Podcast Transcript: Todd Edgar On Managing Money, China and Advice from Paul Tudor Jones

This is an edited transcript of our podcast episode with Todd Edgar first published on 10 September 2021. Todd Edgar has over 28 years’ experience in financial markets. He was Global Head of Macro Proprietary at Barclays Capital and before that as Global Head of the Commodities and FX Proprietary Trading at JPMorgan. In this podcast we discuss how markets changed since the global financial crisis (2008), approach to investing, views on crypto markets, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Introduction

Bilal Hafeez (00:01):

Welcome to Macro Hive Conversations with Bilal Hafeez. We aim to bring you the best macro to help you successfully invest in financial markets.

Summer is over, at least in the Northern Hemisphere, so it’s time to get serious about investing once again. We’ve been refining our Macro Hive Prime offering to make it much more impactful for private investors. Our recent notes reflect this. I take a look at which equity markets offer the best dividend yields. After all, if equity prices stop going up, you’ll need dividends to keep some returns coming in. Regular contributor John Tierney gives us an update on which equity sectors he likes and which ETFs to follow accordingly, then we have recent podcast guest Alberto Gallo give an investor’s take on the recent clamp downs on the private sector in China and what it means for your exposure to China. You can get access to all of this and more, including our member Slack room where the Macro Hive team and members discuss markets all hours of the day. It’s refreshingly different from Twitter. When you sign up, the first month is free, and then it’s only the cost of a few weekly cappuccinos. It’s well worth it, and many call Macro Hive the hidden gem for investors. Once again, sign up at macrohive.com. If you’re interested in our more high-octane research product for professional and institutional investors, you can drop me an email on Bilal, B-I-L-A-L, bilal@macrohive.com.

Now, onto this episode’s guest, Todd Edgar. Todd has over 28 years’ experience in financial markets. He’s spent the last two years as CIO of Atreaus Family, a family office allocating capital to equities, rates, commodities, FX, crypto, and real estate. Prior to that, he spent nine years as founder and CIO of Atreaus Capital, a global macro hedge fund with a peak AUM of three billion dollars. He’s also served as a managing director of Barclays Capital as the global head of macro prop trading. Before that, he had senior roles at JPMorgan, Tudor, and Morgan Stanley. Now, on to our conversation.

Bilal Hafeez (02:03):

Welcome, Todd, to the podcast show. It’s great to have you on.

Todd Edgar (02:06):

Oh, thanks, mate. Thanks for having me.

Where is started for Todd Edgar

Bilal Hafeez (02:08):

Great. As usual, I always like to ask my guests something about their origin story. It’d be good to learn where you went to university, what you studied, and was it inevitable you’d go to finance, and then how did your finance career unfold?

Todd Edgar (02:23):

Well, that’s a good question, and sort of a somewhat amusing one, I guess, in terms of… As you can probably tell from my accent, I’m Australian. I went to college, or university, in Australia at University of New South Wales, and I actually started there. I worked full time and went nights. I worked as an auditor, of all things, at Pricewaterhouse straight out of high school, which I did for two years. I wouldn’t say hated every second of it, but reasonably close. Then once that finished, when I went to full-time uni, I switched from accounting finance to, actually, philosophy, which I found way more interesting. When I graduated, I had this sort of weird sort of hybrid degree of a bit of accounting, a bit of finance, and a lot of philosophy.

Bilal Hafeez (03:04):

That’s an unusual combination, I have to say.

Todd Edgar (03:06):

Yeah. Oh, I guess it’s a bit of the cliche needs must. I guess the accounting bit was needs. The finance stuff, I’d always been somewhat interested in. I was one of those annoying children that traded shares from a fairly young age, and that sort of led me then into applying for a job at a bunch of banks. Given my rather strange resume, I didn’t get a lot of interest, so I actually ended up getting a job as a snowboard instructor. Sort of towards the end of the season, I get a call from Bankers Trust in Australia, and sort of was interested in having a chat.

I went in for these interviews, and it was actually a series of disastrous interviews where the guy look would at my resume and say, “So tell me something about Black-Scholes.” I’m like, “Well, clearly, I don’t know anything about Black-Scholes.” Or, “Talk me through the rates curve.” I’m like, “What does that even mean?” I’d try and steer the conversation to, “Hey, here’s some sort of trading,” or whatever else, and they’re “Well, you don’t really know what you’re doing.” Then the very last person who interviewed me picks up my resume and looks at me, goes, “So I see you surf.” I’m like, “Aha. That’s something to talk about.” Then we talked about surfing for an hour, and I got the job.

I guess with the benefit of hindsight, I realise now what he was doing, which was he was using surfing as a metaphor for risk. He was asking me all these questions about sort of how I’d assess conditions and when I paddle out and blah blah blah blah blah. I think I was very lucky in that it just turned out, as I subsequently found out, I was just a much better surfer than he was, so all my risks, all my answers were the right ones, again, through complete dumb luck. I ended up on an FX derivatives desk, which was actually a really good, so that was 1993. That was at Bankers Trust in Sydney, and they were fantastic. Obviously, Bankers Trust doesn’t exist anymore, but still to this day, I’d say that was probably my favourite ever place to work.

