How to succeed as a hedge fund trader

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The failures are phenomenal and frequent. Take Benros Capital, a hedge fund launched by two former Goldman Sachs traders that shuttered earlier this year or Edoma Partners started by Goldman prop trader Pierre-Henri Flamand in 2010, which folded less than two years later.

What works once, may only work once. Succeeding at a leading firm doesn’t ensure your success if you go off on your own. And the struggles can be magnified for those who launch without a big bank background and track record that attracts investors.

If ex-Goldman golden boys can’t succeed as hedge fund traders who can? Here are three ways to tinker your thinking so that trading becomes a successful form of investing.

Employ real-world risk experience

In the heyday of hedge funds, there seemed to be no need for risk management, and it was easy to lay the blame on prime brokers. Today’s Hedgeworld requires diligent, complex risk-taking measures. This goes beyond back-office tools. It starts with your own mentality and how you parlay risk taking in other facets of your life.

If you have a penchant for poker, use the skill not the gamble. Billionaires Stanley Druckenmiller and Steve Cohen culled the thoughtful process from their poker prowess into ROI.  Many others like BlueCrest Capital Management co-founder Michael Platt began playing with trading and investing when they still in school, realizing the role of risk long before they entered a fierce and fickle marketplace.

Platt had some help from grandmother, making his first investment in trust savings banks that were selling shares to the public. “When I was a kid, I used to go round to her house, and she’d be sitting there working out what she was going to buy and at what profit levels. She wasn’t like most grandmothers,” told Bloomberg in a 2010 interview.

Channel your inner child

Sure, you need to be a sophisticated investor who comprehends quantitative metrics and qualitative risks while ensuring execution of a stealth strategy. But consider the time and attention you must pay to the markets and myriad factors that could impact any and every bet.

You can’t just set up shop, hope for, even make, one big win, and expect the cycle to continue on its own. Hedge fund traders must have a voracious appetite for what they do and how to do it. Think about when you were a child and became fascinated by the creation of the galaxy or the inner workings of a mechanical toy. You must harness and maintain that level of enthusiasm in order to persevere. As soon as you lose passion and intellectual curiosity, all bets are off.

Don't fear failure

You can’t ever dismiss one-time, short-term dips and drawbacks. And you must learn from your mistakes.

Jack Schwager's “Hedge Fund Market Wizards” chronicles the flurry of failures of Larry Benedict, founder of Banyan Capital Management. Benedict is an active, very short-term trader who makes hundreds of trades per day focused on mean reversion. Success came only after stumbling and even questioning his career choice. Those early errors made him embrace risk management, and that discipline has paved the way to his ongoing gains.

“Since I started in the business, I have seen a number of traders who ended up committing suicide or being homeless. The one trait they all shared was that they had a gambler's mentality,” Benedict tells Schwager in his 2012 book.  “When they were losing, they were always looking for that one trade that would make it all back. I learned early on that you can't do that. This is a business where you have to work. That's what I do. Every day I make hundreds of transactions. I grind out the returns. If you look at my daily returns, you will see there are very few big up days.”

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