Beach Books

Smart guys go macro

by Tom Fitt
Inside the House of Money, by Steven Drobny. Wiley, John and Sons. 384 pages. $29.95

If you select Steven Drobny’s Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets as summer beach reading, be sure to stash SPF-50 sunscreen in your beach bag, because you’ve probably spent way too many winter hours indoors staring at a computer screen attempting to understand the recent market.
Inside the House of Money offers a history of global macro trading — plus an explanation of present and future market trends. The story is told through interviews Drobny initiated between 2004 and 2006 with 13 stock, money market and futures traders, whom he dubs “SGs” (smart guys). In the macro trading world, it’s an all-star list in which the Manhattan Beach resident most certainly should be included.
The first edition of Inside the House of Money was published in 2006. The 2009 update adds, in a sentence, We saw this coming.
Drobny, 37, surfs El Porto and works just up the hill, a healthy distance from Wall Street, at Drobny Global Advisors (DGA). The company consists primarily of Drobny and his partner Dr. Andres Drobny, 54. Though not related, their histories are remarkably similar. First the name: According to Steven, people named “Drobny” account for .0001 percent of the U.S. population. Both attended high school in Bethesda, Maryland; both received advanced degrees from the London School of Economics, and both worked at major investment banks in London.
DGA offers global economic research and strategies. According to a Dow Jones Newswire report, dated Sept. 22, 2003, “The Drobnys publish their newsletter only when they have something worth saying. And when they do publish, they’re offering trade ideas and probabilities, not merely fact-based economics.”
Andres started the newsletter in 1999. Steven joined the force in 2000. “A meeting with the Drobnys is more likely to take place at the surf club rather than the office,” Adrian Fairbourn of Fund Advisors, a London-based hedge fund investor, told Dow Jones.
“While some of the conversation will revolve around the quality of the waves, you will tend to enter into a debate on global economics and hedge fund manager allocations,” Fairbourn said.
Macro hedge fund investors risk millions of dollars in hopes of a dramatic, 30 to 40 percent return. It’s a fast business with heavy investments, big risks, sometimes big pay-offs. Investors anticipate a rising enterprise falling short, or a falling entity soaring. They hedge. Hence the term “hedge fund.”
Inside the House of Money is user friendly to subscribers of Wall Street Journal. If the Sunday Los Angeles Times business section serves as your birdcage liner, it would be best if you select a summer read with the word “Love” in the title.

Coming to terms:
Global macro: The term is somewhat redundant. Strategists in global macro trading view business as it pertains to political and economic conditions throughout the world. They don’t research a specific company or a specific business.
“Global macro is the willingness to opportunistically look at every idea that comes along, from micro situations to country-specific situations, across every asset category and every country in the world,” said Jim Leitner, one of the economic gurus Drobny interviewed in 2004.
Andres Drobny says in the book, “Global macro is trading based on economic/political/sociological factors, so-called ‘fundamental factors’ that move market prices. You can also define it in terms of what it isn’t. It isn’t looking at individual companies… It’s not really about individual stocks, per se, although it can be about stock market indexes.”
Hedge Funds: As the name implies, hedge funds are created to absorb losses. For such commitments, investors are provided exemptions from some Federal regulations governing short-selling, derivative contracts, leverage, fee structures and liquidity of interests in the fund. Managers of hedge funds specifically outline their goals and routinely reap a 20 percent-plus return for their work. DGA presents trends and offers advice to these managers.
The “Smart Guys” Drobny interviews share certain characteristics: humility, patience and perseverance, plus multiple degrees from the world’s finest universities. Drobny also elicits idiosyncrasies in his interviews.
“I look at lunar cycles and like to know when the moon is full,” said Dr. John Porter, head of Barclays Bank Capital in London. “There is nothing mystical about me… but I once read this empirical study on the very statistically significant correlation between full moons and trend reversals.”
Given Porter’s background, Drobny asked if he would be interested in the job as Federal Reserve Chairman. “I don’t know if I’m worthy of that,” he said. “The post-Greenspan era cannot be forecast and it’s going to be very interesting, given all the imbalances out there.”
U.S. economist Dr. Sushil Wadhwani, a former Monetary Policy Committee member of the Bank of England, told Drobny, “I’d like to believe the United States will muddle through, but the imbalances are getting so big, it seems more gloomy scenarios are looking more likely.” This was said in 2004.
Amidst the hustle and bustle of everyday trading, Drobny says of Wadhwani: “In a world seemingly dominated by testosterone-charged personalities ever tempted by fast lives, Wadhwani prefers to spend weekends watching cricket and being with family. An admitted pragmatist, he views economics as a means for understanding how the world works and the framework of the field as a tool for positively impacting the behavior of society.”
Yra Harris, of the Chicago Mercantile Exchange Praxis Trading in Chicago, best reflects the macro traders’ attitude of humility, patience and perseverance.
“How to take a loss? Just do it, because you can always get back in. Don’t ever put your ego out there where you’re afraid to say that you’re wrong, because the market is right and you are wrong. Respect that… I can’t stand it when people say, ‘Can you believe what the market did?’ They better look at what they did… The markets are like water. They will flow to the weakest point that they can push through, and they always do. It’s like an omniscient force saying, ‘F—you. I’m going to teach you a lesson; there’s nobody bigger than me.’” ER