'A Glut Of Trading Opportunities' Says Andrew Law Of Caxton Associates

Includes: SPY
by: John M. Mason

Andrew Law is Chief Executive Officer and Chairman of Caxton Associates, who Sam Jones of the Financial Times says "ranks alongside the likes of George Soros when it comes to influence and nous in the upper echelons of international finance."

So far for Mr. Law and Caxton "It's been a good year." Caxton, in 2013, has a trading gain of $1.0 billion. And, as a consequence of this exceptional performance, Caxton started taking money again this past summer after having been shut to new investors "for years."

The reason: Caxton "scented a glut of trading opportunities."

Caxton Associates is a global macro fund focusing on major movements in currencies, bond prices, bond prices, interest rate derivatives or equities based on broad international trends.

It relishes an "uncorrelated world"…a world where economic policies are disconnected, yet one in which the economic policies of different countries have taken strong positions that they are wedded to.

Hedge funds have floundered since 2009 because they have been unwilling or unable to take risks in markets because of political unpredictability and see-sawing prices. That period seems to be over, for Mr. Law states, "What I think we're seeing is the return of global macro."

In the United States Mr. Law describes the scenario as follows. First, he sees the United States economy continuing along the path it has traced over the past four years or so. The US economy is just going to continue to crawl along: "It's clear to us now that the US economy just isn't going to reach escape velocity."

Programs of short-term stimulus, whether coming from the monetary side or the fiscal side, have not had much an effect on economic growth and, in the future, will not be much more successful.

Second, the shutdown of the government and the debt-ceiling debate has caused further damage to the economy ... how much we won't know until a later time. Furthermore, the resolution reached last week to re-open the government is just an exercise in kicking the can down the road.

In terms of resolving the situation, "The problem has not been solved and the hopes for a grand bargain are in tatters…."

One consequence of this is that the talk about the tapering of security purchases by the Federal Reserve is "off the table for the foreseeable future." Tapering will not begin until there is more information that the state of the economy is improving and the Fed will not want to be overly anxious to start the tapering with a new Fed Chair coming into office in February 2014.

This observation has created opportunities for an organization like Caxton for with the turnaround in interest rates over the past two weeks or so and the view that the malaise in Washington will continue along with the continuation of quantitative easing on the part of the Fed, Caxton has been snapping up US bonds in recent weeks betting that interest rates will remain soft for the near term.

This just shows how fast Mr. Law and Caxton are willing to change their positions. Earlier this year, the firm's prognosis was for faster economic growth and Federal Reserve tapering, a situation where interest rates would rise and bond prices would fall. This led to Caxton shorting Treasury bonds. According to another article in the Financial Times "The firm had made hundreds of millions of dollars" with this strategy.

Another current "opportunity" coming from the economic policies of the US government? According to Mr. Law, Europe is getting stronger, money is coming back to the continent, and the euro is strengthening against the dollar. It will be interesting to see what happens in the market and how the European Central Bank will respond if the euro/dollar exchange rate rises to 1.40 or more.

Obviously, there are potential trading opportunities here.

Sam Jones quotes Mr. Law, in the first article mentioned above, as having three core principles. "One is to listen to the markets, a second one is politics and policy matters, and the third one is risk control."

The first two principles open up many opportunities where there are dislocations created between where markets are and what politicians and policymakers want to take things. This is one thing I try and discuss over and over again in my blog posts.

But, along with this, Mr. Law looks for traders who are screened for certain characteristics. These are "the ability to see markets for what they are - a set of opportunities you either get right or wrong; the ability not to take it personally; the ability to know when to walk away after a loss and dust oneself down and to know when to go all in."

Looking at the different position Caxton has taken in the US bond market this year, one certainly sees that Mr. Law applies these characteristics in what he does.

Given these characteristics, however, is not enough. One must be careful not to get too convinced of one's invincibility. Over the last four years or so the hedge fund industry has not done too well. In fact, "in 2012, 873 hedge funds shut down-more than 10 percent of the industry."

Mr. Law states, "The hardest thing in this business is durability ... you get people who get things right for one or two years and think they are invincible. Can they repeat that in the next period of time after that? Most of the time no. People who try to knock the lights out - they don't stay on the racetrack."

This reminds me of the Warren Buffett saying that you don't know what swimmers don't have on any bathing suits until the tide goes out. One shouldn't go swimming without really being prepared for what you might experience. A lot of our hedge fund friends were just riding the wave ... until it stopped.

Mr. Law, in these articles, just presents the view ... which I strongly believe in ... that one has to look for the opportunities created through the disconnect between the action of government policy-makers and the situations that exist in economic and financial markets. These opportunities may be "unintended consequences" but they are still opportunities that people are going to take advantage of. The one thing that investing in these opportunities requires, however, is something that Mr. Law alludes to. One does not want to be among the last dancers on the dance floor when the music stops.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.