As I sort of later assumed managerial responsibility, continued to try and rebuild the Bankers Trust ethos and failed dismally every time. But again, obviously, part of that ethos, and I guess this is ultimately also why it fell over, was fairly laissez faire, to put it kindly, attitude to risk, in terms of, “So you’re wanting to take risk? Take risk.” if you wanted to… You know? I was, again, rather fortunate that the guy who was my boss and I was sitting next to turned out to be one of the bigger risk-takers in the room at that point in time. Sitting next to him, I was like, “Well, I won’t take that much risk, but I’ll take a little bit less than him,” and that sort of got you on a good path.

Moving forward now, that was 28 years ago now, I guess, FX derivatives into commodities, on the banking side of things, and then, I guess, in 2003-ish, I guess, I sort of moved to the buy side as a portfolio manager, then sort of flopped backwards and forth a little bit between buy side firms and prop desks as a portfolio manager. Then about 10, or over 10 years ago, took a team of people who were working for me and we spun out to start a macro fund. That was Atreus Capital. We did that for eight or nine years. It was an interesting path, which I can talk about, but as I tell people now, I’m glad I did it, but I’m glad I don’t do it anymore. So then about two years ago, I took the fairly well-trodden path of turning that into a family office, and that’s what I’m doing now.

Challenges of running a hedge fund

Bilal Hafeez (06:33):

Okay. No, that’s a great story. Well, I will pick you up on running your own hedge fund. As someone who hasn’t started up a hedge fund, it’s always alluring to think, “Okay, start up a hedge fund.” What’s it like? I mean, what was the biggest challenges you found?

Todd Edgar (06:49):

It was the sort of, I guess, Glengarry Glen Ross, always be closing type thing, in terms of demands on one’s time, in terms of investor stuff was a lot. Having said that, I actually really enjoyed it at first. I actually found that I actually was a better salesman than I thought I was, or thought I would be, rather, but ultimately, if you’re the founder and sort of CIO of a hedge fund, as I was, you’re wearing a bunch of different hats. Obviously, you’re a portfolio manager. I hired a bunch of investor relations people over the years, and all of them were pretty good, but at the end of the day, if someone’s going to write you a check, they want to speak to you. I worked out that in the nearly 10 years I was running a fund, I had an average three investor meetings a day for 10 years. You’re talking about nearly 7,500 investor meetings over a 10 year period. I mean, that’s a lot. It’s not necessarily for me at… Well, I think you find your own demon with this, in terms of in that for some people, they say, “Well, I’m off the desk, and I missed this opportunity.” That wasn’t my issue with it. I guess it hurt my trading mentality. I’ll just give you an example to illustrate this, but this is just one of them, and there was a bunch of ways that this happened. If you think about sort of when you’ve had a loss, for example, and what you should be doing if you’ve lost money on something, is you want to think about why you’ve lost money and see if there’s anything systematic there and if there’s anything you can learn from that loss, and then you want to forget about it. Then you want to move on. You want to be the goldfish and swim around in the tank, and the next lap is new.

What I found for me in the process of sort of running this fund, and sort of, to a certain extent, being the person people wanted to talk to, that was a very difficult thing to do in those circumstances, because think about it. If you’ve had a bad month, okay, you’re going to have literally 100 meetings about why you suck. I found that very psychologically difficult. Maybe if I was a stronger person, or you’re more thick-skinned, or whatever else, yeah, I would have done a better job of that, but I didn’t, and eventually, it really weighed on me. Five years ago, sort of where I just wasn’t enjoying it, and I kept doing it for another two or three, four years after that… You get to the point where you’re like, “If I’m doing something I’ve always wanted to do and always had this aspiration to be, and all of a sudden, here I am and I’m not loving it, well, what am I doing wrong?” Then you unpack, again, what do you actually good at? For myself, I think, “Well, what am I good at and what do I enjoy?” Those two things often go together, but not always true. For me, it’s always been the investing side of things. I do like that, and that’s what I’ve… Even to this day, so I jump out of bed every morning, but I’m sort of excited to get up and do what I do, whereas the running a fund, the investor stuff, and even, frankly, managing people and that sort of stuff, I didn’t enjoy it, and I’m, frankly, not very good at it.

How markets have changed since the global financial crisis (2008)

Bilal Hafeez (09:54):

Yeah, okay. That’s very frank of you, and it all makes sense. I mean, the thing about the last 10, 15 years, of course, is that we’ve had the global financial crisis which has changed markets in many ways. A lot more central bank intervention, collapsing rates to zero everywhere. I mean, do you think the environment we’ve been in has impacted the way you trade, or is it just another macro environment you have to trade? I mean, is there something fundamentally different now in the post-GFC world?

Todd Edgar (10:21):

I think C, all the above. I think there is actually a little bit of both. Different investing styles work at different times, and to your point, I actually very much agree with you. If you think about sort of the classic macro environment have what you would want, you’d want different economies and different central banks doing different things at different times. Currencies are a purest example of how one can express that sort of thing, and that just hasn’t happened. To your point, it hasn’t really happened since 2008 in any sort of meaningful way, so hence trying to make money trading currencies has been, by and large, pretty difficult, with maybe the exception of Abenomics, and maybe the dollar move after the French election. A few others, but over a 13-year period, you’ve got three trades, which is a tough thing to make a living out of, and an even tougher thing to build a business on top of. But that being said, there’s always opportunities.

