Sales & Trading and Hedge Fund reading list

Even though I should be studying for my Options & Futures exam coming up next week, I am meeting up with lots of first years interested in working on the trading floor or in hedge funds to give them advice on CVs and interview preparation. The question on what to read in preparation keeps coming up, so I will make a post with all the books I find very helpful to get inside into trading and investing, as well as the technical knowledge required. I recommend the following books. Obviously, you don't need to read them to pass interviews. If you are lazy, you can get by with your introductory finance class, the Wall Street Journal, and the Vault Guide to Finance Interviews. Still, I believe that if you are not interested enough to pick up a good book on investing or the markets in your spare time, it is questionable if you will enjoy working in the financial markets, and thus it is unlikely you will be successful or happy if you work in this field. So at the least reading these books will give you an idea if you are really passionate about markets.

Technical knowledge
Inventing Money: The Story of Long Term Capital Management and the Legends behind it


This is the best book on the lives of Fischer, Black, Scholes, and Merton, the fathers of modern derivative pricing. It gives an excellent introduction into how and why derivatives were developed and how the industry grew. It might be a bit heavy if you have no background whatsoever, but even then I think it will familiarize you with the concepts important in trading.

Derivatives

We have had some readings from this book in our Options class, and as an introduction it is much easier to understand than the classic John Hull book on derivatives that everyone recommends but probably not many actually fully understand. So if you want a book on derivatives that is easy to understand and study by yourself, with a very good depth and practical and intuitive explanations, this is really good. It is written by the NYU Stern professor Rangarajan Sundaram. It is more expensive than the Hull book unfortunately.

Now on to lighter things :-). There are a lot of books on investing, the hedge fund world, and trading, but these are my favourites. Depending on where you lean and what you are interested in, you may have other choices, here are my top choices.

Easy reading
Reminiscences of a Stock Operator

This is the autobiography of one of the first speculators in the 20th century, who made his fortunes in the 1929 crash shorting stock prices. He seems to have had a very unusual gift for interpreting stock prices and where they were likely to go, so much so that brokerages would refuse to take his orders, forcing him to operate anonymously even when he was in his teens. His insight on trading and investing are as true today as they were 80 years ago.

How I made $2m in the stock market


Despite the dodgy title, this is actually an excellent book on stock picking. It was written by Nicolas Darvas in the late 50s and follows a very similar investment style to Jesse Livermore, the author of reminiscences of a stock operator. It is a great introduction to technical analysis versus a fundamentals based approach to investing. It is also a very easy read and a great way to get started on investing.

Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets

As stupid as the title sounds, this is actually a great book full of interviews with macro traders, i.e. investors who analyze global economic trends in currencies, interest rates and commodities to take positions on large movements and trends. It is fascinating how they interpret current events and what connections they make. You have to be interested in macro investing to like this book, as it is unrelated to corporate finance or technical aspects of trading.

Market Wizards: Interview with Top Traders

This is something like the original of Inside the House of Money, a collection of interviews with successful traders from the 70s. Lots of their stories are focused on how they made money shorting soybeans or wheat in the Chicago trading pits, but there are lots of characters here that became famous hedge fund managers later. It does get technical when they describe exactly what they sold when and why, so again you need to be interested in investing to read this book.

Hedgehogging

A much lighter read, this is quite an entertaining book on the hedge fund industry and the characters in it (managers, investors, wives, journalists, funds of funds etc.). It is written by Barton Biggs, formerly head of Morgan Stanley investment management. He has a degree in literature, is well-read and has a healthy distance to money and the finance industry. He can be quite sarcastic at times and I laughed a lot reading it.

Beating the Street

Written by Fidelity star Peter Lynch. This is about investing in stocks and quite useful personally. There are a lot of interview questions like "how would you invest $1m" or "which stock do you like and why", so this comes in handy.

I don't like any of the overhyped books such as Liar's Poker or When Genius Failed and think they are quite useless and won't give you a good idea of what trading floors or hedge funds are about. I do think reading the Wall Street Journal and the Economist helps a lot as well. The FT has some advantage in their coverage of political issues, but in terms of finance and business the WSJ goes into greater depth and technical detail, which is very helpful if you want to go beyond the journalist ling

Lots to read over the Xmas holidays!!! ;-). I didn't do it last year but in retrospect I must say I was not well prepared for the interviews, I didn't even know how options were priced, so I really recommend the following class to prepare better than me and know about option pricing and the general idea of hedging trading positions.

One day at a hedge fund in London

I told you guys I had some more tricks up my sleeve when I left the investment bank in August, and now I can share it. Actually, I had two offers for summer internships, and I wanted to do both, so I accepted both. The second offer was from a large hedge fund in London in their event driven group (my loyal readers might remember my posts on hedge fund interviews). I started today and cannot believe how much I have learned in a day. Compared to working in a bank it seems much more creative and intellectually challenging, I will really need to work hard and switch my brain on. I am quite intimidated right now by all I have to learn as fast as possible, but I hope in a few weeks I will know much more.

