Paul Tudor Jones is a “Slave to the Tape”

Paul Tudor Jones is one of many hedge fund legends who recently did a number of short interviews in Alpha Magazine; his comments on the energy markets were noteworthy:

Is the price of oil high for fundamental reasons, or are hedge fund managers and Wall Street driving it up?

It’s a very bullish supply-and-demand situation, and the peak oil theory is probably correct. But the run-up in prices is now bringing in an enormous amount of speculative, nontraditional capital such as pension funds and university endowments — principally through index products.

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.

I might as well throw in my two cents; right now oil bulls are right up there will Apple iPhone fans in terms of smug invincibility. There is nothing wrong with being passionate about a theme, but refusing to poke holes in your thesis and question your assumption is dangerous.

Oil bulls possess a religious-like fervor that has seemed to gain strength with each uptick in crude; as an outsider watching from a distance, I have to say it is a little scary. Just an impartial observation, and it is not , in a vaccum, necessarily actionable.

Meanwhile, Global Macro strategies are enjoying a renaissance, and Paul is in the thick of it; he loves to play the game, and does not seem to have lost his enthusiasm over the years:

I love trading macro. If trading is like chess, then macro is like three-dimensional chess. It is just hard to find a great macro trader. When trading macro, you never have a complete information set or information edge the way analysts can have when trading individual securities. It’s a hell of a lot easier to get an information edge on one stock than it is on the S&P 500. When it comes to trading macro, you cannot rely solely on fundamentals; you have to be a tape reader, which is something of a lost art form.

The inability to read a tape and spot trends is also why so many in the relative-value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced “100-year events” every five years. While I spend a significant amount of my time on analytics and collecting fundamental information, at the end of the day, I am a slave to the tape and proud of it.

Good stuff, check it out, they feature Louis Bacon to Alfred Winslow Jones in their Hall of Fame

And if you did not know, Alfred Winslow Jones came up with the standard 20% incentive fee hedge funds charge, borrowing a page from ancient lore:

He (Jones) charged a 20 percent performance fee — unheard of in its time, though standard today — justifying it with a piece of captains’ lore from antiquity: Phoenician sailing ships, he was fond of saying, claimed 20 percent of a cargo if they delivered it safely to port.

Hard-driving hedge fund managers, he deemed, deserved no less.

Somebody tell James Simons it is supposed to be 2/20, not 5/44.

Paul Tudor Jones Interview
Alpha Magazine
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