Speaking to Legends
At 22 I graduated from university and decided to set up a crypto hedge fund. I learned everything by doing and after years of 100-hour weeks, progress started to happen. Fast forward, I am a Forbes 30 Under 30 lister, running one of the largest crypto hedge funds in the world and a frequent speaker at top conferences. I have been featured in Bloomberg, Forbes, and many other leading news media outlets. In this podcast, I speak with some of the world's most successful hedge fund managers, investors, and entrepreneurs. We discuss their journey to success, the lessons they've learned along the way, and the mindset they use to achieve greatness. FOLLOW ►Twitter - https://twitter.com/NikitaAFadeev Linkedin - https://www.linkedin.com/in/nikitafadeev/ Instagram - https://www.instagram.com/7nf/
Speaking to Legends
#4 Steve Mobbs - Life and Career of a Quant Hedge Fund Manager
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Nikita Fadeev
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Episode 4
Steve Mobbs was the co-founder of OxAM, a quantitative hedge fund that peaked at $5 billion in AUM. In this episode, Steve gives his behind the scene of the hedge fund world and expands on his experience. You will learn how and why his first fund failed and what lessons he learned from that experience. He also explains how he started OxAM and grew it from a small team with AUM of 10 million to a multi-billion dollar powerhouse with over 100 employees. Steve also goes in length to discuss the trade-offs between being small and nimble vs large and slow to adjust.
For links, resources and book recommendations by Steve, see our episode show notes on our website.
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0:01
Hello and welcome. Speaking to Legends podcast. This show is a quest for ideas, insights and stories from the lives of the most successful hedge fund managers. We're learning about their spectacular careers. We share their life lessons and dissect their investment techniques.
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sharing educational and thought provoking content, which helps you learn, grow and think. If you like the show and find it useful. Please support it by subscribing and writing a review on iTunes. Help us spread the word and grow the show by sharing it with a friend or two. The legend of today is Steve Mobbs. Steve is a founding partner of Oxford Asset Management, a quantitative hedge fund, which peaked at 5 billion in assets under management. In this episode, Steve gives his behind the scenes of the hedge fund world and expands on his experience. You will learn how and why his first hedge fund failed and less than He learned from that experience how he started Oxford Asset management and grew it from a small team and 10 million in AUM to multi billion dollar powerhouse with hundred employees. Steve also goes in length to discuss the trade off between being small and nimble versus large and slow to adjust. Let's get right into it. Hi, Steve, great talking to you excited to have you on the show. Welcome.
1:28
It's good to be here. Thanks a lot for inviting me Nikita.
1:31
Let's start from your background. You did maths at Cambridge and then economics at Oxford. How did you find those years? And do you think if at all, it prepared you for starting the career?
1:48
I loved my time at university. I mean, I came from a fairly humble background, I was the first one in my family to go to university so it was a bit of a revelation for me to go to Cambridge. I mean, being a clever kid at school and, you go to university and you find there quite a lot of clever kids around. I enjoyed maths at first, but I found it a little more abstract than, the certainly school maths it prepared me for and, I was not sorry to stop doing that at the end of my time there. I'd always been interested in politics and I'd considered changing to economics, partly through the Cambridge course, but I kind of decided that I wanted to see it through and get a good degree, which I did. So I went off and studied economics and studying economics was some new revelation came to growing up in sort of state dominated in the UK of the 70s. It was super interesting. And I sort of looked at the world and encouraged them to look at the world in a somewhat different way. And you asked whether it was, whether I found it useful for my career, and the answer is - to a point, but less than you might expect. I mean, I felt that in general the maths was, I've used maths one way or another through my career but I'm not sure I've used any of the heavy duty maths or very much of the heavy duty maths we used in Cambridge in economics well, no, I learned some econometrics at Oxford but I think I'm more generally just learned to look at the world of markets and of profits and just encouraged me really to look at some look at the capitalist system in a way that you possibly didn't in the UK in the mid 70s. So, again, I like enjoyed my time at Oxford, but I came out, very much not knowing anything that was very useful or very relevant, and the finance, which I learned very much learned on the job, I read a lot of articles, I read a lot of books, I took some courses and it was not that I came out of, Cambridge or Oxford with a particular toolkit. But I did come out with a certain amount of self belief and a belief that I could teach myself stuff that I needed. And did that really surround my career.
4:13
Yeah, it quite often happens that the start of the career doesn't leverage so much of the skills picked up along the way through the university, but it kind of equips you with tools to just think and how to learn and those kinds of things and it sounds like you found that to be quite useful. And so you started your career at BP and then went into banking and then spent 10 years at Credit Suisse First Boston and Deutsche Bank. Well, there you undertook a variety of roles. Can you please expand on your time there and any notable stories you want to share?
4:51
Oh, there's so many stories. I mean, the first thing I was gonna say was that compared to kids today who've all done internships and very clued up about the world of work. My generation was very much less so. I mean, there weren't internships, I pitched up at my first job, which was as a macro economist actually working for British Petroleum. Really super naive about what the working world was like, it took you a year or two years really to get used to a working environment. I mean, I wasn't very good at my first job. I didn't like them. They didn't like me. And it took me a couple of years really to work out that this wasn't a place for me and that I needed to get out. And it was really serendipity that I ended up in the city because finance was the one thing I wasn't going to do. I was quite left wing in those days. I didn't really think that the work in the cities in Britain seemed appropriate for a left wing kid like me, but I was pretty desperate actually. I mean, this was the depths of sanctions recession, it was extraordinary difficult to get a job I must have had about 35 rejections from jobs I applied to as a VP. You know, I finally found this job that this wasn't Credit Suisse First Boston actually this was a year in a bond fund manager of Bank of America Fund Management Department. And I was desperate for a job because I really felt I had to get out of it because I wasn't enjoying it and they didn't like me in a suddenly you get to do a job where your skill set is perfect for it and you do it well, and you feel that, you just go in every day walking on air because you're learning new stuff, and super exciting. So I did that for a year. And then I got this extraordinarily good fortune of bumping into an old mate of mine from Oxford, who said, that Credit Suisse First Boston, which is not the best, really the best investment bank at the time. So it was setting up a research department, what are you doing these days? And I said, that's what I'm doing. So I use exactly the kind of guy that we need. Why don't you come and meet my boss? And I did and you know, I was exactly what they needed. And I had exactly the right skill set for what they were doing and I joined CSFB's bond research department and I knew a bit about bond research and I taught myself an awful lot more. And I was lucky to work with a guy who was, super kind and, taught me a lot. It was just the most perfect job for three years. You know, I loved it. I worked on all sorts of different problems, which were incredibly interesting. At the time, there weren't smart people working in event that's not quite fair. There weren't academic people working in investment banks, there wasn't a top cadre of sort of PhD mathematicians as there are these these days. And in CSFB, which I say had all these interesting stuff going on, there was really just three of us sort of three or four of us sitting in the centre of the trading floor trying to work on different problems, build option pricing models, write papers, structure deals, you name it, we did it, really, and we're very grateful for us to get to work on that stuff. And it was the other thing I was saying is that it was the time when the PC was coming in, the personal computer, the humble IBM PC which these days we would, sort of say was trivially , underpowered, the fact that you could do calculations on the fly in the middle of the trading floor just transformed stuff that you could do in finance, if you could, you could programme the Lotus 123 spreadsheet you were hailed as a genius I was rather fortunate to ride that wave. I did work in the research department for three years until the guy who was put in to run research and expand it and make it into a big marketing effort. He and I didn't get along very well and I was looking for things I might do to get away from him. Trading was the obvious thing. So I said I'd like to trade so I went off to the arbitrage department and where there was three or four, sort of smart guy I sat down in the PC installed to trade whatever I found, even try and make some money. Then I had another unit piece of extraordinary good fortune that I stumbled on a super inefficient market, which was the market for Japanese warrants, which was equity warrants, which were long dated equity options, which is an astonishingly inefficient market.
