No matter the category of investing, great investors share common principles and investors, personal and professional, can benefit from their experience.
During my vacation, I took the chance to read a collection of interviews with some of the world’s top global macro hedge fund traders called Inside the House of Money.
Though global macro hedge funds invest in almost any asset including currencies, stocks, bonds, options, derivatives and commodities, there are common threads with venture capital.
As in a chorus, the many hedge fund traders interviewed praised the importance of investing in liquid markets where there is huge trading volume and interest.
Venture capitalists trade private stocks so there is no direct comparison, but there is an analogy. The late Eugene Kleiner, founder of Fairchild Semiconductor, said it best with the wonderful aphorism on his profile. “The time to take the tarts is when they’re being passed.” In other words, invest in hot markets where there are lots of buyers who are chasing growth.
Second, many of the traders believe in concentrated positions. Said another way, when you have conviction make big bets. Black Wednesday is one of the most famous days in the hedge fund world. On that day, George Soros and Stanley Druckenmiller “broke” the British pound. Their Quantum fund shorted the British Pound after the government joined the European Exchange Rate Mechanism which required the Pound to stay within certain exchange rate thresholds with other European currencies.
Druckenmiller hypothesized that the agreed upon exchange rates would be very difficult for the UK to sustain because the British economy was weakening. So he shorted the pound with a few hundred million dollar position. Soros, having seen the bet placed, convinced Druckenmiller to make a huge bet, increasing it by an order of magnitude to $10B. On September 16, 1982, pressured by the tremendous short position and the challenges of high interest rates, the British Government withdrew the Pound from the ERM, netting Quantum $1B in trading profits overnight.
In the same way, venture capital works best when investors take large interests in companies both of total capital outlay and ownership. Such investments require conviction on the investor’s part – believing in an entrepreneur’s vision and the fundamentals of the market are essential for a director of the board. Also, entrepreneur and VC incentives align because both are significant share holders and consequently both should work hard together to ensure success as a result.
These oft-repeated lessons are true for entrepreneurs as well. Take big bets in hot spaces.
Global macro investing differs from venture investing in many ways. The time horizons are shorter. Hedge funds invest in assets, venture capitalists in people. Public markets vs private markets. But successful investing, both in terms of entrepreneur time and venture capital does follow some of the same themes.