Hedge Fund Masters: How Top Hedge Fund Traders Set Goals, Overcome Barriers, and Achieve Peak Performance

Hedge Fund Masters: How Top Hedge Fund Traders Set Goals, Overcome Barriers, and Achieve Peak Performance

by Ari Kiev

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Discover the psychological strategies that hedge fund traders use to maximize their success in Hedge Fund Masters. Author Ari Kiev interviewed over 80 hedge fund traders, including some of the most successful hedge fund operators in the world, to illustrate the principles of success. Filled with in-depth insights and practical advice, the book explores the…  See more details below


Discover the psychological strategies that hedge fund traders use to maximize their success in Hedge Fund Masters. Author Ari Kiev interviewed over 80 hedge fund traders, including some of the most successful hedge fund operators in the world, to illustrate the principles of success. Filled with in-depth insights and practical advice, the book explores the pressures felt by professional hedge fund traders as they manage enormous sums of their clients' money and shows you how to maintain emotional balance, focus on targets and goals, overcome deep-seated psychological obstacles, and trade with consistency and discipline.

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Publication date:
Wiley Trading , #239
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Barnes & Noble
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388 KB

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Hedge Fund Masters

By Ari Kiev

John Wiley & Sons

ISBN: 0-471-72416-5

Chapter One

Defining Mastery

What is mastery? Webster defines mastery as the possession of a skill or technique that implies freedom from flaws or imperfections; or skill or knowledge in a subject that makes one a master in that subject. Mastery is having supreme proficiency in a particular activity. In this book, I expand the use of the term mastery to describe that degree of competence at which the individual is willing and able to take responsibility for the outcome of his or her efforts, even in environments where the individual does not control all of the forces, such as the markets.


I view mastery as a strategy for effective living as well as trading. It is a strategy that lets you tap your hidden potential by taking on challenges over and above the mundane or ordinary. By understanding the psychological underpinnings of mastery and the obstacles that you have to overcome in your efforts to obtain it, you are actually working toward your greater vision.

Ultimately mastery is about adaptation, not just about learning a specific set of skills. This kind of adaptation requires willingness to face and to conquer internal psychological issues, fears, and uncertainty. A master trader learns to adapt to changing requirements of the marketplace as well as to deal with the psychological factors underlying the development and maintenance of mastery.

Elements of adaptation include developing flexibility, learning new methodologies, creating support structures, encouraging the use of coaching, building teamwork, and finding new ways of doing things. While there are certain intellectual, genetic, and personality factors that contribute to the development of mastery, ultimately whether an individual develops mastery depends on his motivation, desire, and willingness to be coached. Mastery is a matter of attitude and, beyond that, the development of the power of your mental potential. Mastery is ultimately about creating a new world outside of your habitual or automatic responses, which are based on your past experiences, on what you learned as a child, or on how your culture has defined your existence. Mastery is about letting the future define your actions in the present and living out of a declared vision. It also involves a willingness to embrace the unknown.

One trader, who was beginning to embrace the principles of mastery, described this view of mastery to me: "It is useful not to get too distracted by the mind traps that others tell you about in helping you to line up your portfolio. The more critical thing to do is to decide what you are inclined to do, what you are going to do, and what it is that is interfering with the implementation of your plan."

Case Study on the Need for Mastery

Clearly, it is easier to maintain mastery if you do not put yourself in jeopardy and do not add pressure by having a negative performance. So, in an effort to adapt to new or changing markets, you must to realize that change itself can throw you off balance and stir up additional problems for yourself.

The principles in this book point to the fact that you develop mastery by action. The very act of focusing on the development of mastery as a psychological approach to performance moves the spotlight away from yourself and encourages you to focus on the steps needed to reach your goal. It also encourages you to see, for example, how you may be misreading or misinterpreting events. It prompts you to take responsibility for your results and to consider how you are currently (although unwittingly) inviting the results you are getting, even though they are not what you say you want.

An interesting example of this was illustrated by Derek, a new portfolio manager who wanted to switch strategies. He was attempting to adjust to working in a hedge fund that emphasized the short-term, catalyst-driven model of trading, rather than the long-term, fundamentalist, buy-and-hold approach that he had learned at a previous hedge fund. While no one had expressly encouraged the strategy change, he was caught up in the moment and in the pull of a faster-moving culture where people sought to produce short-term results and capitalize on the intraday volatility of the markets rather than ride out the volatility and suffer the pain of temporary drawdowns.