9:13
You know, where not many smart people were trying to make money out of it. There was a huge amount of manipulation and wacky stuff going on. And it was really like the Wild West having lost incredible amounts of money in the first few weeks, but I tried to figure out what was going on, and having been summoned by the head of trading to try and explain what I'd lost so much money in a short period, like said to him, this is a guy called Oswald Grubel, who later went on to run the bank. He said, You know what's going on? I said, No idea I've lost I've built these models they seem smart and you know, I bought this and I sold this, and I've no idea how I've managed to lose so much money and I was expecting to be sent back to research with my tail between my legs. He said, Well, if you can lose this much money this quickly Must be something really interesting happening in these markets keep really small, and try and figure out what it is. And I did. And I made, you know, lots of money out of it, you know, later I left seems to be largely and viewed with the confidence that I could make money out of this market. And you know, it was the best, most fun thing I ever did in my career actually was trading these these, you know, wacky long days adoptions on dodgy Japanese companies. So that was, that was some of my time that CSFB was a fantastic time great time to be there. It was time of opportunity. It was a time when everything was expanding everyone you know, the one very many people around you know that everyone believed in you. Yes, go ahead, go ahead and try and do that. You know, people joining an investment bank today, there's so many, you know, clever people around you get given a very small little role here, that you felt the world is your oyster and there was, you know, just stacks of things to be done. It was just amazing. choosing which one was most interesting that day. So those were great times.
11:06
Yeah, it sounds like you had lots of responsibility and lots of opportunity to choose what to do and get exposure to all sorts of challenges. And as you say, these days, it's much more specialist rather than generalist roles that companies, hedge funds, banks that they want you to be in. And so kind of leveraging this experience at Credit Suisse First Boston, how did you get into Deutsche Bank and how was your time there?
11:37
Well, I mean, I was a sort of a young man in a hurry, really, and there's a lot of young men do I felt I'd been underpaid one year, and I felt that my P&L was carrying the department, which probably was and I felt that I could probably do better, better elsewhere. I think I was also, as I recall, I think I was slightly miffed that I hadn't been promoted one year and that my extraordinary talents had not been recognised as I said, I was a young man in a hurry. So I, a friend of mine who'd worked work at CSFB have gone off to Deutsche Bank and he approached me and they said,
12:14
We are looking to set up a trading department and would you like to come and do it. I didn't realise at the time for Deutsche Bank became a major force in investment banking, I didn't realise what a sort of a , sleepy, dopey play it was, that there was a chap there who I worked for, who was trying to make his name in the bank and, he saw me as I think as somebody who could put some money on the table and make him look like he was modernising it. And so I went there, took one chap from CSFB with me and tried to make a go visit Deutsche Bank and it was for a couple of years it seemed like the most appealling decision because what I didn't realise was that there are lots of people in Deutsche Bank who really didn't think that the bank should be proprietary trading. If it did, it should be doing it should be doing from Frankfurt, you know, that I was that I shouldn't have been hired. And, you know, I was just desperately unhappy for a year or two thought I'd, you know, I'd been so happy to be CSFB and Deutsche Bank, you know, there's all these obstacles put in our way. You know, we couldn't have you, couldn't buy this, we couldn't have this computer because it wasn't a standard. We couldn't trade this. I couldn't have any risk limits. I managed to negotiate and share the profits. But what I had in my naive it's failed to realise was that you know, if you don't have any risk limits and can't take new positions, doesn't matter what percentage profits they're prepared to give you. So you know, things came to a head when the head of worldwide trading, Ribbentrop, whos father was one of the people who'd been executed after the war. He was the guy who's trying to get in sacked. And you know, I went over and we had to show that I'm meeting with him and the chief executive Rolf-Ernst Breuer. Ribbentrop said you shouldn't be here. He's not reporting to me. I'm really not, you know, I just don't think we should be doing this. And Breuer. Ribbentro, I said, that's fine. You can report to me then. So I basically ended up reporting to the chief executive of Deutsche. And things got better after that, because,he had me under his wing a little, he didn't spend much time with me, but, you know, people knew he had my back, you know, we got more risk limits, you know, we made you know, we had a couple of really tremendous years, I expanded the province substantially, we had maybe 20 people at this height, and things were, for several years, things went swimmingly. Then Deutsche Bank decided that it was going to get serious in investment banking, and it hired a bunch of guys from Merrill Lynch, including a guy called Edson Mitchell, and you can read about this in the book Dark Towers, which has just come out by Einrich, which is the story of how Deutsche and some of its adventures in the worlds of investment banking. But from my point of view, Mitchell didn't like me and I didn't like him and you know, the writing was real, you know from the outset because I was not his guy and I didn't you know we had one or two rounds about things, he wasn't really a trader didn't really understand trading and so really, I was on a declining setting things were , I was really on the way out I didn't realise it at the time. And one of the things I look back on and I think I probably should resign rather earlier, but I kept going, kept making some money, but you know, he didn't trust me and I didn't like him. So, you know, in 97 I left and but you know, I had some good years at Deutsche and achieved some good stuff, but I think you know, one of the things I look back on may be interesting to some younger people. I mean, I loved my time at CSFB and I regarded Deutsche as a job and all the people that I'm ever meet now who worked for me at Deutsche said what a fabulous time they had at Deutsche, it was the happiest time of their career. And I think, well, it was the happiest time of my career. I spent all my time, you know, sort of advising political battles and trying to protect you guys. But they didn't realise that at the time, it probably means that I did my job, right. Whereas I look back with nostalgia at my time at CSFB. And what a wonderful time it was there and possibly there were some people who were protecting my back and making it easy for me to do my job then maybe they didn't enjoy the politics so much.
16:33
Yeah, the political component is, a quite a time allocation for especially for more senior guys in big corporations, and back then, like the banks, I guess they were becoming bigger and bigger, but they were still not such a huge driving force, as they soon became after that. As you left Deutsche in 1997 you set up a fund, can you tell us a bit more about that?
17:03
I set up a hedge fund at the time and I called it Medici Capital Management. And I had one investor of Paloma Partners was still in business actually, whose business was basically to seed other funds, but provide them with infrastructure. So I only had one client. And, and, you know, they gave me money to, to set up and I hired a bunch of guys, the idea was to create a sort of a look alike, Deutsche trading department, and for a year we did really, really well, we made loads of money and, you know, it was fantastic start. And then I know you had Victor on a couple of weeks ago, who is an old friend of mine, then Long Term Capital happened and, we had a lot of similar positions to Long Term Capital and a lot of other funds that Paloma was backing had similar positions and Paloma lost a lot of money. We lost some money and Paloma were over leveraged and all of their trading groups had to liquidate. You know, they can they became one of the one of the big liquidators around the LTCM thing that we had to basically unwind all of our positions into a market with no liquidity and it's quite heartbreaking thing to do. As you kind of each day you sell a bit more and the price goes down a bit more. We crystallised all our losses. paluma, crystallised all its losses, Paloma laid off most of its trading funds, including us. So I'm left with 20 guys trying to decide what to do. Clearly, this is not an environment in which you're gonna be able to raise money. I did make an attempt to raise money, but in the end I had to shut down the fund laid off the guys, and, licking my wounds really, it was a very, very difficult experience. You know, you make people promises and you can't deliver on it. Now, your confidence is shot because, you've lost lots of money and trades you really believed in didn't work out. So I took a couple a years off my kids were quite young and I became, I sort of took them to school I became the guy, the dad on the touchline. We had some fantastic all of these, you know, I did that for two, three years, really. And I was uncertain in my mind at that point as to whether I was really going to go back to finance. I mean, by being immodest, I had enough money to live on for the rest of my life. I was around 40, just over 40. So, you know, and again, became a bit itchy really, because a lot of my friends were doing stuff that was interesting, and I'm still pretty interested in finance and kind of reading about it. So when chap I knew approached me and said, you know, I'd really like to set up a fund. I didn't know how to do it. I've no trading experience, but I can do the you know, I'm a good computer scientist. We should start a quant fund together. And I said, I I'm not sure. Andre Stern his name was. I'm not really sure. I'm not sure about it Andre, but you know, set it up and I'll kind of consult with you and I'll give you a bit of help but you know, I don't know, I'm not really sure I want to do it anymore. So we set up OxAM, but it was within about three months of giving, you know, going and giving a bit of advice and showing him and his colleagues, couple of colleagues how to trade trade I was working full time and you know, I work full time after that, this is like something like 2000 really, you know, I did all the research and trading and because that was what I was good at Andre did more of the front of house investor relations, kind of stuff. He was better at computer science than I was and certainly systems infrastructure was his. And we set out a set up Oxford Asset Management, which was a quant systematic fund. Now this was, you know, something we'd always done I'd always done a bit of but it was not something that it really, you know, spent most of my time doing at Deutsche was more of a relative value kind of operation as indeed was CSFB. But we've done some quant. And I was pretty confident that we could do quant well. So we set up and then we started trading in 2004. And we started with $10 million. And we gradually grew it, and, you know, it's all very sort of slow. The growth was steady, slow and steady, really, rather than remarkable. We had pretty good performance and, grew in an evolutionary way people, look to the performance, they came and assessed us and there was a trickle of money coming in, we were pretty successful, I think.
