Jamie May is one of the most famous and successful hedge fund managers. Jamie made his public debut in a book written by Michael Lewis that covered the mortgage-backed securities markets and their impact on the big financial crisis. Jamie was included in the book because of his successful positions that his hedge fund took on during the crisis. May majored in history and was influenced by his investor father to take an accounting course, his entry into private equity. His hedge fund, known as Cornwall, is a family business created as a means of diversifying his father's wealth. Since the company was financed exclusively by his father, this meant that he could make independent investment decisions, but sometimes there was not enough capital to participate in certain trading ideas. Due to a lack of funds, he decided to open the doors to outside investors.
Mr. May was very selective in choosing his investors, choosing investors who were like-minded so that he was comfortable sharing ideas and being transparent in his actions. Jemmy was unhappy with the way his trading methods were presented in the book written by Michael Lewis. He was concerned that his trades would be considered aggressive by readers and that he was lucky despite the fact that a lot of work had been done on them and he was influenced by some of the fundamental data received. During the great financial crisis of 2008, Jemmy's fund went short with a higher risk / reward ratio and this led many people to conclude that it was too asymmetrical and more like a gamble, but it wasn't. After graduating as an accountant, he landed his first job at a private equity firm. In this job, he learned that the need to analyze a company for its fundamental value is critical to determining whether an investment is good or bad.
He also believes that good analysis is done by a person who knows what questions to ask about investments. When he started investing, he was drawn to special situations. Special situations arise when the market has assessed the potential risk. He believes that in such a situation it is easier to apply the analysis, since the catalysts for the price movement are not known in detail. He believes that the markets are poor in pricing risks that may come from litigation or regulation. For example, in 2003, the market value of a cigarette manufacturing company fell by fifty percent after rating agencies downgraded its rating. The reason for the downgrade was the lawsuits they faced at the time. It was not difficult, given the risk of the company's insolvency. So it made sense for people to reduce their exposure to stocks. Although some investors argued that the agencies were wrong and the company had more chances to win.
Jamie's attention was drawn to the positive feedback from other investors and he decided to investigate further. They got as much information as possible about the case and even went so far as to seek advice from lawyers who were following the case closely. The data they received gave them an idea of the outcome of the proceedings. Markets tend to exaggerate uncertainty, especially when it comes to the complexities of litigation, and this was one of the cases. To measure the discount, he took the price of non-tobacco stocks, subtracted the value of tobacco shares, and the difference was the litigation discount. The results of the lawsuits should have either confirmed the fears expressed by the agencies that the share price would be driven down, or, if it were the other way around, the stock would rise substantially.
Their analysis indicated that the price was likely to go up, so they bought a call option which gave them 250% of their investment. The May Fund uses options as a speculation tool and sometimes as an indicator. When volatility is at historically low levels, it can indicate future volatility and uncertainty. Jemmy's strategy is to look for options that are overpriced or underpriced. Markets tend to perceive long-term options as having little volatility, which Mai sees as irrational thinking. For example, they bought 10-year Dow options to hedge inflation. Volatility expectations are very low and the companies that make up the index are best placed to offer higher prices to consumers, and if interest rates are raised, a rally could occur. Brazil is a major exporter of goods. Commodity prices rose in 2010, and the strong growth of the Chinese economy, which is a major importer of commodities, caused inflationary pressure in Brazil.
There was a very high possibility that the Brazilian central bank was about to raise interest rates. At the time, rates were eight percent, and the six-month forward rate was estimated at twelve percent. Jemmy thought the forward rate was mispriced and decided to buy a call option that had a strike price of ten percent instead of the twelve percent implied by the forward rates. Since the Swiss franc performs well in terms of off-market risk and the Australian dollar tends to perform well in terms of risk in the market, they bought the worst option. The worst option is when you pay one premium for trading a basket of instruments. After the 2008 crisis, they realized the weakness of the euro and decided to bet against it using the worst options, betting EUR/CHF and EUR/AUD against it. Because the franc and the Australians were highly correlated, this meant that they would pay a smaller amount of the premium.
His strategy is mainly to determine the direction of the market when options are priced with a fifty percent chance that the price will go in either direction. Such opportunities are rare and require patience, but bring great profits. These are some of Jamie's quotes. It's amazing how much the great traders have in common. Profitable traders do not look for urgent trades and wait for the right opportunities. It's not about how much money you make, it's about how much money you keep. Let's try to learn from those who have been successful in order to minimize the learning curve.