Trader Profile: Louis Bacon
Image source: https://louisbacon.com/
Not a lot of material exists as it relates to Louis Bacon and his trading which is somewhat surprising given he was a major hedge fund player until he converted his firm to a family office in 2019.
However, some material does exist (sources at the end), and this post shares excerpts from various articles on Louis Bacon’s trading. When combined, the material paints a decent picture of Bacon as a trader.
Like a lot of traders, Bacon didn’t have an easy start:
Bacon was a literature major at Middlebury College. One summer he captained a sportfishing boat for Walter Frank, who had a seat on the New York Stock Exchange. He caught the bug.
Bacon soon headed off to get his MBA at Columbia University, where he used his student loan as capital to continue to trade. To his chagrin, he lost it all—and had to work odd jobs to make up the difference.
…in 1985, when Bacon first tried to run money for Commodities Corp… [Bacon was] Mortified after losing a third of $100,000 in principal, he insisted on giving the balance back. Elaine Crocker, the Commodities Corp. executive who funded traders, coaxed him a couple years later to try again. Crocker, his ally and protector back then, has that job officially as the president of Moore Capital today.
Having earned his M.B.A., Bacon entered the Bankers Trust trading and sales program in 1981. "They took an instant dislike to me," says Bacon, "I thought I was too cool." His superior attitude brought him the equivalent of a Siberian assignment…
But Louis had friends in high places and these relationships helped his career along:
Back to work for fishing buddy Walter Frank trading currencies in 1982, he lost some of the capital Frank fronted him. Still, Shearson Lehman hired him as a futures broker. Lucky for Bacon that his brother Zack, a trader at Soros' Quantum Fund, and his friend [Paul Tudor] Jones both traded through his desk, making him a big producer.
Bacon's gilt-edged client list had another advantage…By trading on behalf of Soros and Jones, Bacon learned their investing styles.
Bacon's mother died in 1983. When his father eventually remarried, it was to the sister of a man who was fast becoming a Wall Street legend: Julian Robertson.
By 1989 [~33 years old] he was on his own. [Paul Tudor] Jones wasn't accepting new money, so he recommended his clients invest in Moore [Bacon’s fund].
Bacon also went to high school with Lee Ainslie the founder of Maverick Capital. Some rolodex! That said, the following quote points out that connections alone didn’t make him the success he became.
You can't say that his career is a story of someone starting at the bottom and clawing his way up. But he took the ball and ran with it…
He had a great first year as a money manager which undoubtedly went a long way in raising capital:
Bacon's first year proved to be his best, when he correctly predicted the first Gulf war's impact on world oil prices and shorted the Nikkei index just before it collapsed. The fund was up 86%.
In terms of trading style, Louis had some dramatic early experiences that ingrained the need to manage risk/cut losses:
…was it when the mentor at whose knee he'd learned to trade commodities blew his brains out after a single mistake erased his net worth? Philip Hehmeyer, a free-wheeling Southerner, was a larger-than-life character on the New York Cotton Exchange. He was also short the S&P 500 Index before the August 1982 rally and took his life at 37 rather than face bankruptcy and public humiliation. "I saw the utter agony and ruination of sticking with a losing position," Bacon says.
In what little material exists on Bacon and his trading, risk management (cutting losses) comes up again and again:
…guided by aggressive risk management…
…Bacon is quicker to fold a losing hand. "Kovner might say, 'I'm losing. But I think I'm correct. I'll keep my positions.' Louis can't stand it. He'll go to cash,"
"If a stock goes from 100 to 90, an investor who looks at fundamentals will think maybe it's a better buy," explains one source. "But with Louis, he will figure he must have been wrong about something and get out."
"If you look at Louis's long-term track record, there is probably no trader alive who has better risk control on an asset base his size," says Paul Tudor Jones, a close friend of Bacon's who runs Tudor Investment Corp. "He wrote the book on capital preservation."