21:59
Thank you for sharing this story and for going into details on inner workings and your thinking process at that time. And if you were to reflect right now, a little bit more about the approaches and techniques and ideas that went into the first venture versus the second, how similar were they? And perhaps you can also, while answering that touch upon on the trading, how similar was that?
22:28
Well,
22:31
I think the sorts of people we hired were different. I mean, it's a very different feeling running a quant fund to running a relative value fund and the sorts of people you tend to hire tend to be different. The quant fund... there's the sort of CSFB and Deutsche trading was all about you know, smart guys who are looking for market anomalies and, people with a sort of commercial trading if you like. Sorts of people you tend to hire and quant funds tend to be PhD mathematicians, PhD physicists, who are not always quite as, quite as commercial, the sense of the place of the OxAM was much more of a sort of research operation than a trading floor. People wouldn't come in and say, hey, what's what's this anomaly in the market at the moment it was much more here's a bunch of data, let's go away and do a research project on it. And that's a slightly different feeling. And when I say it's, OxAM had more of a feel of a, I think most you know, quant firms have more of the feel of a sort of a research department of university about them than a commercial than a buzzy trading floor feel about it. Well, Medici and you know, Deutsche I regard them as being very similar with typically you would hire people who were traders, people who had, you know, who had an eye for, market anomalies and for trading and, for markets and still in the world of OTC Markets, rather than, quantitative rather than computer based trading. And those would be the sorts of people who you hired and those and, you know, managing traders has its own challenges and, you know, bring the best out of them has its own challenges. Whereas bringing the best out of researchers who have sort of quantitative, cerebral university types has its own challenges as well but they're slightly different challenges. You know, OxAM was a different environment and felt different.
24:48
And as you werekind of riding the wave of success and having some very strong years OxAM, joined the billion dollar club, how do you think your personal day to day change as a result of it, and what did the expansion mean to the trading operation of the firm?
25:10
It is an excellent question, let's just talk through, you know, some of the ups and downs of OxAM, and I mean, we grew gradually and we were, I think we started with $10 million. We perhaps 100 at the end of the first year, perhaps 2-3 hundred at t the end of the second year. One of the salient things that happened was the crash of the quant crash of 2007. You know, when we lost... all quant funds lost stacks of money over two, three day period. There was a big unwinding, it was the beginning of the crash beginning of the great financial crisis and we were very much the canary in the coal mine, we and quant funds. We lost money over the quant crush. We only lost the money that we made already that year, however, when 2008 happened, we had a lot of there are a lot of redemptions not because we lost money in 2008 actually, we made money in 2008 but we had effectively, you know, monthly redemptions, which allowed people to take money from us. When the people they really wanted to take their money from, they couldn't get the money out. So we'd lost a lot of assets under management. And as I said, we got down having been a billion and a half, we got down to 700 million. We then gradually began to because we have good performance over this period, you know, the money gradually started coming in again. And we got up to a billion, a billion and a half, we got up to 2 billion we made the decision that we were going to get, we were going to take on more assets, we would hire more people we were going to expand. So up to this point, we'd been 25-30 people and 25-30 people is an organisation and this is really the answer to your question. 25-30 people is an organisation that is very easy to control. You've got two main partners who are really completely on top of everything that's happening. I mean I was on top, I knew every little piece of research, I kind of knew the equations, it was my baby totally. But once you take on more people and it gets 50-60-70 people, which is and ultimately we became 100 people, it feels very different, it feels different working there, it's very difficult, different firm to control is very different, you start having to have, you know, sub layers of management, you start having a whole lot of meetings, there are a you know, there are personalities, there are guys you know that you know that that aren't pulling their weights or that aren't doing as well, and it becomes much less dynamic place. Now, frankly, managing a firm of that size was something that we struggled with, you know, it was much harder than I think either of us either Andre and I thought it is going to be, you know, I think if I had my time again, I, at least I'm not shy, I at least resist that temptation to grow it. I mean growing is very, it's very tempting to think all these things that you want to do that you can't quite do because you don't have the resources or you're not quite doing properly but you can hire a couple of guys to make that more robust process or a more robust system or you hire you have better system better computer, you know, infrastructure that needs several people to manage it. Each individual decision you make is very seductive. It looks like the right thing to do to get better, you know, to get bigger and to get better and to you know, have guys who specialise in things as opposed to people who do things in a not quite perfect way but you know, get you get by. And each of those decisions, looks seductive, and you make each of those decisions and then suddenly, you end up with a firm, there's two or three times the size of the previous one. And it no longer has the same dynamism or it seemed to me that the OxAM at them time lacked the dynamism of the OxAM in 25-30 people there, you know, when there was 25-30 people, you had a new idea, people would work on it overnight, and you get it working the next day. Suddenly, when it was 70 or 80 people, you know, you had an idea and it would take a while to finish and, you know, then you'd need to, you know, someone needs to write production code for it, and it just became slower and more stodgy as an organisation, whereas, you know, super dynamic in the early days, and it was, you know, it was more fun place to work in the early days, not just for me as the founding partner. But as, you know, if I talked to the people who were there at the time, they would all say I think, yeah, it was really great in those days, but you know, somehow we lost something as we became larger. I wonder whether other firms have the same experience. I mean, I didn't notice, lot of firms grow successfully and manage multiple offices successfully. I mean perhaps some people are better at it than others. But, you know, I felt that was something we lost along the way.
30:18
And if we were just to focus on trading for a second, so obviously, as a AUM grows, and you need to have different processes and improve your infrastructure and all of that, and on top of it, the market impact and all of the costs and fees there is obviously a benefit to economie of scale and having the AUM. But at the same time, the capacity constraint of some strategies can kick in, and what was your kind of experience on this, while at the same time, obviously having some human aspect to the expansion and growth of OxAM?
31:01
Well Nikita, you summarise some of the pros and cons of expansion quite well, we did expand and we got up to four and a half, four and a three quarter billion. You know some of the good things about that were that we added a lot more trading strategies, we got a more a diversified set of income flows, we were able to go out and hire some smart people. We had lots more data sources. We were able to expand some of the we thought good strategies that we've worked on in the previous couple of years that were that were that were scalable. Clearly, some of the things we did were not scalable. So, but and it became more it became harder to move money around the market we spent more time worrying about At a bad impact and we had before. So it was a mixed picture, really. And we felt it was the logical thing to do the next step. But you know, something's harder for sure. And as I say, one of the aspects of that was the organisational challenge of managing a larger, organisation.
