Letter #264: Greg Coffey and Jawad Mian (2024)
Founder of Kirkoswald & Co-CIO of Moore Europe and Founder of Stray Reflections | Greg Coffey on risk management and more
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Greg Coffey is the Founder of Kirkoswald Capital Partners. Prior to founding Kirkoswald, Greg had been retired after serving as Co-Chief Investment Officer of Moore Europe Capital Management, a subsidiary of Moore Capital. Before joining Moore, Greg was a trader at GLG Partners. Before GLG, Greg oversaw global equity proprietary trading at Bank Austria. Greg was hired at Bank Austria from Blueborder Partners, a George Soros related hedge fund. Prior to joining the hedge fund world, Greg traded emerging market equity derivatives at Bankers Trust and Deutsche Bank AG. He started his career at Macquarie Bank.
Jawad Mian is the Founder and Managing Editor at Stray Reflections, an independent global macro research and trading advisory with a focus on major investment themes. Recently, he was also a Partner at Karavan, a venture capital platform in Pakistan. Before founding Stray Reflections, Jawad was a Portfolio Manager at QInvest, where he managed $250mn across global and MENA equity markets. Prior to QInvest, Jawad was a Portfolio Manager at Rasmala. He started his career at CIBC Mellon, where he left as a Senior Fund Analyst.
Today’s letter is the transcript of a conversation between Greg and Jawad. In this conversation, Greg tells Jawad about the memories from his upbringing that have driven his decisions and aspirations, when he first started to believe in himself, the difference between risk-taking and risk-managing, holding onto large positions through highly volatile periods, how his psychology changes during a drawdown, how he decides when to be more aggressive, how he balances rational analysis versus intuition in his decision-making, and how he manages emotion self-discipline. He then answers a few rapid fire questions, including his biggest strengths as a trader, what he reminds himself when in periods of doubt, what he always considers when evaluating potential trades, what he focuses on in risk management, one piece of advice to a young trader, what keeps him going despite the ups and downs of trading, how he manages to get through drawdowns, what he takes solace in when overwhelmed or stressed, the important relationships in his life, and what he would say to his younger self.
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
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Transcript
Jawad Mian: Greg Coffey. Our past shapes our present. It helps to identify who we are, where we're headed. What memories from your upbringing have sort of driven your decisions and aspirations?
Greg Coffey: Wow, he's going--a new direction from Jawad. I think when I was growing up, I--my aspiration was to own a house on Sydney Harbor. And I grew up in a bad suburb, in a great city, and I guess the name of my firm is the street of the house--I ended up buying a house in on Sydney Harbor with my first meaningful bonus. I think we all need to be driven by a goal, I guess, at some point.
Jawad Mian: When did you start believing in yourself? The big leap in confidence where you're like, I can do this.
Greg Coffey: I don't know that anyone ever believes in themself. I think that that's the key to this business is understanding that the market's there to teach you how bad you are at your job. And every time you get some kind of self-confidence that you're good at it, you tend to get taught very quickly that you're not as good as you think you are.
Jawad Mian: Everyone marvels at your risk-taking appetite, but I've only ever heard you talk about your role as a risk manager. How do you differentiate?
Greg Coffey: I think my risk appetite now is significantly different to that when I was younger. I think if I break down my career, when I--when you first start in your career and you're taught to manage your losses and let your profits run, but in reality, you're surrounded by risk managers that want to cut your positions as opposed to allow you to make significant capital through longer term trends, which basically means that you're forced into a situation where you're continually trying to make sense, to make $1, as opposed to where I am now in my career, which is I'm trying to make sure I don't lose such that I can make the dollar times times. But when I was younger, my goal was to be a money maker. It was a wealth accumulation goal. And then over my career, I've changed into, I guess, a wealth manager now, and my focus is more on risk management than it is on making money. I mean, I tell all my LPs when--the question that you always get asked is, What's your return goal? And my return goal is--or in my career, I would have come up with a number that was very high, and now I say my goal is to not lose money, to do sensible things, use the experience that I've built over my career together with the experience we have at the firm, to build portfolios that are sensible and bulletproof. And by bulletproof I mean we are focused on not losing money. And if it means that we can't take the risk we want to take because it opens us up to left-tail gap in performance, then we won't take that risk. It's a very different mindset to that of earlier in my career where it was be active in the marketplace, make every cent out of every market and any asset that's moving at any time of the day, and be as big as possible, to make as much money as possible, and trade your way out of downside. It's a very different philosophy now.