Bacon on the drivers of his success: Hard work, patience, knowing when to hold 'em, fold 'em or go all in. We have a rigorous risk framework, and although I do not micromanage every position, my portfolio managers understand the risk format prior to joining the firm.
As to general insight on his trading:
A futures trader by training…
Bacon, whose hyperactive investing style can make a day trader look relaxed, was nimble enough to keep his losses in check.
Bacon's incessant trading generates huge commissions…
The following comments offer more insight on the “incessant trading”:
Like any good macro trader, Bacon strives to identify long-running trends, or investment themes, such as euro convergence or structural interest rate moves. But unlike many others, Bacon can have an itchy trigger finger, and he will sometimes trade in and out and around his positions, even if they're moving in the predicted direction. "If Louis thinks something is going from 70 to 100, he'll trade in and out 15 times before it gets there, where we would get in and hang on as it went up and down," says one trader at a rival hedge fund.
"The difference between Louis and Julian [Robertson] is, Julian sees the mountain from afar and doesn't worry about the valley. Louis has a long-term macroeconomic vision on every position, but he won't let that stand in the way of making money over the next five minutes," says one former employee.
Bacon is capable of holding positions when he thinks they have potential: A source close to Moore notes that the firm maintained a stake in European bonds, particularly Swedish and Italian securities, from 1995 to 1999. But typically, if an investment seems to be moving against him, Bacon will get out quickly.
Combining what I know of futures trading with Bacon’s published returns and the commentary I’ve read, I think Bacon was probably continually taking a position in line with his theses and bailing out if it didn’t work quickly then repeating. By getting out of everything but the winners quickly, Bacon would ensure low return volatility while managing risk/drawdowns allowing him to “write the book on capital preservation”. Back to commentary on his trading:
…Bacon in a recent investor letter: "Those traders with a futures background are more 'sensitive' to market action, whereas value-based equity traders are trained to react less to the market and focus much more on their assessment of a company's or situation's viability."
Bacon has developed a reputation for not betting the ranch on any one trade. But when he sees a surefire opportunity, he plows in.
Though he studies charts and diagrams, he relies on an obsessive attention to detail—and ultimately instinct. "He is like an animal in his ability to sense the market," says one longtime investor.
Bacon keeps a firm hand on the tiller. "Very few people at the firm are allowed to take serious risk," says one source. "There's a lot of people there, but they are mostly in support, research or administrative positions."
"Louis can reduce a trade down to a couple of key themes and focus on them rather than getting lost in the chatter," says Jones. "In macro that's what separates the winners from the losers."
"The key thing about Louis is his ability to analyze and process information quickly, while controlling risk,"
…Bacon's hallmark has been consistency…
Bacon: [PTJ’s] approach to research and trading had a real impact too. He wasn't worried about small stuff. He taught me to think in points, not dollars, and he always used to say, "It's just points, it is not money." He gave me an ongoing tutorial in disassociating oneself from the result of the trade, yet still having passion about it.
One thing to keep in mind is that, as Moore Capital grew, they diversified into other approaches:
Bacon directly oversees close to $8 billion of his funds' investments, but he has hired niche market specialists, who have helped him to increase the reach of Moore's macro funds into such areas as venture capital, Japanese distressed securities and emerging markets.
Most famous macro funds eventually did the same. I point this out because I believe it is necessary to isolate the trading of founders like Bacon from their aggregate firm activities. While I’d guess Bacon pays attention to everything, the research I have done leads me to believe he is not running venture capital, distressed, etc. Per my research, Bacon’s specific trading is more in line with the style of Commodities Corp.
Regarding more specific information on Bacon’s trading:
Bacon: We tend to make top-down, interest-rate-driven investments. We've been pretty U.S.- and European-centric throughout most of Moore's history, and we have been pretty closely focused on what happens with the interest rate cycle and the reactions that it drives around the world. But our focus is shifting now because micromarkets – and those can be anything from individual equities to commodities and emerging markets – are becoming more and more dominant.