Getting back to the fun side of things, what can be challenging in that, given that setup, and I think that is the setup, you tend to be… If you’re running a fund and you’re pitching investors, you have to tell a story. “This is what we do. This is how we do it. This is why it works.” Process, process, process, reason, reason, reason, and that’s how you raise money. Now, one of the one of the things about that is it becomes quite limiting in a weird sort of way. If I think about when I started the fund back in 2011, no, 2010, I was pitching us as an FX and commodities shop, which if I think about what we were most competent in, that would probably be it.

Frankly, the next seven years markets were horrible. What we should have done, what I should have done, is think, “Well, okay. This is not really working. Either do I change my process to make it work, or do I, or actually not or, and/or do I look at different markets? Do I look at different things?” That’s a very difficult conversation to have with an investor without them redeeming. It’s been very interesting… For me, in the last couple of years, where I’m just sort of managing my own money now, it’s almost like the blinkers have been taken off. It’s like, “Oh, look at that over there.” Yeah. I do think, yes, it has changed, but it always does. Is it harder? It was always pretty hard. I mean, I always think it’s pretty… Maybe someone out there finds this easy, but I don’t.

Approach to investing

Bilal Hafeez (12:50):

Yeah. In terms of your approach to investing in markets, I mean, do you have a particular approach? As in, do you prefer certain time horizons, like the one-week horizon, three month, six month? Do you to trade sort of big macro themes, or do you prefer to look at flow and the microstructure of markets and look at anomalies there? Do you have an approach?

Todd Edgar (13:11):

Definitely a top-down, big macro theme person. That’s not because I think that’s right or better, it’s just because that’s what fits with how I like to look at the world and what… Not just how I like to look at the world, but actually just what resonates with me. You think about how one gets investment ideas… You can get them from reading and then thinking, or you get from talking and then thinking. So, the question of, what conversation do you want to have, and what do you want to read? If you’re sitting there… For me, for example, if I’m sitting here reading a report about a company, or even, frankly, a commodities balance sheet, that’s just spectacularly boring for me so it won’t resonate. It won’t work, whereas if I’m thinking about something sort of maybe a bit more political or a bit more macro that will resonate with me, I’ll be happy to sit there and read that sort of stuff all day, and eventually, I’ll find something that works. Beyond that, to your question around sort of timeframes and process, I try to be pretty agnostic about that, in terms of…

For example, I’ve been effectively long Chinese bonds for three years now, and I would assume I have no reason to change that, and I hope I’ll be long with them for another three years, whereas I have the long gold at the moment and I’ll probably change my mind by the end of this conversation, sort of thing. I try not to be too prescriptive around things like timeframes. If it’s working, keep going. If it stops working, stop. Then in terms of a process around how does it get into the portfolio, a lot of process there, and then it would be probably even more important process around risk management. Stop losses, sizing, et cetera, et cetera. That’s something I’m also sort of pretty religious about, I guess.

Bilal Hafeez (14:55):

Then in terms of flow and positioning… I mean, when I speak to lots of macro investors, many of them have become quite short term, and they focus a lot on flows and what CTAs are doing in the market, where the barriers are in the market, all of those sorts of things, because they feel like it’s harder to cap longer-term trends. I mean, do you have a view on that?

Todd Edgar (15:14):

Yeah. I mean, once again, I’m never… You can tell me you take investment decisions based on the number of ducks in your backyard, and I’m like, “Awesome. That’s good. If it works, fantastic. That’s great. Trade away.” I’m not going to sit here and tell you that that can’t work. It probably can, and probably there’s a bunch out there probably do it very successfully. Those people ain’t me. I can give you a philosophical, rather, example why I struggle with that a little bit.

The example I’d give you is sort of almost Pascal’s wager style box. Think about you take a trade, and back in the days when I was managing a lot more money, let’s say there’s a market rise. A big trader. Let’s say I am taking it. I’m buying a billion whatever. I’m buying a billion Aussie or something. Now, I can be doing two things here. I can be getting into a position and I can be getting out of a position. There’s another two things that can happen, getting back to the Pascal’s wager style box, which is that the trade will make me money or the trade will lose me money, and you’re not going to know either of those things until after the fact.

If you think about that box where getting in and getting out on the X axis, and winning and losing is on the Y axis, there’s only one box out of those four where that information is valuable. It’s getting in when you’re about to win. The rest of them, the other three boxes, are either useless or actually worse than useless. In fact, dangerous. Unless I’m high-frequency trader guy where I’m literally just front-running my order, which maybe I should be careful about using those exact terms, but I’m actually literally sitting in front of me knowing that I’m going to buy a billion Aussie, and you’re ticking in front of me. The rest, any other information? Unless you know a priori that that is a getting in trade that’s going to win, which you can’t know, it’s useless information.

Bilal Hafeez (17:16):

Yeah. No, that’s a fair point. I think part of the issue around flow and those sorts of information positioning is that on the sell side, sell side people need to tell the story every day, and so there’s always some story about some flow or positioning. It’s an easy thing to talk about, to some extent. Whether it has value is less of the question, I guess.

Todd Edgar (17:37):

Well, I would agree with you, and I also would say, getting back to my point before about 7,500 investor meetings in 10 years, it’s not just sell side people who need to tell a story. I mean, everyone needs to tell a story, and whether it’s… Well, not everyone. Almost everyone needs to tell a story. Whether it’s you running a fund, you need to tell your investors a story. If you work in a fund, you need to tell your boss a story. Almost everyone needs a story.

