost it all–and had to work odd jobs to make up the difference. From this experience, he learned how to handle risk, explains Arpad Busson, who runs London-based EIM Group, a firm specializing in alternative asset management and fundraising and whose clients have had money with Bacon since 1990. Bacon landed at Shearson Lehman Hutton in 1983 as a futures broker, trading on behalf of some of the biggest names in the hedge fund world. For a 27-year-old, Bacon deployed a powerful Rolodex. Jones and brother Zack, who deployed landed at Soros Fund Management as head trader, threw plenty of business Bacon’s way. He quickly became a top commission producer.
Louis was very fortunate to be right in the middle of that network, notes Charles Stockley, president of Stockley Asset Management, a futures trading firm, and a childhood friend of Jones’s. You can’t say that his career is a story of someone starting at the bottom and clawing his way up. But he took the ball and ran with it, and ultimately he surpassed them all.
Bacon’s gilt-edged client list had another advantage, in addition to the hefty commissions: By trading on behalf of Soros and Jones, Bacon learned their investing styles. By 1986 Bacon had acquired enough of a reputation to start managing other peoples’ money. The following year, while still at Shearson, he set up a small fund called Remington Investment Strategies (it remains part of the Moore Capital family). Right off he hit a home run. He correctly anticipated the stock market crash, going short S&P futures and then shifting to a long position just as the market bottomed. By the end of the decade, Bacon had established a strong track record, and he decided to move to a bigger stage. When he set up Moore Capital in 1989 (the firm bears his mother’s maiden name), he already had more than $100 million under management. He quickly raised $1.8 million more for an offshore fund, Moore Global Investments, which is today Bacon’s biggest portfolio. Much of the sum came from Antoine Bernheim, whose Dome Capital Management invests in hedge funds on behalf of European investors. The key thing about Louis is his ability to analyze and process information quickly, while controlling risk, enthuses Bernheim. That is the essence of a talented hedge fund manager.
The early investors were quickly rewarded: That first year, Moore Global was up 86 percent, thanks largely to Bacon’s decision to short the Nikkei index just before the Japanese markets collapsed. He also anticipated Saddam Hussein’s invasion of Kuwait and went short stocks and long oil. As Bacon set out to raise more money, his task was made easier by his friendship with Jones, who had decided to close his funds to new money. In a letter to investors, Jones recommended they invest spare capital with Moore. Jones also introduced Bacon to Busson, who had helped him raise money in Europe. By the end of 1990, Bacon had $200 million under management and was up a healthy 29 percent.
Bacon soon began refining his trading style. Though he studies charts and diagrams, he relies on an obsessive attention to detail–and ultimately instinct. He is like an animal in his ability to sense the market, says one longtime investor. Like any good macro trader, Bacon strives to identify long-running trends, or investment themes, such as euro convergence or structural interest rate moves. But unlike many others, Bacon can have an itchy trigger finger, and he will sometimes trade in and out and around his positions, even if they’re moving in the predicted direction. If Louis thinks something is going from 70 to 100, he’ll trade in and out 15 times before it gets there, where we would get in and hang on as it went up and down, says one trader at a rival hedge fund. Even today, with some 230 employees, Bacon keeps a firm hand on the tiller. Very few people at the firm are allowed to take serious risk, says one source. There’s a lot of people there, but they are mostly in support, research or administrative positions. Still, Bacon is capable of holding positions when he thinks they have potential: A source close to Moore notes that the firm maintained a stake in European bonds, particularly Swedish and Italian securities, from 1995 to 1999. But typically, if an investment seems to be moving against him, Bacon will get out quickly.
If a stock goes from 100 to 90, an investor who looks at fundamentals will think maybe it’s a better buy, explains one source. But with Louis, he will figure he must have been wrong about something and get out. Contrast that, say, with Robertson, who, even after shutting down his firm, was doggedly holding on to massive positions in such stocks as US Airways Group and United Asset Management Corp.
The difference between Louis and Julian is, Julian sees the mountain from afar and doesn’t worry about the valley. Louis has a long-term macroeconomic vision on every position, but he won’t let that stand in the way of making money over the next five minutes, says one former employee. Bacon’s risk habits were formed in the futures arena. Interestingly, many of the macro funds that have disbanded or scaled back following losses–Steinhardt Partners, Odyssey Partners, Soros Fund Management and Tiger Management – were led by stock pickers. Meanwhile, most of the surviving macro players–Bacon, Jones, Kovner and Trout – come from the futures business. The only people who survive in the futures world are those who understand and can manage risk, explains hedge fund consultant Hunt Taylor. That’s because the leverage is so high. Agreed Bacon in a recent investor letter: Those traders with a futures background are more ‘sensitive’ to market action, whereas value-based equity traders are trained to react less to the market and focus much more on their assessment of a company’s or situation’s viability.
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