Peter Borish, who served as founding partner and director of research at Tudor Investment Corp., has become the chief strategist and trading coach at Quad Advisors, a New York-based hedge fund incubator and accelerator. The new venture is an offshoot of Quad Capital, the proprietary trading firm founded in 2007 by John Guarino and Rino Ciampi.
Quad Advisors provides small and mid-size hedge funds a scalable trading platform, in-house analyst research, risk assessment, accounting and technology services, as well as access to Quad and investor capital. Borish (who says Guarino reminds him of “a young Paul Jones”) spoke recently to Mary Campbell from Futures' sister site FINalternatives' about what attracted him to Quad Advisors, what being a trading coach involves and why nobody wants his 1999 cell phone.
What attracted you to Quad Advisors?
I really feel Quad Capital and Quad Advisors is where the asset management business is going...
Clearly...the asset management business has to change... recently there was a story about the New York pension fund which had $4 billion more under management but their fees had gone up 10 times and the returns were just not there. Markets evolve, individuals evolve and if you become too large...the question becomes how do you diversify? It's hard to diversify, so in the end your returns become close to the index, and therefore why should you be paying a lot of fees?
Markets have a way of working themselves out...and one of the things that markets are working on is the relatively high fees in the alternatives space for not a tremendous amount of innovation. Quad Advisors is looking for managers who are small enough and nimble enough to generate alpha, not leveraged beta.
What factors do you consider when evaluating a fund for the Quad Advisors platform?
The first thing we're looking for is experience and a track record. As I like to say...young guys have all the moves, but old guys win championships. Experience matters.
What we're looking for are those that have had an established background, were entrepreneurial and decided they wanted to go start their business. But they're stuck in that $20 million to $50 million capital constraint, and part of the reason they can't raise more capital is they don't have the capital to build out the infrastructure. That’s where we come in…we have all the infrastructure.
We're looking for people that trade options, they can trade futures, they can trade equities—we're not looking for index huggers. We're looking for people that can generate alpha.
I was giving a talk at an emerging managers conference, where 500 people attended. After I tell a bad joke or two I say, 'Okay, look around, 80% of you are gone.' Because it's mathematically impossible for everybody to generate alpha...Every 10-year-old kid thinks they're going to be playing in the NBA. And then they grow up a little bit and then reality sets in and that's the way it is here.
For people to get here, it's a long, slow process...We have to understand what they do, we have to see that it's replicable. I don't want somebody that says, 'Hey, look at me I have this great track record—I bought one stock and it went up a whole lot.' They have to have an approach and a methodology that's consistent over time.
What do you do as a trading coach?
I tell them all their good trades were my ideas and all their bad trades were their ideas...just kidding, not really. [laughs]
Seriously, though, we have our risk manager and our processes to deal with our trader’s actual positioning, their risk and their leverage. So if they're using that, and know what their P & L is they don't need me to be a Monday morning quarterback...I try to stress the approach and the methodology and the discipline. Are you trading the trade or do you feel, particularly with the discretionary traders, that you have an edge? And then, if you feel you have an edge, what's your risk/reward associated with that? Because in this business, unless you can have a 3, 3.5 to 1 minimum risk reward, you probably should not be putting on the trade.
Does Quad Group invest in its traders?
There are multiple ways to come to the Quad Group. Individuals can start with Quad Capital or hedge funds can join Quad Advisors. We will make an investment in traders we feel that have the talent to come through the Quad Capital route. One of the reasons that the timing for this business is so interesting is clearly because of Dodd-Frank and the Volker Rule, we think there's an opportunity for talent recruitment...
Not only do we have traders, we have analysts that we're trying to bring in and recruit and those analysts get an opportunity...to try to monetize their idea...And then we have a training program where we have recruits coming in for two years where we pay them and they learn the entire business.
We've also recruited some returning veterans. We think that if you've been in that environment, you might understand something about risk.
And in return for access to Quad Advisors' resources, they give you a share of what they earn?
Yes, we are top-line revenue partners with the hedge funds that join Quad Advisors—and...I mean partners. Let’s take it a step further...if a Quad Advisor hedge fund wants to hire a third-party marketer, they can do that. For us, that means they have a partner and our fee will be reduced too...When you're a partner, you should be a partner.
Why should investors consider smaller hedge funds?
I think the key word is innovative. Nobody wants to invest in an old tech startup...they want innovative approaches to the marketplace. That's what we're looking for to generate returns. We think that those that are innovative and hungry—and obviously have the numbers to support them—have the ability to potentially grow a firm. My claim to fame is I was one of the first global macro technical guys on Wall Street at Tudor and we built Tudor Systems Corporation. I went out independently in 1995 with my own CTA. If I said to you, 'Hey, I'm going to restart all the models I used in 1995'...that's really going to excite you, isn't it? 'And oh, by the way, I'm going to give you my 1999 cell phone too.'
What is the first advice you give a would-be hedge fund manager?
I would say that this is a business where you have to make time your ally. Meaningful change takes place slowly and over time...Are you entrepreneurial enough and are you hungry enough to deal with that early stage and [the] inevitable fits and starts?
If you read every single Market Wizards book, 90% of the traders there will all say they had a near-death experience. Hopefully, the people we recruit have had that already...and that's the best risk management tool that they can have. Because generally it comes from thinking that you're smarter than you are and the market has a way of humbling you.
One of the points we are going to emphasize is, “Do you have the patience and the makeup?” Because we're going to be your partner and it's not going to happen overnight.
This interview initially appeared in FINalternatives