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Rene Levesque By: Rene Levesque, Founder, Mountjoy Capital

When asked about the behavioral and personality characteristics of the successful traders, Mr. Schwager, author of several books on Market Wizards, answers with the following: "People who are successful traders will have the ability to quickly admit that they’re wrong...discipline is also important."

An adequate evaluation of the manager’s behavioral biases is paramount to the effective identification of absolute return strategies within the Hedge Fund universe. As well, a comprehensive inventory of the strategy’s embedded explicit and implicit volatility (Vega) and gap-risk (Gamma) postures are also important in the assessment of a manager’s propensity to generate absolute returns.

Active Risk Management and Behavioral Biases

The Hedge Fund universe’s constituents generally exhibit an impressive arsenal of idea generation and research talent. This, overlaid with position-specific and/or portfolio-level risk mitigation, represents what most Hedge Funds are all about. The risk mitigation toolbox includes, for example: diversification, paired positions, systemic and/or sector hedges, market neutrality, and targeted risk calibration. Hedge Fund managers and investors have sought comfort in these risk mitigation tools in their quest for absolute returns. As recent history demonstrated, none of the risk mitigation tools offer a guarantee to absolute retur......................

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