32:20
Definitely maintaining the growth, there was so many different factors that are at play, and so many different cycles of the market. And it's quite chaotic. In its nature,
32:33
things become, you know, it's not always you can't always predict, how the competition in your space is going to evolve. And I think, you know, quant became a lot more competitive, you know, various times over this period, you know, there was some things that we were pretty confident we were going to be able to, generate a lot of money out of a futures operation. For example, we had set up a, you know, futures, a futures units, you know, which had, extremely good returns initially and you know, we were we were pretty confident that we were doing some stuff with our futures funds wouldn't weren't doing and that we were going to do well at it. In the end, we struggled in futures, but we struggled along with the whole futures industry struggling, but I don't think it was unreasonable at the time to presume that, you know, the, the stuff that we developed was was going to be successful.
33:32
Speaking about evolution of hedge fund strategies, approaches, techniques, I and also the fact that some of these one in a million year, events happen every 10 years. And so you spent over 35 years in finance, and you saw the, the firsthand some of these events, the crash of 1987, Dotcom bust at quant quake. And, and so on. And so this events, to me are a perfect opportunity for funds that are promising the uncorrelated returns and are advocating for the edge that they have. So do you do think funds lived up to the expectation in that COVID-19 pandemic?
34:22
Well, you have to... I'm an outsider now, I'm outside of the industry and I have been for the last nearly nearly two years. But I think it is one of the sadnesses that the hedge fund industry as a whole is that you know, it promises uncorrelated returns and in general, often the returns are uncorrelated except when the shit really hits the fan. When hedge funds discover that, you know, quite a lot of the things they do are extremists are correlated with, you know, with markets and risk premia. And, you know, it seems to be the case with COVID, it certainly was the case in 2007 and eight, it was the case in 98. And I'm probably one of the few people around who was in trading 87 I can assure you the same things there then, you know, all these little positions which you had, which you thought were hedged, all managed, the market goes down 25% overnight, which is a pretty serious stress test, but they all seem to manage to find ways to lose money. So, you know, although you've been uncorrelated, you're ostensibly uncorrelated most of the time when it really matters. And when people are really looking at you to be uncorrelated, you know, you seem to manage to be correlated. Now, I think there are reasons for that, you know, there's a lot hedge funds and a lot of you're not just talking quant here. You know, take, take our take various risk premia there's an unwinding effect that people go cash and that everyone unwindes the same stuff at the same time. But, you know, I do think there's a weakness of story for hedge funds, which is you tell people go away and don't calculate your numbers and how uncorrelated you are. But then, once in a blue moon something happens and you managed to find ways to lose not just small amounts of money but quite extravagant amounts of money at the same time, the market, the equity market is going down significantly. So, you know, I think COVID fits into that pattern.
36:30
What's kind of your outlook because the theme I guess, throughout our conversation was that the market got a lot more efficient when in 80s it was just a couple of guys on the trading floor scribbling some formulas right now it's a very proper sophisticated operation all around and a lot more minds are spending time on this. Will hedge funds have their rebirth, or will it kind of continue to slide and say, as it had been the case over the past few years?
37:08
I think it's the supply and demand of opportunity. I mean, I think there's a lot of money, chasing opportunities in hedge funds. There's a lot of clever guys, we've all been educated in the same place and understand the same things I think you will always find, that there are really smart people who are better than the others, who will generate supernormal returns. But I think for the average guy, doing sensible things but not extravagantly different things, it's just become a whole lot harder to make money. You know, when I started out, it was very easy to see how to make money it was very easy to see where the anomalies were, it was very easy to generate, you know, consistent returns and find ways to diversify them across, different strategies, I think it has just gradually become a whole lot harder. A lot more money has been, you know, is chasing it in terms of whether hedge funds, you know, how hedge funds continue to do. I mean, I think, you know, the expectations around hedge fund returns have become much lower and arguably more realistic. I mean, the time in the 90s when people would expect double digit returns from a hedge fund and mid teen returns, you know, I think those are long gone. And, I think institutional investors really looking for something that is uncorrelated and, which offers reasonable returns. So I don't think hedge fund industry is dying, but I don't think it's any longer as sexy and exciting and I don't think that the claims you know, for excess returns, can possibly be as extravagant as they were, and I think if you invest in hedge funds in general as opposed to the, perhaps the top decile or so of them, then I think you're going to get a pretty disappointing experience. And I think, and if you look at the data and statistics for hedge fund returns over the last, you know, dozen years, and there are all sorts of survivorship bias in this data, but even allowing for that, you know, some of the average hedge funds has done really poorly, I think you, clearly have to believe that you're picking good ones, you know, why you're picking good ones, you as an investor, you know, for the hedge funds really to justify their existence.
39:39
It's kind of adjustment of expectations to reality. Would you agree to this, that maybe the number of outliers on the right tail got a bit lower so that average return that investors are casting is now closer to what is reasonable?
39:57
Yeah, I think that's I think that's possibly right or I think some of the other thing, which, you know, one notices is that some of the outliers are small little things which are difficult to scale, which are relatively small hedge funds if they were to set up on their own, but that they're funded by hedge fund platforms, which looking after the fixed costs, the infrastructure, etc, so if I can make supernormal returns with 50 or 100 million dollars that might not be big enough for me to justify setting up a hedge fund, but if I can go to a platform that provides me with the ability to do that, and I just hired a couple of guys, I don't have clients systems and settlements and stuff, then perhaps that seems to me, at least from the outside to be one of the ways that the industry is going.
40:51
We always conclude our episode by asking our guests for three pieces of advice they would give to their younger self. What are yours?
41:00
Possibly the advice, this may be not a generic advice. This is maybe some advice that would be good for the 23 year old Steve Mobbs with his quirks and characteristics. I think the first thing I probably didn't realise when I came out of university somebody who sort of built a career and self image out of being clever, was that really to be successful in a career it's better to be clever than smart but clever is one of the... it's less important than you think it is. And you know, there are an awful lot of other skills that you need to have now and probably everyone listening to this recording actually realises that but I think I was rather slow to realise that and as a rather kind of intellectually arrogant, you know, person in their mid 20s associated with being clever and expected to paddle back. Clever is a tool and it's not the most important tool. And you know, if you work in quant finance, you're quite used to hiring very clever people, some who are successful and some who are not successful, you know, some of the ones who are not successful that quite figured out what other skills they need as well as being clever. So that's first thing. The second thing I'd say, what I think I'd say take control of your career, be aware that there are going to be, you know, certain big opportunities are going to come along. And, you know, I think you have to recognise what those opportunities are. And I think when you look back at my age, when you get to my age, look back on your career, there will be two or three moments when you made a decision that really made a difference to the outcome. You know, if you'd made a different decision, the outcome might well have been quite different. So you know, I think you can... a lot of things that happened to me were in fact, you know, good fortune and serendipity. And I think looking back, I could have probably tried rather harder to take control of my career and to be proactive about it. And I think I would probably encourage other people to be more proactive maybe than I was. I think I was fortunate that when the opportunity came along, I seize them, but I think I should have tried rather harder to purpose things, my way and I think the third thing is to recognise that there's an awful lot of luck involved in a career being in the right place at the right time, you know, the timing of a particular market, you know, and being identified with that market or, you know, getting on with a particular person and that particular person getting a you know, taking you with them or, getting the opportunity I guess to some extent you make your own luck, but there is luck involved and a lot of you know, whether you're successful or not, can be quite path dependent If you happen to set up that fund just before that crash, you will never going to succeed in your there's no chance of you succeeding. If on the other hand, you happen to surf the wave of setting up at a time with benign market environment and you had good performance for two or three years, it's' a lot easier than it is if you set up in a difficult time and there's not much you can do to control that. So you can be kind of philosophical about it, I guess and accept that there is luck involved. And I guess keep trying if you get knocked down and run lucky. So those are some of the three thoughts anyway.
