Hedge Fund Market Wizards by Jack D. Schwager

Author:Jack D. Schwager
Language: eng
Format: epub, mobi
Publisher: Wiley
Published: 2012-04-17T04:00:00+00:00

Chapter 8

Michael Platt

The Art and Science of Risk Control

Michael Platt achieved career clarity at an early age. “I have had a very easy life,” he says, “because I never had to think about what I wanted to do. I wanted to be a trader from when I was 12, and I started when I was 13.” Platt continued to successfully trade stocks through high school and university with one major exception: His stock account lost half its value in a single day—the crash of October 19, 1987. This episode was the first and last time Platt experienced a large percentage loss.

After graduating from the London School of Economics in 1991, Platt joined JP Morgan where he had an extremely profitable eight-year career, trading a wide range of fixed income derivatives. His success at the firm led to repeated promotions, culminating with his appointment as managing director in London with the responsibility of heading up proprietary relative value trading. Platt left JP Morgan in 2000, along with William Reeves, to co-found BlueCrest. The firm has been extremely successful, growing to close to $29 billion in assets under management and nearly 400 staff by early 2012. The majority of assets are in two programs: a discretionary strategy headed by Michael Platt, and a systematic trend-following strategy headed by Leda Braga, who joined the firm in 2001.

The discretionary trading strategy has achieved an average annual compounded net return of just under 14 percent.1 The hallmark of BlueCrest’s performance is not its return, but rather its extraordinary risk control. In 11 years of operation, the discretionary strategy’s largest peak-to-trough equity drawdown has been under 5 percent. Keep in mind, this track record includes the 2008 financial meltdown in which many hedge funds witnessed single days with larger drawdowns. The return/risk of the discretionary strategy headed by Platt is off the charts with a Gain to Pain ratio of 5.6. (The Gain to Pain ratio is a loss-based, as opposed to volatility-based, return/risk measure; see Appendix A for a more detailed explanation of this metric.)

The consistent and extended low-risk numbers achieved by BlueCrest’s discretionary strategy are not a matter of chance. Platt is obsessive about risk control. It permeates his own trading and the design of every aspect of the strategy. The discretionary strategy has kept losses remarkably low through a three-tiered process of combining broad diversification—seven teams trading different strategies and sectors—extreme tight reins on the losses of individual traders, and oversight by a seven-person risk management team. Platt is really serious about risk control.

I met Platt at the firm’s Geneva office. We talked in a conference room that was memorable for its unusual color: orange. When discussing trading strategies, Platt speaks at a speed that is somewhere between a rushed New Yorker and the fast-talking executive in the famous Fed Ex commercial. When the topic of conversation is a four-legged fixed income trade, keeping up with Platt can be a challenge.

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