market folly

David Gerstenhaber, founder of global macro hedge fund Argonaut Capital, recently sat down with Opalesque TV to discuss risk management, how global macro investing has changed over the years, as well as how he got his start in the business.

Gerstenhaber was interested in markets at an early age and pursued economics as a result of it. He was working at Morgan Stanley in London when he started helping Julian Robertson's Tiger Management with some macro-oriented trades. Robertson then offered him a job and he accepted. After working for three years at Tiger Management, Gerstenhaber went on to found Argonaut Capital.

Risk Management

At Argonaut, he argues that one of their key advantages is their internal psychology about using options. He says, "We love to have asymmetric risk/reward in our favor, but not against us. And so, when we see themes that we have determined are likely to prevail for an extended period of time, we will do our best to structure our investments through options so that we have significant upside but limited downside ... We have a longstanding history of using options to reflect our positions rather than just buy directional risk."

On How Global Macro Investing Has Changed

In the interview, he emphasizes how making "big bets" was almost encouraged back in the day as investors were more tolerant of volatility in search of high returns. He also notes that risk management was not very developed and many investors didn't place a large emphasis on it. After shock events in 1998, the internet bubble, and housing bubble, it's very clear that risk management is very prevalent in global macro investing these days. Louis Bacon of Moore Capital has been known to place emphasis on risk first.

Practicing global macro investing now, Gerstenhaber identifies it as a four-asset class business: foreign exchange, fixed income, commodities, and equity indicies. Ideally, Argonaut wants to have positions in each asset class and offsetting value at risk (VaR) in each one of the asset classes so they aren't exposed to systemic risk. And interestingly enough, Argonaut's typical timeframe for holding an investment is identified as around "half a business cycle."

What is the future for global macro investing?

Gerstenhaber believes the global macro universe is expanding, rather than contracting like other strategies. For instance, he argues that the long/short US equity opportunity set is declining, yet there are more and more managers investing in that strategy each year.

One interesting quote from the interview is when Gerstenhaber said he sees a potential for a "muted rate of return for the long-only investor" in stocks or fixed income. While he's obviously biased since he is in the hedge fund industry and doesn't run long-only money, it's an interesting notion that investors shouldn't expect the same annual returns as they have seen in the past.

Embedded below is a video interview with David Gerstenhaber of hedge fund Argonaut Capital (RSS & Email readers may need to come to the site to watch it):



It's clear that Argonaut places a lot of emphasis on primary research and traveling the globe to craft and refine their investment theses. To see some of the hedge fund's thoughts from this year, check out Argonaut's thoughts on what went wrong in the markets. And for further global macro insight, we posted up Paolo Pellegrini's PSQR Capital last letter to investors before closing.