44:34
Thank you, Steve, for sharing your wisdom and for spending time with us. Really appreciate it. Speak soon.
44:42
Thanks a lot Nikita, cheers.
44:46
Thank you for listening to this episode of Speaking to Legends. I hope you found it to be useful and thought provoking.
44:52
If you enjoyed this show, please write a review on iTunes to support us. Stay tuned.
Hello and welcome. Speaking to Legends podcast. This show is a quest for ideas, insights and stories from the lives of the most successful hedge fund managers. We're learning about their spectacular careers. We share their life lessons and dissect their investment techniques.
0:20
We're thrilled by the prospect of
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sharing educational and thought provoking content, which helps you learn, grow and think. If you like the show and find it useful. Please support it by subscribing and writing a review on iTunes. Help us spread the word and grow the show by sharing it with a friend or two. The legend of today is Steve Mobbs. Steve is a founding partner of Oxford Asset Management, a quantitative hedge fund, which peaked at 5 billion in assets under management. In this episode, Steve gives his behind the scenes of the hedge fund world and expands on his experience. You will learn how and why his first hedge fund failed and less than He learned from that experience how he started Oxford Asset management and grew it from a small team and 10 million in AUM to multi billion dollar powerhouse with hundred employees. Steve also goes in length to discuss the trade off between being small and nimble versus large and slow to adjust. Let's get right into it. Hi, Steve, great talking to you excited to have you on the show. Welcome.
1:28
It's good to be here. Thanks a lot for inviting me Nikita.
1:31
Let's start from your background. You did maths at Cambridge and then economics at Oxford. How did you find those years? And do you think if at all, it prepared you for starting the career?
1:48
I loved my time at university. I mean, I came from a fairly humble background, I was the first one in my family to go to university so it was a bit of a revelation for me to go to Cambridge. I mean, being a clever kid at school and, you go to university and you find there quite a lot of clever kids around. I enjoyed maths at first, but I found it a little more abstract than, the certainly school maths it prepared me for and, I was not sorry to stop doing that at the end of my time there. I'd always been interested in politics and I'd considered changing to economics, partly through the Cambridge course, but I kind of decided that I wanted to see it through and get a good degree, which I did. So I went off and studied economics and studying economics was some new revelation came to growing up in sort of state dominated in the UK of the 70s. It was super interesting. And I sort of looked at the world and encouraged them to look at the world in a somewhat different way. And you asked whether it was, whether I found it useful for my career, and the answer is - to a point, but less than you might expect. I mean, I felt that in general the maths was, I've used maths one way or another through my career but I'm not sure I've used any of the heavy duty maths or very much of the heavy duty maths we used in Cambridge in economics well, no, I learned some econometrics at Oxford but I think I'm more generally just learned to look at the world of markets and of profits and just encouraged me really to look at some look at the capitalist system in a way that you possibly didn't in the UK in the mid 70s. So, again, I like enjoyed my time at Oxford, but I came out, very much not knowing anything that was very useful or very relevant, and the finance, which I learned very much learned on the job, I read a lot of articles, I read a lot of books, I took some courses and it was not that I came out of, Cambridge or Oxford with a particular toolkit. But I did come out with a certain amount of self belief and a belief that I could teach myself stuff that I needed. And did that really surround my career.
4:13
Yeah, it quite often happens that the start of the career doesn't leverage so much of the skills picked up along the way through the university, but it kind of equips you with tools to just think and how to learn and those kinds of things and it sounds like you found that to be quite useful. And so you started your career at BP and then went into banking and then spent 10 years at Credit Suisse First Boston and Deutsche Bank. Well, there you undertook a variety of roles. Can you please expand on your time there and any notable stories you want to share?
4:51
Oh, there's so many stories. I mean, the first thing I was gonna say was that compared to kids today who've all done internships and very clued up about the world of work. My generation was very much less so. I mean, there weren't internships, I pitched up at my first job, which was as a macro economist actually working for British Petroleum. Really super naive about what the working world was like, it took you a year or two years really to get used to a working environment. I mean, I wasn't very good at my first job. I didn't like them. They didn't like me. And it took me a couple of years really to work out that this wasn't a place for me and that I needed to get out. And it was really serendipity that I ended up in the city because finance was the one thing I wasn't going to do. I was quite left wing in those days. I didn't really think that the work in the cities in Britain seemed appropriate for a left wing kid like me, but I was pretty desperate actually. I mean, this was the depths of sanctions recession, it was extraordinary difficult to get a job I must have had about 35 rejections from jobs I applied to as a VP. You know, I finally found this job that this wasn't Credit Suisse First Boston actually this was a year in a bond fund manager of Bank of America Fund Management Department. And I was desperate for a job because I really felt I had to get out of it because I wasn't enjoying it and they didn't like me in a suddenly you get to do a job where your skill set is perfect for it and you do it well, and you feel that, you just go in every day walking on air because you're learning new stuff, and super exciting. So I did that for a year. And then I got this extraordinarily good fortune of bumping into an old mate of mine from Oxford, who said, that Credit Suisse First Boston, which is not the best, really the best investment bank at the time. So it was setting up a research department, what are you doing these days? And I said, that's what I'm doing. So I use exactly the kind of guy that we need. Why don't you come and meet my boss? And I did and you know, I was exactly what they needed. And I had exactly the right skill set for what they were doing and I joined CSFB's bond research department and I knew a bit about bond research and I taught myself an awful lot more. And I was lucky to work with a guy who was, super kind and, taught me a lot. It was just the most perfect job for three years. You know, I loved it. I worked on all sorts of different problems, which were incredibly interesting. At the time, there weren't smart people working in event that's not quite fair. There weren't academic people working in investment banks, there wasn't a top cadre of sort of PhD mathematicians as there are these these days. And in CSFB, which I say had all these interesting stuff going on, there was really just three of us sort of three or four of us sitting in the centre of the trading floor trying to work on different problems, build option pricing models, write papers, structure deals, you name it, we did it, really, and we're very grateful for us to get to work on that stuff. And it was the other thing I was saying is that it was the time when the PC was coming in, the personal computer, the humble IBM PC which these days we would, sort of say was trivially , underpowered, the fact that you could do calculations on the fly in the middle of the trading floor just transformed stuff that you could do in finance, if you could, you could programme the Lotus 123 spreadsheet you were hailed as a genius I was rather fortunate to ride that wave. I did work in the research department for three years until the guy who was put in to run research and expand it and make it into a big marketing effort. He and I didn't get along very well and I was looking for things I might do to get away from him. Trading was the obvious thing. So I said I'd like to trade so I went off to the arbitrage department and where there was three or four, sort of smart guy I sat down in the PC installed to trade whatever I found, even try and make some money. Then I had another unit piece of extraordinary good fortune that I stumbled on a super inefficient market, which was the market for Japanese warrants, which was equity warrants, which were long dated equity options, which is an astonishingly inefficient market.