Reason for being long China bonds

Bilal Hafeez (18:01):

Yeah. Yeah, no, that’s a good point. Yeah. Going on to sort of core or macro views, you mentioned long China rates. You’ve held that for a number of years now. It would be good to know, what’s the thought behind that, and then how have you kind of evaluated that trade as time has gone on?

Todd Edgar (18:17):

Oh, well, again, I’ll answer the second bit first. For me, it’s is it working, in terms of in that that is so much of… If it works, I want to do it. If it’s not working, I don’t want to do it. Now, obviously, there’s going to be timeframe and volatility parameters around that. How does one define working? Simply, is it making me money, and within the parameters and the risk parameters I’ve set, and within the timeframe I’m thinking? The timeframe, I tend… As I said, the risk parameters are religious. The timeframe is a little more airy-fairy. Obviously, the other overlay to that is that if the thesis changes, that would also be a reason to take something off, even if it might be working.

PBoC the new Bundesbank

Todd Edgar (19:02):

To use that as an example, I think ultimately, since even going back to 2009, obviously, the Chinese fiscal monetary response to that crisis was throw the kitchen sink at it, which has been the Western approach since then, as well, whereas, really, since then, which is 10 years ago, the Chinese have been one of the very few hard money central banks in that sort of environment. If you look back in history, I almost feel like the PBOC is almost become the Bundesbank. If you have a hard money central bank, you want to own those bonds. It’s, frankly, not much more complicated than that, and last but not least, it’s obviously also a relatively high yield in the current world, so you’ve got a hard money central bank that yields 3% a year in a world where zero yields, you’d be doing cartwheels over.

Bilal Hafeez (19:58):

In terms of asset class there, do you also have a long China yuan trade, as well, or why did you not think about the FX side?

Todd Edgar (20:05):

Yes. Well, it’s unhedged, so yes, that is also a big part of it as well, and that all goes into the same mix. Yeah, the yuan, I do worry that you wake up one morning, and I mean, not to sort of… China invades Taiwan, or… Which I’m not predicting that. I don’t necessarily… Who knows? Could. Or what you’ve seen in sort of the private tutoring companies happens to the currency, as well. But I do think there is a… Again, if you think about sort of, “What would I do if I was Xi,” I think there is a lot to be said for having a reasonably stable robust currency in the current environment. That could change, but I think that’s the balance of probabilities, so I’m sort of comfortable with that at this point. And if you’re not comfortable, it’s easy to hedge. Buy some optionality. You can hedge the currency side of things. Especially in the size I trade now, you do with the press of a button.

Are commodities in a new supercycle?

Bilal Hafeez (21:03):

Yeah. Obviously, China has a big influence on commodity markets, and we’ve seen some big swings in commodities, especially since COVID. Now, some of that with COVID is we went extremely low levels and we’ve just bounced back to more normal levels, but many people are talking about the beginning of a new supercycle in commodities. Do you have a take on that or not? I mean, I know you have a lot of expertise in commodities, as well.

Todd Edgar (21:27):

Yeah. Well, the caveat, I’ve done a fairly horrendous job in catching a lot of these moves. You were talking about timeframes before. For me, in the last year with commodities, it’s been one of those sort of timeframe mismatches where you’ve got the one-year view with the two-day stop sort of thing, so I haven’t done a good job with that. With a caveat of someone who’s done a crappy job of catching this, I don’t really know, in terms of in that if I think about why do I want to be involved in a commodities market on the long and short side, this is straight from my investor pitch, I want all the ducks to be in a row. I want to be able to sit here and say, “I think there’s supply tightness.”

I think if I want to be long, I want to have supply tightness and I want to have the capacity for that to be at the margin getting tighter, and then I also want to have increasing demand, and then some sort of technical overlay of prices. I think that you’ve had both those things in a lot of commodities for the last… Oh, since COVID, I guess. Yeah. So now, in the last, let’s call it five months, commodities have got a lot harder. There’s been a lot more sort of sideways chop and pretty big reversals. I think the supply stuff is probably still there. I mean, I think the things that are tight, like aluminium or copper, oil, maybe. Obviously, natural gas has been a standout. I mean, that’s a whole sort of idiosyncratic thing going on there at the moment. Soft commodities, maybe, maybe not sort of thing. That’s a lot…

Well, if you think about the lead time, sorry, I’m jumping around a bit here, but the lead time of a copper mine is 10 years, whereas if there’s a tight supply balance in corn, six months later, you might have a great harvest and it changes it, so that’s a little more fluid. But I think in a lot of this stuff, the supply, the supply tightness is perhaps still there. The demand stuff… Yeah, maybe that’s a little bit more of a question mark than what it was six months or a year ago. For me, the only commodity position I have on at the moment, or two, actually, I’m a little bit long gold, which I don’t… It’s a bit of a beating of head against wall, that trade over the last year, but I’m having another crack at that one in small size, and I’m a long aluminium. Fairly recent one.

How to think about inflation

Bilal Hafeez (23:39):

Yeah. Do you have a view on the big inflation debate? I mean, there’s been a huge amount of ink that has been spilled on this topic. Sometimes I wonder whether there’s been too much discussion on this, but I always ask investors this question.