We run a laissez-faire, entrepreneurial shop. I started my career in futures, and the rallying cry was always free markets for free men, so I've tried to create an open architecture here for traders to test their ideas and thrive. I think that we have a good understanding of risk, but we take a different approach to it. We prefer to see what our traders want to have as their individual risk profiles, and then we fit our assets around those to modify our net exposure.
Bacon: We kind of had the moniker "global macro" thrust upon us. We didn't sign up for it. But I look at it as kind of the 007 license to do whatever we want, and we're in a period now where globally there is no lack of opportunity: in fixed income and currencies and the distressed and credit markets. We don't have to try and decide to make our money in any one instrument or strategy – we can invest in private equity, individual equities or arbitrage. We feel that we are versatile enough that we can move into a number of different strategies, and if doing that means that we're global macro, then we're not going to argue with the label.
Last year Moore was up 34%. Doing what? His moves included shorting the falling U.S. market in the first quarter and switching to a long position in the second. He also sold short the weakening dollar and profited from rallying high-yield bonds and base metals. He's reluctant to say much more than that, and he says next to nothing to his customers about what bets he is making. In a letter to clients last March Bacon predicted a tough environment for hedge fund operators in 2004. "In these waters tactical trading will be key," he said. Moore was up 10% at the end of November, roughly on par with a world stock index.
Convinced that the strong U.S. economy would lead to higher inflation, Bacon in the first quarter shorted bonds and interest-rate-sensitive stocks while staying long in tech stocks and some foreign equities. He also shorted the dollar to hedge against a stock market rout. In March, sensing bad news, he started selling but couldn't get out of stocks fast enough, even as the dollar and bonds rose against him.
As to more insight on his character:
Louis Moore Bacon craves order, discipline, routine. He doesn't like distractions…When he travels among these locations everything must be laid out just so in advance. The day before he embarks, a Moore Capital employee is dispatched to Bacon's destination to ensure that whatever he's scrutinizing—from displays on his computer screens to hard copies of any files or documents he has been studying—is arranged in an exact replica at the desk he will be using next.
…he is good at controlling his own exposure, with suspicion that can verge on paranoia. A former Moore employee recalls a day in 1991 when James Kelly, Moore's president at the time, strolled through the office with a private detective who carried a box that had a TV-like antenna and blinking lights, sweeping for bugs. Staffers won't even tell you whether Bacon's in town. He's serious about confidentiality agreements and not above some intimidation.
Even big investors rarely lay eyes on him. "Client meetings that are supposed to be face-to-face inevitably wind up as conference calls,"
In terms of why he avoids publicity:
Bacon is no recluse. A charming, engaging conversationalist, according to friends, Bacon is a serious outdoorsman who loves to hunt and fish; an avid athlete, he delights in snowmobiling, skiing and free diving. His charitable foundation is devoted to conservation causes. "But he has made a decision not to be a public figure," says a former Moore employee. "He's just not a flamboyant personality. Soros and Robertson enjoy an audience. But Louis is a private person who likes his space."
"Transparency on positions and thought processes is not something that is healthy to share with competitors, from either the investor or market-participant standpoint," Bacon summed up in a letter to investors.
"Publicity in no way enhances our ability to deliver for investors or to build our business, whatever the short-term fix to the ego," a spokeswoman for the firm wrote in a statement.
Finally, the following comment from Bacon stuck in my mind hence sharing it here:
Should hedge fund managers give back? They should, and they do, probably more so than other pockets of wealth, perhaps because after mastering the markets on their wits, they believe their wealth is replicable.
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Sources:
https://www.forbes.com/global/2004/1220/072.html?sh=17c001772196
https://www.institutionalinvestor.com/article/2btfwnx5ikgbazvsrg074/portfolio/louis-bacon-macro-macro-man
https://www.wallstreetoasis.com/forum/trading/macro-hf-interviews-paul-tudor-jones-louis-bacon-and-bruce-kovner