Jawad Mian: When you do take a big swing now, what actually allows you to hold on to the position despite the volatility?
Greg Coffey: I don't think we take big swings now, I guess is the point, in the context of, historically, my career. Certainly we will take risk relative to the PnL we've generated. I think that the learning of my career is that you make all your money by taking three to four positions a year that work really well. And most of our risk is in fixed income, a little bit of currency, very little equity. And my job is to work out what rate cycles will look like and hold them for the whole cycle. When I was first--I started my career in 94, and everyone gets given Reminiscences of a Stock Operator, everyone gets given Market Wizards, I mean, it probably still happens--I give all my people the same books when they start at my firm. And I read a particular chapter about--I think it was Paul Tudor Jones holding a fixed income position for three years, and I didn't really know how, when I first started trading in 94, how to hold a fixed income position for more than three minutes. I mean, you have to stop out because it's going against you, and then you re-establish. And I'm reading about this guy who's holding a trend for three years, I'm like, how do you do that? And the first part of my career, the answer was, well, you can't, because you don't have the rope from your management team. And the second bit is when you get the rope, back in the early 2000s it was, you were able to really be ahead of the marketplace daytrading because computers and algos weren't beating you. So we used to take very big positions for trends, hold the big position for the whole trend, but really be actively and aggressively managing the drawdown of that position by daytrading. And then all of a sudden I got really, really bad at day trading. And I thought it was just a phase, and it actually just was the market changed. I couldn't be the first guy trading after payrolls anymore because the algos had already traded every single piece of that number before I could pick the phone up. So I had to change. And that change really was born into taking smaller positions, knowing--we caught a 1100 basis point sell off in Chilean rates two to three years ago, or three into one year ago. And over a two year cycle, we had 150 basis point pullbacks and weren't forced out of the position because I wasn't big enough. It's a sizing issue. And then you realize that if you can make money slowly and not be so big that your monthly PnL drawdown forces you out either through your own protocol or your LP protocol, or if you're working at a pod, your manager's protocol, then you're able to make the most money.
Jawad Mian: Everyone in this room knows that drawdowns suck. How does your psychology change when you're in one?
Greg Coffey: I think you naturally get--I think I try to pretend I'm in a drawdown phase when I'm not so that we're not big enough to get the drawdown to have to act differently. We're--really, really, really hate losing money, like everyone does, right? But I think the key part of running a macro hedge fund is not being stopped out, whether that's by your own psychology, whether that's be your investors' limits or your manager's limit, it's to ensure that your size is never big enough to get you anywhere near what looks like a stop loss area, which then gives you the ability, I guess, to get on the front foot when you're making money. And you have to--look, when you see something and something changes, and you feel like you're in front of the curve, or that the market suits your style, or whatever it is, you need to make a lot of money out of that.
Jawad Mian: So how do you decide when you want to become more aggressive, like, what role does rational analysis versus intuition play in your decision-making?