9:13
You know, where not many smart people were trying to make money out of it. There was a huge amount of manipulation and wacky stuff going on. And it was really like the Wild West having lost incredible amounts of money in the first few weeks, but I tried to figure out what was going on, and having been summoned by the head of trading to try and explain what I'd lost so much money in a short period, like said to him, this is a guy called Oswald Grubel, who later went on to run the bank. He said, You know what's going on? I said, No idea I've lost I've built these models they seem smart and you know, I bought this and I sold this, and I've no idea how I've managed to lose so much money and I was expecting to be sent back to research with my tail between my legs. He said, Well, if you can lose this much money this quickly Must be something really interesting happening in these markets keep really small, and try and figure out what it is. And I did. And I made, you know, lots of money out of it, you know, later I left seems to be largely and viewed with the confidence that I could make money out of this market. And you know, it was the best, most fun thing I ever did in my career actually was trading these these, you know, wacky long days adoptions on dodgy Japanese companies. So that was, that was some of my time that CSFB was a fantastic time great time to be there. It was time of opportunity. It was a time when everything was expanding everyone you know, the one very many people around you know that everyone believed in you. Yes, go ahead, go ahead and try and do that. You know, people joining an investment bank today, there's so many, you know, clever people around you get given a very small little role here, that you felt the world is your oyster and there was, you know, just stacks of things to be done. It was just amazing. choosing which one was most interesting that day. So those were great times.
11:06
Yeah, it sounds like you had lots of responsibility and lots of opportunity to choose what to do and get exposure to all sorts of challenges. And as you say, these days, it's much more specialist rather than generalist roles that companies, hedge funds, banks that they want you to be in. And so kind of leveraging this experience at Credit Suisse First Boston, how did you get into Deutsche Bank and how was your time there?
11:37
Well, I mean, I was a sort of a young man in a hurry, really, and there's a lot of young men do I felt I'd been underpaid one year, and I felt that my P&L was carrying the department, which probably was and I felt that I could probably do better, better elsewhere. I think I was also, as I recall, I think I was slightly miffed that I hadn't been promoted one year and that my extraordinary talents had not been recognised as I said, I was a young man in a hurry. So I, a friend of mine who'd worked work at CSFB have gone off to Deutsche Bank and he approached me and they said,
12:14
We are looking to set up a trading department and would you like to come and do it. I didn't realise at the time for Deutsche Bank became a major force in investment banking, I didn't realise what a sort of a , sleepy, dopey play it was, that there was a chap there who I worked for, who was trying to make his name in the bank and, he saw me as I think as somebody who could put some money on the table and make him look like he was modernising it. And so I went there, took one chap from CSFB with me and tried to make a go visit Deutsche Bank and it was for a couple of years it seemed like the most appealling decision because what I didn't realise was that there are lots of people in Deutsche Bank who really didn't think that the bank should be proprietary trading. If it did, it should be doing it should be doing from Frankfurt, you know, that I was that I shouldn't have been hired. And, you know, I was just desperately unhappy for a year or two thought I'd, you know, I'd been so happy to be CSFB and Deutsche Bank, you know, there's all these obstacles put in our way. You know, we couldn't have you, couldn't buy this, we couldn't have this computer because it wasn't a standard. We couldn't trade this. I couldn't have any risk limits. I managed to negotiate and share the profits. But what I had in my naive it's failed to realise was that you know, if you don't have any risk limits and can't take new positions, doesn't matter what percentage profits they're prepared to give you. So you know, things came to a head when the head of worldwide trading, Ribbentrop, whos father was one of the people who'd been executed after the war. He was the guy who's trying to get in sacked. And you know, I went over and we had to show that I'm meeting with him and the chief executive Rolf-Ernst Breuer. Ribbentrop said you shouldn't be here. He's not reporting to me. I'm really not, you know, I just don't think we should be doing this. And Breuer. Ribbentro, I said, that's fine. You can report to me then. So I basically ended up reporting to the chief executive of Deutsche. And things got better after that, because,he had me under his wing a little, he didn't spend much time with me, but, you know, people knew he had my back, you know, we got more risk limits, you know, we made you know, we had a couple of really tremendous years, I expanded the province substantially, we had maybe 20 people at this height, and things were, for several years, things went swimmingly. Then Deutsche Bank decided that it was going to get serious in investment banking, and it hired a bunch of guys from Merrill Lynch, including a guy called Edson Mitchell, and you can read about this in the book Dark Towers, which has just come out by Einrich, which is the story of how Deutsche and some of its adventures in the worlds of investment banking. But from my point of view, Mitchell didn't like me and I didn't like him and you know, the writing was real, you know from the outset because I was not his guy and I didn't you know we had one or two rounds about things, he wasn't really a trader didn't really understand trading and so really, I was on a declining setting things were , I was really on the way out I didn't realise it at the time. And one of the things I look back on and I think I probably should resign rather earlier, but I kept going, kept making some money, but you know, he didn't trust me and I didn't like him. So, you know, in 97 I left and but you know, I had some good years at Deutsche and achieved some good stuff, but I think you know, one of the things I look back on may be interesting to some younger people. I mean, I loved my time at CSFB and I regarded Deutsche as a job and all the people that I'm ever meet now who worked for me at Deutsche said what a fabulous time they had at Deutsche, it was the happiest time of their career. And I think, well, it was the happiest time of my career. I spent all my time, you know, sort of advising political battles and trying to protect you guys. But they didn't realise that at the time, it probably means that I did my job, right. Whereas I look back with nostalgia at my time at CSFB. And what a wonderful time it was there and possibly there were some people who were protecting my back and making it easy for me to do my job then maybe they didn't enjoy the politics so much.
16:33
Yeah, the political component is, a quite a time allocation for especially for more senior guys in big corporations, and back then, like the banks, I guess they were becoming bigger and bigger, but they were still not such a huge driving force, as they soon became after that. As you left Deutsche in 1997 you set up a fund, can you tell us a bit more about that?
17:03
I set up a hedge fund at the time and I called it Medici Capital Management. And I had one investor of Paloma Partners was still in business actually, whose business was basically to seed other funds, but provide them with infrastructure. So I only had one client. And, and, you know, they gave me money to, to set up and I hired a bunch of guys, the idea was to create a sort of a look alike, Deutsche trading department, and for a year we did really, really well, we made loads of money and, you know, it was fantastic start. And then I know you had Victor on a couple of weeks ago, who is an old friend of mine, then Long Term Capital happened and, we had a lot of similar positions to Long Term Capital and a lot of other funds that Paloma was backing had similar positions and Paloma lost a lot of money. We lost some money and Paloma were over leveraged and all of their trading groups had to liquidate. You know, they can they became one of the one of the big liquidators around the LTCM thing that we had to basically unwind all of our positions into a market with no liquidity and it's quite heartbreaking thing to do. As you kind of each day you sell a bit more and the price goes down a bit more. We crystallised all our losses. paluma, crystallised all its losses, Paloma laid off most of its trading funds, including us. So I'm left with 20 guys trying to decide what to do. Clearly, this is not an environment in which you're gonna be able to raise money. I did make an attempt to raise money, but in the end I had to shut down the fund laid off the guys, and, licking my wounds really, it was a very, very difficult experience. You know, you make people promises and you can't deliver on it. Now, your confidence is shot because, you've lost lots of money and trades you really believed in didn't work out. So I took a couple a years off my kids were quite young and I became, I sort of took them to school I became the guy, the dad on the touchline. We had some fantastic all of these, you know, I did that for two, three years, really. And I was uncertain in my mind at that point as to whether I was really going to go back to finance. I mean, by being immodest, I had enough money to live on for the rest of my life. I was around 40, just over 40. So, you know, and again, became a bit itchy really, because a lot of my friends were doing stuff that was interesting, and I'm still pretty interested in finance and kind of reading about it. So when chap I knew approached me and said, you know, I'd really like to set up a fund. I didn't know how to do it. I've no trading experience, but I can do the you know, I'm a good computer scientist. We should start a quant fund together. And I said, I I'm not sure. Andre Stern his name was. I'm not really sure. I'm not sure about it Andre, but you know, set it up and I'll kind of consult with you and I'll give you a bit of help but you know, I don't know, I'm not really sure I want to do it anymore. So we set up OxAM, but it was within about three months of giving, you know, going and giving a bit of advice and showing him and his colleagues, couple of colleagues how to trade trade I was working full time and you know, I work full time after that, this is like something like 2000 really, you know, I did all the research and trading and because that was what I was good at Andre did more of the front of house investor relations, kind of stuff. He was better at computer science than I was and certainly systems infrastructure was his. And we set out a set up Oxford Asset Management, which was a quant systematic fund. Now this was, you know, something we'd always done I'd always done a bit of but it was not something that it really, you know, spent most of my time doing at Deutsche was more of a relative value kind of operation as indeed was CSFB. But we've done some quant. And I was pretty confident that we could do quant well. So we set up and then we started trading in 2004. And we started with $10 million. And we gradually grew it, and, you know, it's all very sort of slow. The growth was steady, slow and steady, really, rather than remarkable. We had pretty good performance and, grew in an evolutionary way people, look to the performance, they came and assessed us and there was a trickle of money coming in, we were pretty successful, I think.