Todd Edgar (23:54):

I feel like maybe there’s been a bit of a… I mean, I’ll answer this in a different way, and it is sort of a little linked, also, to the currency question. I think those two things are often linked in that you sort of, “Well, this current fiscal monetary mix, there will be inflation and the dollar will depreciate.” I’ve made the argument that’s already happening, it’s just happening in a different way than what people expect it to be. One of the better charts, or one of the better thoughts that I’ve seen in a while was sort of a few months ago, someone was mentioning to me the idea of using… Well, backtrack a little bit. If you think about an asset, a stock or a bond or whatever else, in a weird sort of way, having an FX trader’s mindset in the current environment, I think is a, well, not mindset, but a way of looking at the world, could be helpful. What I mean by that is if you think about it, you trade FX, there’s always you’re buying something, you’re selling something, and you’re equally focused on both, whereas if you trade a stock, you’re buying a stock, and you’re focused on the thing you’re buying, and you don’t even think about the thing you’re selling, which has been a dollar or a fiat currency.

I think in the current environment, where we’re continuing to see the expansion of central bank balance sheets, we’ve got… MMT is a loaded term, but you sort of read the books. What we’re seeing now is not a million miles away from that. That should be inflationary, and it should be fiat currency depreciating-y, I guess, but you’re not seeing that manifest itself in the bond market or the currency markets, and there’s a lot of head scratching around that. Once again, getting back to that mindset of what is on the other side of whatever it is you’re buying or selling. I don’t know. I’ve made the argument you have seen an enormous amount of that. The S&P has doubled, and that’s not as… Yeah, there’s been a multiple expansion, blah blah blah blah blah, but that’s less about the S&P doubling. It’s more about what’s on the other side of that. Real estate is very big everywhere, and once again, is real estate big or is the other side of the thing going down? Crypto, you make the same argument with crypto. Even gold, as much as it’s been frustrating for the last 12 months, it’s still… If you look at gold divided by the Fed’s balance sheet, it’s actually held its value okay. I think that’s a really useful… To sort of rephrase your question, will we see inflation in the way we saw it in 1974 and with CPI going up and bonds going down, blah blah blah? I mean, maybe. I mean, I’m open to that idea, but I would make a fairly strong argument that we are already seeing inflation, just not in that way. We are already seeing currency debasement, just not in the way you expect it. Until the policies change, and I see no or little evidence of that happening, that’ll continue.

Bilal Hafeez (26:43):

Yeah, no, that makes sense. Yeah. I think one big difference with the ’70s, as you point out, is that today, it’s so much easier for everyone to access financial markets in different ways. If you have some excess cash, you aren’t constrained by your access to markets. You can just put all that money in buying crypto or equities, whereas I think in the ’70s, it was a lot more difficult to do that, so ended up going to the real economy.

Todd Edgar (27:07):

No Robin Hood in the ’70s.

Bilal Hafeez (27:08):

Yep. Yeah. In terms of nothing changing on that side in terms of policy, what’s your take, then, on Fed? Because there’s a lot of focus on taper, is the Fed going to raise its dots soon? That’s a big focal point at the moment.

Todd Edgar (27:25):

Again, my answer to most things is, “I don’t know,” which makes me a horrible interview subject, but I don’t know. I mean, maybe they will. Maybe, and then obviously, the more important question is what happens in markets after that? Once again, who knows? I mean, in terms of in the… I always think about the George Soros comment, which is that sort of, “I don’t predict. I only observe.” I think that’s a really useful way to think about financial markets.

To the question around the Fed, I can make a strong case for the Japanification, for want of a better word, of the US, where they talk and they maybe try and taper a little bit, and you’re already seeing, for example, the Citi Surprise Index gone negative… or two ago. You already see sort of the Fed being a little bit behind the eight ball already. Or maybe everything’s good and they taper and hike rates a little bit and everything’s hunky dory. If I had to bet at the moment, well, I’m long stocks and I’m long bond, so I’ve got sort of a bit of a risk parity position going on, which is, obviously, perhaps that will work better if the Fed is more dovish. I do think there is a little bit of a Hotel California type of effect with all this, where even if they do taper a little bit, it’s going to be hard for them to really taper. You look at the Fed’s balance sheet since 2008, and there’s not been much evidence of much tapering, and there’s been a few cycles there. There’s always some excuse not to. I also think getting back to the dots, again, to reiterate the I don’t know side of things, to me, the idea that anyone can predict anything in two years’ time with any accuracy is, frankly, insane. I mean, it’s hubristic, and I don’t think they actually believe it themselves. Maybe they do. I don’t know, but that’s hubris to the extreme. I mean, you don’t know what’s going to happen tomorrow, let alone two or three years’ time.

Views on crypto

Bilal Hafeez (29:22):

Yeah. No, understood. In terms of, say, new asset classes like crypto, I mean, how do you think about that? It’s easy to be skeptical, especially if one is from traditional financial markets, but at the same time, we’ve seen huge moves in market capital as those markets have increased. It seems an interesting market to trade in because there’s a lot of volatility in it.