The following conversation from early 2002 illustrates the adjustments that a trader needs to make so that he can reduce distractions and stay true to the strategy that he had developed over the years-a strategy that would ultimately produce the greatest results for him. I include this conversation by way of emphasizing that mastery is a practice of excellence that requires honesty, consciousness, choice, and a willingness to take responsibility for what you produce.

Derek: This market has been so incredibly volatile ever since I started. You buy something, and the next day it's down twenty percent. Well, maybe I should be less short-term oriented. At my previous hedge fund, I spent seventy-five percent of the time trying to understand the story on the fundamentals and maybe twenty-five percent of my time trading. In the past several weeks I have spent seventy-five percent of my time trying to figure out the market and twenty to twenty-five percent of my time doing the fundamentals. I am down a little bit. So I have to get the P&L [profit and loss] in a positive direction to get the momentum behind me. Once I start doing better I will start feeling more confident and get back to playing my game. Kiev: You are losing money in longer-term positions where the prices are going down, but you believe in the eventual recovery of your stocks? Have you reviewed your historical performance? D: I just did this from February because I was very curious. I thought I did okay on some of my longer-term holdings, and I looked at where I lost money. So, I think these are the top ten losers where I lost money. I was under pressure to perform, and I sort of took shots. You can afford to do that when you're up a lot. When you are up fifteen, twenty, and thirty million bucks, you can take shots with these things. But these weren't my ideas. I didn't spend a lot of time doing work on them. D: So, you're losing more when you play other people's stuff. D: Yes. I should be doing even fewer trades. K: You should be making more money in your winners than you are losing in your losers. D: Which isn't happening. I lost a million and a half bucks, which means I am doing too much trading. K: Are you holding your losers too long and not holding your winners long enough? D: It is possible, but this market is getting incredibly volatile. K: What would mastery be for you? D: Less trades and more conviction, like XYZ Corp. when I was shorting it. I only made six thousand dollars on it. If I held on to that short position, I would have made two hundred thousand. K: You got out too fast? D: I got out too fast. I think that is what happens when you start losing money. You feel pressure on yourself to cut your losses and to make money. K: Is it possible that you are cutting the winners? D: You never know what is a winner and what is a loser. K: If you knew more about the company, wouldn't you know enough to stay in it? D: I think that is right. K: You don't have the confidence in your work or the conviction in your positions that would enable you to do it. D: On the long side, I think that is right. So, on the long side I have to stick to it. One computer company I owned was a loser here and was down two and a half bucks the other day on some kind of rumor. I bought two hundred thousand shares. It was a seven percent position. It was twenty-one, and it could go to twenty. I mean anything could happen. It could go to nineteen. I felt like this was it. I mean I have to take my shots. I am here to buy these things when everyone else hates them. I knew the fundamentals. Then it bounced up two bucks, and I sold some stock, which is fine. So I am trying to build more longs that I have the conviction in and then trying to get a little more conviction on the short side. For the moment, I'm covering shorts that go against me because I don't have conviction. I feel better, but I haven't made any money. Yet, it's good to feel better when I have stopped losing lots of money. I am only down about a million. K: How much are you running? D: A hundred million, but I haven't taken up the capacity yet. I am taking about forty of it because I have been taking baby steps. I wanted to get a P&L behind me so I can take some shots on stuff. I feel like I am getting there. I am not there yet, but I feel better about my process. K: Do you have some longs you could be bigger in? D: I have one seven-and-a-half-dollar stock, which is a long, and I am making it bigger. K: What percentage? D: At this point, it is a four or five percent position. I am going to take that to a seven or eight percent position. I think it's maybe a ten-dollar stock this month. You have to feel pretty good about it. It's eight. It's a twenty-five percent move. I felt good about it last month. In a down Nasdaq tape, I made money in it. It was my number-one idea last month. To me it's a shame that I only made that much money on it. I should have owned more stock. In a year, I want to reduce these small losers where I just kind of get in and out, and I am not really sure what I am doing. I think I am getting there. I am being much more selective in what I am going to do. K: It seems to me you have a lot more positions. D: These are all my active positions now. These are from the month of February. My active positions right now are quite small. I want to have more conviction in my ideas. K: So, about this seven-and-a-half-dollar stock. Do you really think it's a good one? D: I want to step it up. It is so much easier when you have P&L behind you. At my last hedge fund, I always had a positive P&L. Even this year when I left, I had a positive P&L for January. I don't want to be negative. So, one of the differences for me has been the psychological effect of having a negative P&L. I have to get over that. I am not here to get back to breakeven. I am here to get up to twenty, thirty, forty million bucks. I understand that I need to be stepping up. I am trying to react to that. I think I am going to get there. K: It sounds as if you are preoccupied and not playing your game. You are really concerned about your P&L. But I am saying, "Do what you do. The P&L will take care of itself." With too much concern about P&L, you are going to start buying stuff you don't know. You're going to start playing like an amateur if you let the emotion get in the way and you get too tense. If you are really concerned with P&L, then the perfect thing for you to do is what you already know how to do. D: That is my thing-to make money in a down market. I feel like I, more than anyone else, can find stocks that are off the beaten path, things where I can get involved in what I know better. I can react to my game. I am trying to do more with that. K: That method that will produce results. D: Absolutely. It's proven that it will. I feel like I am getting there. Derek's trading is clearly being influenced by his belief that he must build a cushion before he can start taking more risk. This is good risk management; but from the angle I am pursuing, it is reflective of a cautious Life Principle that is keeping him from reaching his ultimate capability. (I'll talk in detail about Life Principles a bit later in the book.) By continuously challenging his views, I am trying to get him to think more proactively about what is possible, to gather confidence from his own prior performance, and to not be too distracted by concerns about making the right impression in a new shop.