Greg Coffey: Not sure. I think it's very--I think when you've been doing this for a long period of time, I guess it's--you feel like it's a rational analysis, but it's probably more intuition that something's happening. We were always taught--I mean, I think people get taught to layer into positions--I like X, I'll buy a little bit of X, or sell a bit of X, whatever it is. It's going well, I'll buy a little bit more. I'll buy a little bit more as it's going up. Now, I think that's the most absurd way to manage money in the world. Because what it means is that if you've caught a trend, your average-in price is somewhere three quarters up. And then you get a 25% drawdown in the thing, and you're back to flat. And then what do you do if you have another 5% drawdown? It makes no sense. So when we have a big idea and a big thought process, I like to think, Okay, if my maximum size is 100 for this position, or I can lose X in that position, then I'll go in for 200 at the start. And then if I get the first part of the trade, I'll take off half. Then I've got my full position, I'm in the money already. So I try to do it backwards. Try to be big early, small late.
Jawad Mian: You hate losing money, but then how do you manage or approach emotional self-discipline?
Greg Coffey: I don't understand the question.
Jawad Mian: How do you deal with, like, just the--protecting your mental and emotional state because of the volatility of the PnL--when you get a losing streak, for example--
Greg Coffey: I think you understand--it's very important to know what your limits are and not get anywhere near them. If you think that you can lose X, call it whatever, 3% in a portfolio, and that's your limit, then make sure that your position size isn't going to lose you one and a half. You get nowhere near it, and you're always on the front foot.
Jawad Mian: So you never find yourself feeling low in confidence, or--
Greg Coffey: Pretty much on a daily basis. Yeah.
Jawad Mian: Okay. I want you to I want you to finish a few sentences for me, all right? So my biggest strength as a trader is ___?
Greg Coffey: Risk management.
Jawad Mian: In moments of doubt, I remind myself that ___?
Greg Coffey: I don't have an answer to that. Sorry.
Jawad Mian: When evaluating--
Greg Coffey: Keep fighting, maybe. I don't know.
Jawad Mian: Keep fighting. When evaluating potential trades, I always consider ____?
Greg Coffey: Downside.
Jawad Mian: In my approach to risk management, I always focus on ____?
Greg Coffey: Well it's the same answer--downside portfolio. It's a risk management question. Sorry, I'm really boring. Sorry.
Jawad Mian: If I could give one piece of advice to a young trader, it would be ____? They're counting on you.
Greg Coffey: I think--trade smaller and let trends run longer--is the thing that I do differently now that I wish I'd done earlier in my career.
Jawad Mian: What keeps me going despite the ups and downs of trading is ____?
Greg Coffey: It's a fun job. I don't know. It's...
Jawad Mian: I manage--
Greg Coffey: Fear of failure. I don't know.
Jawad Mian: I manage to get through a draw down by ___?
Greg Coffey: Fighting hard. Never giving up.
Jawad Mian: When feeling overwhelmed or stressed, I find solace in ____?
Greg Coffey: Jawad, I'm really impressed with you remembering all this--you program yourself for all these questions. Just to be clear, I have a thing on when I do these things, which is very, very rarely, which is, I never want to know what the questions are. Which I had said, like, we had a pre-prep interview, and I said to Jawad, like I don't know--I don't want to do this because I don't want to know what you're going to ask me. Now I'm really regretting saying that to him. For the first time ever. Sorry, last question. I'm trying to--
Jawad Mian: When feeling overwhelmed or stressed, I find solace in ____?
Greg Coffey: Family.
Jawad Mian: I wouldn't be where I am today if it wasn't for ____?
Greg Coffey: Well, there's so many answers to that question--
Jawad Mian: List.
Greg Coffey: Family.
Jawad Mian: To the child who dreamed of making it big and buying a house on Sydney Harbor, I would say ____?
Greg Coffey: That's too much of a cliche question. Never give up. Don't stop believing. It happened to me, it can happen to you. I don't know.
Jawad Mian: But it's YOU, the child who had that dream to make it big.
Greg Coffey: I got asked that question once, What would you tell your younger self? And I don't want to go anywhere near my younger self. Things are just fine. I don't want to change anything in the time zone, timeline thing.
Jawad Mian: Greg, to you, I say Thank you. We've benefit greatly from the depth of experience, of wisdom you've shared. Give it up for Greg Coffey.
Greg Coffey: Thank you.
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