Todd Edgar (29:40):

Yeah, I’m involved in a small way. I got involved a couple of years ago, and how I was thinking about it then was almost like an option, in that I want to allocate, as it was, sort of, say 100 basis points in my AUM to this and see how it goes. Since then, I’ve sort of done a lot more work on it and thought a lot more about it. I sort of think that the idea of crypto as a… You pick up the FT and read an article about crypto. I think there’s a massive category error there in that if you use the word crypto to mean Bitcoin to Ethereum to Solana to NFT, that’s saying, “I think futures are going to go up.” It’s like, “What does that mean? I mean, is it an equity futures? Is it a rates future? It doesn’t mean anything.” There are layers. Like from Shrek, “Ogres are like onions. They have layers.” Crypto is also like an onion in that it has multiple layers. I would characterise those as sort of… There’s the gold substitute layer, which is primarily Bitcoin at the moment. There’s the complicated DeFi layer, which is Ethereum at the moment. There’s the transaction DeFi, which is some like Solana or Cardano, and that’s considerably newer. There is the complete special what do you want to call it. There was some Dogecoin or whatever. I think dodgy is probably a better way to put it, but whatever. That’s there. Then on top of that, obviously, there’s the NFT tokenisation space. I think all those things are not to say that it’s a bubble and it’s just not based on anything real. I mean, once again, have a look at the Fed’s balance sheet… I’m not sure what real thing that’s based on. If that’s not a bubble, I don’t know what it is. Once again, I’m not saying that critically. It’s just is what it is. I think it’s getting harder to invest because it’s becoming more complicated and there are more layers to the onion/ogre, so it requires a little more thought and a lot more analysis and a lot more sort of almost stock picking, if you like, but it’s there.

Getting back to something we touched on before, as an investor, it’s not your job to be right. It’s not your job to be, hopefully, too limited in what you do. It’s your job to make money, and you do that by finding places you have some sort of theoretical edge with an overlay of risk management. That’s it. If that happens to be crypto for you, have at it and God bless. If it happens to be currencies, or if it happens to be real estate, whatever, that’s it. It’s not any more complicated than that, but you just have to sort of be honest with yourself and do the work to make sure that statement is actually true.

How to avoid losses impacting your future performance

Bilal Hafeez (32:41):

Yeah. No, that makes sense. On the risk overlay and the risk management, I mean, one thing I’ve always found difficult with risk management is… The theory’s fine. You can have a stop loss, your risk management systems, but there’s a psychological component, in terms of when you’re going through a drawdown or a loss. How do you not allow that to completely derail you and put you off track, in terms of just how you think and just watching P&L all day?

Todd Edgar (33:07):

Well, I tend not to watch P&L at all, actually. I think that’s one really important thing, in terms of in that I know my P&L is at the end of the day, and I have parameters around that, and I have stops, but you want to preplan where your sort of cry uncle point is on whatever, whether it’s portfolio level, whether it’s trade by trade level. Again, if you’re trading larger, you can’t necessarily leave stocks in the market. You can leave calls, or you can hire someone to help you out with that or whatever else, or you can leave stops if you’re trading smaller, but I personally think watching P&L tick around is just toxic. It’s so bad. I think, off on a slight tangent, I mean, that’s part of the reason why private equity is so attractive, because you can mark to market, and even then, it’s partly made up every three months, instead of watching. “Oh my god, it fell.” That’s not to, once again, be critical of that. That can actually be a big edge. I mean, not sort of freaking out when something sells off is probably a good thing. Once again, so long as it is within your risk parameters.

Bilal Hafeez (34:12):

In terms of having a bad run… Let’s say you have a three-month period, just say, where just everything is going wrong. I mean, how do you keep sane during that period?

Todd Edgar (34:21):

I had two-year bad run until the end of the fund life, and ultimately, that was a massive accelerant in terms of me shutting the fund down. There’s not really any magic bullet, in terms of how to do that. You’ve just got to follow your… Well, get smaller. I mean, there’s two things. Get smaller. By all means, stop. No one’s especially… Well, this is not always true, but probably I’d imagine a lot of portfolio management says, “You can just stop.” You say, “Okay, I’m going to take a week off. I’m going to take a month off. I’m going to take a year off.” I mean, you can do that, and that’s incredibly liberating in terms of clearing heads, and just follow the… Well, question whether the process works, obviously. You want to be thinking about… If you have a certain process around taking risk, you’re doing something that perhaps you shouldn’t, then you may want to rethink your process. An example that might be… You asked about sort of since the great financial crisis, how have things changed? One of the things I’d say has changed is breaks. For example, trading breaks used to be quite good. Now, not so much anymore. Yeah. It’s gone from a reasonably high probability signal to, I’d say, a much lower probability signal. You might want to realise that whatever it is you’re doing, something’s changed, perhaps, and you don’t want to do that anymore. So yes, by all means, rethink your process. You should be doing that anyway. That should be not something that you wait for a loss and go, “Crap. I’ve got to change things.” It should be something you’re constantly thinking about, in terms of, “Can I do this better? Is there something I should tweak here? Is there something I should add here?” Then you can obviously test that in parallel. “Is there some other marker I should be looking at? Am I missing something?” That’s something that’s almost the first few things you should be asking yourself every day you wake up, but beyond that, just follow the process, and I guess, to a certain extent, believe in it, as well. I guess that’s that’s also the hard part, in that do believe in yourself as a portfolio manager?