Derek needs to rethink his current approach and to get back to basics. To handle his drawdown, he needs to get smaller in positions where he lacks catalysts or conviction based on fundamentals. He doesn't need to hold anything long term unless he has an edge; and he needs to balance his portfolio so that by being hedged, he will take out market risk. In this way he can reconcile his long-term approach with his preoccupation with P&L and the shorter-term trading approach of the new hedge fund environment.

Just like Derek, many traders need to realize that true mastery is about being totally present in the now and totally engaged in the current activity.

Mastery is a set of skills and exercises that enables you to become more fully absorbed in the processes of your life and work, not to obtain power or prestige but to maximize your performance. It involves asking the kinds of questions to produce a level of expertise that produces extraordinary results.


One of the first ideas essential to the development of mastery is the creation of a concrete goal around which to frame your trading activities. Although this may not always seem to fit the particular trading styles of all traders, it is my firm belief that it is the essential first step to mastery; and even some of the most diehard buy-and-hold value investors (who tend to have long-term general objectives for the stocks that they hold) have, over time, come to recognize the power of setting specific goals.

Once you are focused on goal setting and the development of trading mastery, you will be able to get outside yourself and begin to draft a blueprint for greater success. By creating achievable goals, you can escape the trap of self-cycling trading errors that intensify losses rather than reduce them.

Case Study on Making Commitments

I like to meet periodically with traders in a group setting because I find that this kind of dynamic facilitates the conversation of mastery and provides an opportunity for traders to learn from each other. In the group setting, there is a greater chance of creating the momentum that comes from a shared vision and the inspiration of the leader. When traders get together to discuss what is expected from their groups, each trader talks about his goals and what the individual strategy will be. This dialogue is important since it creates a sense of group cohesiveness. The leader plays a role of catalyst, gadfly, and inspirational source.

I have this particular dialogue periodically with groups of traders. It shows through a psychologically driven conversation, how I prod traders to declare their goals publicly. I have been having these types of conversations for the past 12 years, and many of the traders know the "drill." They understand that the request for making a public declaration of goals for the year is not frivolous, it is a statement of intention to which they will be held.

The purpose of this discussion is to make the traders more aware of their need for flexibility and adaptability and for paying attention to the demands of the market. It keeps them conscious of the goals and of the need to keep digging deeper into themselves for the confidence and strength to produce outsized results. It is based on the view that each trader has the potential for greatness or excellence within himself. Therefore, I ask what each trader can promise to do in the long term and what he will do in the shorter term time frame to make this happen.

In order to reach mastery, traders are challenged to think deeply about what they want to accomplish during the coming year. They have to consider what actions they are willing to commit in order that they can make their goal really happen. They are asked not only about a number, but also about specific strategies:

How are they going to control their losses? How are they going to maximize profitability by sizing their positions commensurate with their goals. What will they do this year that they didn't do last year? What new procedures will they put in place to ensure their results?


Excerpted from Hedge Fund Masters by Ari Kiev Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Meet the Author

ARI KIEV, MD, is a psychiatrist who specializes in stress management and performance enhancement. He is President of the Social Psychiatry Research Institute, and in recent years, has worked with many traders on issues of stress management, goal setting, and performance enhancement. Dr. Kiev is the author of fifteen books, including Trading to Win: The Psychology of Mastering the Markets, Trading in the Zone: Maximizing Performance with Focus and Discipline, and The Psychology of Risk: Mastering Market Uncertainty, all published by Wiley.

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