21:59
Thank you for sharing this story and for going into details on inner workings and your thinking process at that time. And if you were to reflect right now, a little bit more about the approaches and techniques and ideas that went into the first venture versus the second, how similar were they? And perhaps you can also, while answering that touch upon on the trading, how similar was that?
22:28
Well,
22:31
I think the sorts of people we hired were different. I mean, it's a very different feeling running a quant fund to running a relative value fund and the sorts of people you tend to hire tend to be different. The quant fund... there's the sort of CSFB and Deutsche trading was all about you know, smart guys who are looking for market anomalies and, people with a sort of commercial trading if you like. Sorts of people you tend to hire and quant funds tend to be PhD mathematicians, PhD physicists, who are not always quite as, quite as commercial, the sense of the place of the OxAM was much more of a sort of research operation than a trading floor. People wouldn't come in and say, hey, what's what's this anomaly in the market at the moment it was much more here's a bunch of data, let's go away and do a research project on it. And that's a slightly different feeling. And when I say it's, OxAM had more of a feel of a, I think most you know, quant firms have more of the feel of a sort of a research department of university about them than a commercial than a buzzy trading floor feel about it. Well, Medici and you know, Deutsche I regard them as being very similar with typically you would hire people who were traders, people who had, you know, who had an eye for, market anomalies and for trading and, for markets and still in the world of OTC Markets, rather than, quantitative rather than computer based trading. And those would be the sorts of people who you hired and those and, you know, managing traders has its own challenges and, you know, bring the best out of them has its own challenges. Whereas bringing the best out of researchers who have sort of quantitative, cerebral university types has its own challenges as well but they're slightly different challenges. You know, OxAM was a different environment and felt different.
24:48
And as you werekind of riding the wave of success and having some very strong years OxAM, joined the billion dollar club, how do you think your personal day to day change as a result of it, and what did the expansion mean to the trading operation of the firm?
25:10
It is an excellent question, let's just talk through, you know, some of the ups and downs of OxAM, and I mean, we grew gradually and we were, I think we started with $10 million. We perhaps 100 at the end of the first year, perhaps 2-3 hundred at t the end of the second year. One of the salient things that happened was the crash of the quant crash of 2007. You know, when we lost... all quant funds lost stacks of money over two, three day period. There was a big unwinding, it was the beginning of the crash beginning of the great financial crisis and we were very much the canary in the coal mine, we and quant funds. We lost money over the quant crush. We only lost the money that we made already that year, however, when 2008 happened, we had a lot of there are a lot of redemptions not because we lost money in 2008 actually, we made money in 2008 but we had effectively, you know, monthly redemptions, which allowed people to take money from us. When the people they really wanted to take their money from, they couldn't get the money out. So we'd lost a lot of assets under management. And as I said, we got down having been a billion and a half, we got down to 700 million. We then gradually began to because we have good performance over this period, you know, the money gradually started coming in again. And we got up to a billion, a billion and a half, we got up to 2 billion we made the decision that we were going to get, we were going to take on more assets, we would hire more people we were going to expand. So up to this point, we'd been 25-30 people and 25-30 people is an organisation and this is really the answer to your question. 25-30 people is an organisation that is very easy to control. You've got two main partners who are really completely on top of everything that's happening. I mean I was on top, I knew every little piece of research, I kind of knew the equations, it was my baby totally. But once you take on more people and it gets 50-60-70 people, which is and ultimately we became 100 people, it feels very different, it feels different working there, it's very difficult, different firm to control is very different, you start having to have, you know, sub layers of management, you start having a whole lot of meetings, there are a you know, there are personalities, there are guys you know that you know that that aren't pulling their weights or that aren't doing as well, and it becomes much less dynamic place. Now, frankly, managing a firm of that size was something that we struggled with, you know, it was much harder than I think either of us either Andre and I thought it is going to be, you know, I think if I had my time again, I, at least I'm not shy, I at least resist that temptation to grow it. I mean growing is very, it's very tempting to think all these things that you want to do that you can't quite do because you don't have the resources or you're not quite doing properly but you can hire a couple of guys to make that more robust process or a more robust system or you hire you have better system better computer, you know, infrastructure that needs several people to manage it. Each individual decision you make is very seductive. It looks like the right thing to do to get better, you know, to get bigger and to get better and to you know, have guys who specialise in things as opposed to people who do things in a not quite perfect way but you know, get you get by. And each of those decisions, looks seductive, and you make each of those decisions and then suddenly, you end up with a firm, there's two or three times the size of the previous one. And it no longer has the same dynamism or it seemed to me that the OxAM at them time lacked the dynamism of the OxAM in 25-30 people there, you know, when there was 25-30 people, you had a new idea, people would work on it overnight, and you get it working the next day. Suddenly, when it was 70 or 80 people, you know, you had an idea and it would take a while to finish and, you know, then you'd need to, you know, someone needs to write production code for it, and it just became slower and more stodgy as an organisation, whereas, you know, super dynamic in the early days, and it was, you know, it was more fun place to work in the early days, not just for me as the founding partner. But as, you know, if I talked to the people who were there at the time, they would all say I think, yeah, it was really great in those days, but you know, somehow we lost something as we became larger. I wonder whether other firms have the same experience. I mean, I didn't notice, lot of firms grow successfully and manage multiple offices successfully. I mean perhaps some people are better at it than others. But, you know, I felt that was something we lost along the way.
30:18
And if we were just to focus on trading for a second, so obviously, as a AUM grows, and you need to have different processes and improve your infrastructure and all of that, and on top of it, the market impact and all of the costs and fees there is obviously a benefit to economie of scale and having the AUM. But at the same time, the capacity constraint of some strategies can kick in, and what was your kind of experience on this, while at the same time, obviously having some human aspect to the expansion and growth of OxAM?
31:01
Well Nikita, you summarise some of the pros and cons of expansion quite well, we did expand and we got up to four and a half, four and a three quarter billion. You know some of the good things about that were that we added a lot more trading strategies, we got a more a diversified set of income flows, we were able to go out and hire some smart people. We had lots more data sources. We were able to expand some of the we thought good strategies that we've worked on in the previous couple of years that were that were that were scalable. Clearly, some of the things we did were not scalable. So, but and it became more it became harder to move money around the market we spent more time worrying about At a bad impact and we had before. So it was a mixed picture, really. And we felt it was the logical thing to do the next step. But you know, something's harder for sure. And as I say, one of the aspects of that was the organisational challenge of managing a larger, organisation.