Bilal Hafeez (36:19):

Yeah. Yeah, that makes sense. I think taking time out, I think, is probably underrated as a thing to do, because I think there’s so much pressure just to not take time out. Yeah. Yeah, I always find whenever I take time out, like on a holiday or something, I come back recharged. I mean, we all know this, and so you want to use that in all sorts of different situations.

Todd Edgar (36:39):

There is an example of that, and this has happened numerous times where I’ve done that and then come back and then continued to suck. That actually can be dangerous, because it makes you feel even… It can snowball even further and you say, “Well, I just took time off. Now what do I do?” Yeah, that’s, again, not a magic bullet, and you want to be cognisant of the fact that you might come back and think, “Hey, I’m back and it’s going to be great.” Knowing you might be more emotionally fragile than you would have been otherwise, so you want to be want to be aware of that with that as a caveat.

Bilal Hafeez (37:16):

You studied philosophy as an undergrad. Presumably, you’ve stayed in touch with philosophy or you have a philosophy mindset. I mean, has it helped you, do you think, in your investing and trading at all, do you think, or not?

Todd Edgar (37:25):

Oh, I mean, maybe just sort of not being too certain of things. For me, once again, not to say this is prescriptive for anyone else, but the mindset of… To talk philosophy, I think it was actually Socrates, I could be wrong about this, or one of the stoics, who said something along the lines of, “The only thing I’m certain is that I’m not certain of anything. I’m not even certain of that.” I don’t think that the horrible mindset to approach investing with, in that… Again, to sort talk quotes, there was sort of the Mark Twain quote about, “It ain’t what you don’t know that kills you. It’s what for sure that just ain’t true.” I think that from a risk management standpoint, having some fairly large doubts about everything is probably useful. Now, obviously, there’s a trade-off between having no clue or extreme doubts and having the level of conviction you need to put a trade on, and you’ve got to try and tread to find the right balance between those two things, but frankly, from a longevity standpoint, I would rather start from the point of, “I don’t know anything and I’m really unsure,” and move to, “Well, I feel okay about this,” than stuff and, “I know everything, and then, “Oh, well, that didn’t work out very well.” So if that’s your two poles, I think having some sort of affinity with, I guess, the history of thought and all the doubts that go with that probably doesn’t hurt too much.

Advice from Paul Tudor Jones

Bilal Hafeez (38:55):

Yeah, no, that’s great. I wanted to also ask some personal questions. One I like to ask my guests are, what’s the best investment advice you’ve ever received?

Todd Edgar (39:04):

That’s a good question. Best investment advice I’ve ever received. You know what? Actually, it’s funny. I worked at Tudor for a number of years, and that was my first sort of buy side job. Didn’t work out well for me. I had a horrible time there and I was not very good. As a consequence, I think I probably had maybe three conversations with Paul in the entire time I was there. One conversation was, “Hello,” the other conversation was, “Goodbye,” and the conversation I’m about to tell you now. It was sort of along the lines of, not to sort of completely replay it, but it was along the lines of… What it made me realise was that even for someone like him, it’s always hard.

Bilal Hafeez (39:40):

Yeah.

Todd Edgar (39:41):

At that point, I was 20… I went there way too young. I was like 29 years old, and up until that point, everything had sort of worked out pretty well for me.

Bilal Hafeez (39:52):

Yep.

Todd Edgar (39:54):

I remember sitting there and Paul saying this, “It’s just as hard for me as it is for you.” I’m like, “What?” I’m like, “You’ve got billions of dollars and you’ve built this incredible firm. You’re Paul Tudor Jones.” How can it be? How is that true?” He’s like, “Well…” He told me a story about… Told me about a lucky rock, which I won’t recount, but that was such an epiphany for me in that this is never going to be easy, so either quit or sort of man up, to a certain extent. But also, just know that there’s going to be swings and roundabouts, and ups and downs, and have a robust process and a robust self-belief, which, frankly, is a lot easier said than done, around that. Don’t expect it ever to be particularly easy. That’s also, to a certain extent, what makes it continuing to be interesting and… fun is probably the wrong word, but it’s certainly interesting, because it’s a constant challenge. That’s a good thing. You want to have that as a mindset. But it’s never easy, and then the expectation that one day will be if you read enough or you’re experienced enough is a false hope.

How Todd manages his information (over)flow

Bilal Hafeez (41:01):

The other question I wanted to ask was how do you manage your research or information flow, or overflow, I should say? Do you have a system, or how do you manage it?

Todd Edgar (41:09):

I’ve tried a bunch of different things, where I’ve hired analysts and et cetera, et cetera. That doesn’t really work particularly well for me, because either I’ve got, again, the Paul’s thing. I would sort of either religiously follow everything they say and then sort of fire them when it doesn’t work, or be too skeptical or not do anything, and hence then at the end of the year wonder why I’m paying them all this money. That never really worked for me. It has to be the idea and then the execution has to be largely on me. Once again, I’m not saying that’s right. That’s just what I’ve found works for me. I find I’m just a sucker for good writing, at the end of the day. If you think about what’s the point of research, what you’re trying to do is, obviously, come up with some sort of investment thesis that gives you the appropriate risk return, given your trading style and risk parameters, and then execute it. I used to use the analogy of the rubber band ball. Have you ever seen that?

Bilal Hafeez (42:04):

Yes.

Todd Edgar (42:04):

So what you’re trying to do with the research is build this sort of multidimensional rubber band ball, where everything you read might add a rubber band or take a rubber band away, or whatever else, then eventually, you’ve got this sort of worldview, and then the market reflects that. You go, “Oh, I’ve got this,” and then you execute. In terms of the efficacy of research, in terms of adding more rubber bands, again, if it’s crappy writing or I’m not interested in it, I won’t read it. If it’s badly written or boring, doesn’t matter how awesome it is, I’m not going to read it. I can’t make myself do that. Ultimately, and how much differentiation… You’re just looking for different ideas, I guess. Different worldviews that might resonate. You’re looking, to a certain extent, for variety. But once again, I’ve thought about this a lot, in terms of in that if I spend six to 10 hours a day reading, which I do, if I made that one hour, would it make any difference? I don’t know. Maybe. I could try it, but ultimately, I enjoy what I’m doing and it sort of, touch wood, works okay, so I’ll keep at it.

Book that influenced Todd

Market Wizards (Schwager) and Trading in the Zone (Douglas)

Bilal Hafeez (43:22):

Yeah, and I can see, then, if you’re spending that amount of time reading, how much good writing makes a difference. I have to say, I read a lot, as well, and I’ve run lots of research groups over the years and worked with lots of researchers, and a lot of work is actually very poorly written. I mean, people kind of might be good on the data, but when it comes to putting words on paper, it tends to not be as strong, because some of the underlying analysis…

Todd Edgar (43:44):

But then there’s a flip side of that too, which you can have a great writer who doesn’t add much value on the investment side.

Bilal Hafeez (43:49):

Yeah, it’s hard. I do know you read a lot, and when we speak, often you mention a book or two, or I see books piled up high behind you on our Zoom calls. Are there any books that have really influenced you over your career, either for work or even personally?

Todd Edgar (44:04):

On the work side of things, I’ve got a pretty big trading library. I wouldn’t say I’ve read every trading book there is, but I’d probably go pretty close. I’ve got literally hundreds of trading books that I have and have read. The Market Wizards ones are still… That was probably the first one I read, and it’s probably still… I think the latest one was a little weak, but the first couple of Market Wizards books were… Still. I still pick one of those up every nine months or so and reread it, and you’ll still find something that resonates. From, I think, where they are, unless you have already read a bunch of books on this, trading psychology, they may be sort of a little weaker on that. Some of Mark Douglas’ books, I thought were pretty good. They all have stupid titles, I feel like, but Trading in the Zone. I thought was a pretty good book from a psychology standpoint, and I’m sure there’s other ones. I think you read a bunch of them, because they all sort of go over… No one’s breaking any great new ground. It’s just reinforcement. Yeah. That, for me, is the work.

Bilal Hafeez (45:08):

Yeah. Okay, that’s great. Yeah. No, it was great speaking to you. One thing that I guess is, often listeners to follow the views of our guests. I mean, I don’t think you really publish anything anywhere.

Todd Edgar (45:21):

Actually, I do, funnily enough. Actually, I do. You know, actually, I write a… One of the things I used to find immensely painful was writing the investor note to the investors. I did a monthly note for a long time where it was… Why was painful was it was more… Obviously, it was a little bit, as I touched on before, which is sort of rehashing old stuff I’d rather not rehash that, but also because it was a marketing document, so it couldn’t have much personality, and it was more about sort of, “We’re following our process.” That sort of stuff. What I’ve found, actually, since I now don’t have to do that, is actually still do it, but I may put a little bit more personality into it, although that’s for readers to decide. It’s a good discipline for me. To a certain extent, it holds myself accountable, and it also makes me, on a monthly basis, sort of think perhaps a bit broader than I otherwise would about things. I’m actually in the process of writing this month’s one now, and I’m thinking about sort of what could go wrong in the stock market, for example, and I’m just almost brainstorming things. Would I have done that if I wasn’t going to write about it? Maybe, maybe not, but it’s certainly a worthwhile process. I still send it out to people. Happy to… If anyone wants it, there’s 1,000 people on the email, on the distribution list, so 1,000 and… Yeah. More than happy to do it. Yep. Happy to share.

Bilal Hafeez (46:40):

Yep. I’ll just get people to… I’ll put in the show notes. People can just reach out to me and I can then connect them to you, and then you can add them to your mailing list.

Todd Edgar (46:46):

Yeah, happy to do that. I’m not promising anything. It does have a book review. It does have a monthly book review section, though, as well.

Bilal Hafeez (46:51):

Oh, even better. That’s great.

Todd Edgar (46:55):

It’s about what I want to read.

Bilal Hafeez (46:57):

Yeah. I think with that, we can wrap up the conversation. I mean, it was great. I learned a lot during the conversation. It’s great speaking to someone with the amount of experience that you have in the markets, all through the various cycles that we’ve been through.

Todd Edgar (47:09):

Makes me feel very old, but thank you.

Bilal Hafeez (47:11):

Thanks. Thanks a lot, Todd.

Todd Edgar (47:11):

Thanks, mate. Appreciate it.

Bilal Hafeez (47:13):

Thanks for listening to the episode. Please subscribe to the podcast show on Apple, Spotify, or wherever you listen to podcasts. Leave a five-star rating and a nice comment and let other people know about the show. We’d really be grateful. We’ll be back soon so tune in then.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)