32:20
Definitely maintaining the growth, there was so many different factors that are at play, and so many different cycles of the market. And it's quite chaotic. In its nature,
32:33
things become, you know, it's not always you can't always predict, how the competition in your space is going to evolve. And I think, you know, quant became a lot more competitive, you know, various times over this period, you know, there was some things that we were pretty confident we were going to be able to, generate a lot of money out of a futures operation. For example, we had set up a, you know, futures, a futures units, you know, which had, extremely good returns initially and you know, we were we were pretty confident that we were doing some stuff with our futures funds wouldn't weren't doing and that we were going to do well at it. In the end, we struggled in futures, but we struggled along with the whole futures industry struggling, but I don't think it was unreasonable at the time to presume that, you know, the, the stuff that we developed was was going to be successful.
33:32
Speaking about evolution of hedge fund strategies, approaches, techniques, I and also the fact that some of these one in a million year, events happen every 10 years. And so you spent over 35 years in finance, and you saw the, the firsthand some of these events, the crash of 1987, Dotcom bust at quant quake. And, and so on. And so this events, to me are a perfect opportunity for funds that are promising the uncorrelated returns and are advocating for the edge that they have. So do you do think funds lived up to the expectation in that COVID-19 pandemic?
34:22
Well, you have to... I'm an outsider now, I'm outside of the industry and I have been for the last nearly nearly two years. But I think it is one of the sadnesses that the hedge fund industry as a whole is that you know, it promises uncorrelated returns and in general, often the returns are uncorrelated except when the shit really hits the fan. When hedge funds discover that, you know, quite a lot of the things they do are extremists are correlated with, you know, with markets and risk premia. And, you know, it seems to be the case with COVID, it certainly was the case in 2007 and eight, it was the case in 98. And I'm probably one of the few people around who was in trading 87 I can assure you the same things there then, you know, all these little positions which you had, which you thought were hedged, all managed, the market goes down 25% overnight, which is a pretty serious stress test, but they all seem to manage to find ways to lose money. So, you know, although you've been uncorrelated, you're ostensibly uncorrelated most of the time when it really matters. And when people are really looking at you to be uncorrelated, you know, you seem to manage to be correlated. Now, I think there are reasons for that, you know, there's a lot hedge funds and a lot of you're not just talking quant here. You know, take, take our take various risk premia there's an unwinding effect that people go cash and that everyone unwindes the same stuff at the same time. But, you know, I do think there's a weakness of story for hedge funds, which is you tell people go away and don't calculate your numbers and how uncorrelated you are. But then, once in a blue moon something happens and you managed to find ways to lose not just small amounts of money but quite extravagant amounts of money at the same time, the market, the equity market is going down significantly. So, you know, I think COVID fits into that pattern.
36:30
What's kind of your outlook because the theme I guess, throughout our conversation was that the market got a lot more efficient when in 80s it was just a couple of guys on the trading floor scribbling some formulas right now it's a very proper sophisticated operation all around and a lot more minds are spending time on this. Will hedge funds have their rebirth, or will it kind of continue to slide and say, as it had been the case over the past few years?
37:08
I think it's the supply and demand of opportunity. I mean, I think there's a lot of money, chasing opportunities in hedge funds. There's a lot of clever guys, we've all been educated in the same place and understand the same things I think you will always find, that there are really smart people who are better than the others, who will generate supernormal returns. But I think for the average guy, doing sensible things but not extravagantly different things, it's just become a whole lot harder to make money. You know, when I started out, it was very easy to see how to make money it was very easy to see where the anomalies were, it was very easy to generate, you know, consistent returns and find ways to diversify them across, different strategies, I think it has just gradually become a whole lot harder. A lot more money has been, you know, is chasing it in terms of whether hedge funds, you know, how hedge funds continue to do. I mean, I think, you know, the expectations around hedge fund returns have become much lower and arguably more realistic. I mean, the time in the 90s when people would expect double digit returns from a hedge fund and mid teen returns, you know, I think those are long gone. And, I think institutional investors really looking for something that is uncorrelated and, which offers reasonable returns. So I don't think hedge fund industry is dying, but I don't think it's any longer as sexy and exciting and I don't think that the claims you know, for excess returns, can possibly be as extravagant as they were, and I think if you invest in hedge funds in general as opposed to the, perhaps the top decile or so of them, then I think you're going to get a pretty disappointing experience. And I think, and if you look at the data and statistics for hedge fund returns over the last, you know, dozen years, and there are all sorts of survivorship bias in this data, but even allowing for that, you know, some of the average hedge funds has done really poorly, I think you, clearly have to believe that you're picking good ones, you know, why you're picking good ones, you as an investor, you know, for the hedge funds really to justify their existence.
39:39
It's kind of adjustment of expectations to reality. Would you agree to this, that maybe the number of outliers on the right tail got a bit lower so that average return that investors are casting is now closer to what is reasonable?
39:57
Yeah, I think that's I think that's possibly right or I think some of the other thing, which, you know, one notices is that some of the outliers are small little things which are difficult to scale, which are relatively small hedge funds if they were to set up on their own, but that they're funded by hedge fund platforms, which looking after the fixed costs, the infrastructure, etc, so if I can make supernormal returns with 50 or 100 million dollars that might not be big enough for me to justify setting up a hedge fund, but if I can go to a platform that provides me with the ability to do that, and I just hired a couple of guys, I don't have clients systems and settlements and stuff, then perhaps that seems to me, at least from the outside to be one of the ways that the industry is going.
40:51
We always conclude our episode by asking our guests for three pieces of advice they would give to their younger self. What are yours?
41:00
Possibly the advice, this may be not a generic advice. This is maybe some advice that would be good for the 23 year old Steve Mobbs with his quirks and characteristics. I think the first thing I probably didn't realise when I came out of university somebody who sort of built a career and self image out of being clever, was that really to be successful in a career it's better to be clever than smart but clever is one of the... it's less important than you think it is. And you know, there are an awful lot of other skills that you need to have now and probably everyone listening to this recording actually realises that but I think I was rather slow to realise that and as a rather kind of intellectually arrogant, you know, person in their mid 20s associated with being clever and expected to paddle back. Clever is a tool and it's not the most important tool. And you know, if you work in quant finance, you're quite used to hiring very clever people, some who are successful and some who are not successful, you know, some of the ones who are not successful that quite figured out what other skills they need as well as being clever. So that's first thing. The second thing I'd say, what I think I'd say take control of your career, be aware that there are going to be, you know, certain big opportunities are going to come along. And, you know, I think you have to recognise what those opportunities are. And I think when you look back at my age, when you get to my age, look back on your career, there will be two or three moments when you made a decision that really made a difference to the outcome. You know, if you'd made a different decision, the outcome might well have been quite different. So you know, I think you can... a lot of things that happened to me were in fact, you know, good fortune and serendipity. And I think looking back, I could have probably tried rather harder to take control of my career and to be proactive about it. And I think I would probably encourage other people to be more proactive maybe than I was. I think I was fortunate that when the opportunity came along, I seize them, but I think I should have tried rather harder to purpose things, my way and I think the third thing is to recognise that there's an awful lot of luck involved in a career being in the right place at the right time, you know, the timing of a particular market, you know, and being identified with that market or, you know, getting on with a particular person and that particular person getting a you know, taking you with them or, getting the opportunity I guess to some extent you make your own luck, but there is luck involved and a lot of you know, whether you're successful or not, can be quite path dependent If you happen to set up that fund just before that crash, you will never going to succeed in your there's no chance of you succeeding. If on the other hand, you happen to surf the wave of setting up at a time with benign market environment and you had good performance for two or three years, it's' a lot easier than it is if you set up in a difficult time and there's not much you can do to control that. So you can be kind of philosophical about it, I guess and accept that there is luck involved. And I guess keep trying if you get knocked down and run lucky. So those are some of the three thoughts anyway.
44:34
Thank you, Steve, for sharing your wisdom and for spending time with us. Really appreciate it. Speak soon.
44:42
Thanks a lot Nikita, cheers.
44:46
Thank you for listening to this episode of Speaking to Legends. I hope you found it to be useful and thought provoking.
44:52
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