What did I do today? I came in and immediately sat down with the head of the fund who told me what he wants me to work on over the next few weeks. I need to analyse certain aspects of three companies they currently hold live positions in. The tricky part is that being a "market neutral fund", they never hold a naked position, but instead have a position hedged against all kinds of effects they do not want to have exposure to, and therefore might go long on a stock but then short on some currencies, commodities, other stocks in the same industry or sub-industry of some of the business units etc.. So essentially, even when you cover one company, you actually cover 5 companies, some currencies, markets, interest rates etc.. I was instructed to work only on the first company (which given the basket turns out to be four companies and 5 main currencies) over the next days, and then they will add the other two live positions in the middle of the week, as he said I have to learn covering 3-5 live positions at the same time, as they do.

There was not much time today to cover even that position though, because there was a lot going on on the side. Of course I had to fill in lots of forms on compliance, insider trading etc., learn about the policies, the intranet etc.. But the main distraction came from somewhere else. The CEO of a bank was hosting an investor lunch in the City today and a guy who has a position in that bank needed the investment memorandum. He had another meeting though, and they asked me if I could go to the City, attend the lunch and get the booklet. I confirmed that I do not need to know or say anything and agreed to attend, no problem for me getting a 3-course meal with delicious wine and listening to a CEO! Of course, when I arrived there were 15 old men in suits in the room and me in casual clothes, pretty funny. I got all the info and listened attentively, and then went back to Mayfair happily. In the afternoon a CFO of a small company the fund is invested in came to our offices and the head of the fund also asked me to attend, their stock went down 50% over the last weeks and he said it would be interesting for me to see how the meetings with companies whose stocks are down 50% go. So I attended that as well, and then I was talking to the manager afterwards about how they have been affected by the turmoil over the last weeks, and he explained to me why even "market neutral funds" lose money in downturns.

By the time we were finished, it was 7 pm and everybody had left, so I left as well. Tomorrow I really need to advance on my first task though, because on Wednesday they'll throw in additional tasks for me. I'm absolutely thrilled though by how interesting it is and how much I am learning. After a short holiday, angel angie is getting up early again!

2nd part of the summer: commodities

Time is flying by like crazy. less than 4 weeks to go till the end of the summer internship! I have just started with the commodities group, who create investment and hedging products around all kinds of commodities. The people are great and the work is very interesting. I am trying to learn the pricing tools as fast as possible so I can understand more of what they do, but the products are very complex so progress is slow. Also, I have been given a project understanding the fundamentals of lots of regional crude oil grades, for which I am interviewing crude oil traders in Singapore and New York, I am learning a lot!! Never knew that WTI and Brent production are a joke compared to crude grades like Nigerian Bonny Light or Light Louisiana Sweet :-). I love it. The hours are even better than on my last desk, something like 8am to 7pm. Unfortunately that doesn't mean I get much sleep, because we have events every day. Trainings, dinners, lunches, speeches... I don't get to write on my blog much or keep in touch with anyone.

Then on the weekends I try to catch up with everyone and again I don't sleep :-).

Life on the buy-side

These days have been great for appreciating the beauty of working on the buy-side. Believe it or not, only a few days into my internship I got to write a due diligence plan for McKinsey, as they are doing the commercial due diligence on one of the deals we're working on, and I was happy I was the one specifying what they have to do, not the one who has to deliver all that in 4 weeks! Believe it or not, as it turned out I knew the McKinsey partner and Associate Principal of the project, and it is quite ironic they are working for my desk now! They'll be pretty well paid as well though :-).

Other than that, I've also been on a trip to Germany where we met with the management of one potential target one day, and today I came along to another meeting with tax advisors who were pitching a deal to us. The beauty is you don't need to be as well prepared or well-dressed, and they treat you very nicely. As a consultant, you have to be perfect and alert, and they can still be nasty to you if they want to. Today I wasn't even wearing a suit (I decided to go for smart casual today since many people on the trading floor, especially women, seem to do that), and the director asked me to come along to that meeting with PwC, and I said "is it ok? i'm not even wearing a suit today" and he said it wouldn't matter, it would be interesting for me, and I just came along, knew nothing, wasn't dressed to the occasion, but everything went perfectly well. It's much more relaxed.

Right now, I'm helping out on one ongoing deal and also on 3 or 4 opportunities, doing valuations, background checks etc., I'm learning a lot. The legal, fiscal and financial details are very hard to understand though. I'm struggling to understand 100 page documents flodded with words like Opco, Bidco, Rosco, bridge financing, withholding tax, quantum, SPV, ringfencing... you name it. At least I have won a LOT of respect for accountants and lawyers over the last weeks, I always thought those things were pretty straightforward, but it turns out they are not at all.

So much from me, now I will continue working. I just thought I'd take a break to post, because recently I have posted only pictures rather than stories.

Investing in Africa

Is it just me, or are newspapers full of hints that many countries in Africa are booming right now, unnoticed by the general public still in awe about growth in China and India? I think to spot beginning trends, one cannot wait till stories make the front pages. I usually watch out for recurring themes that are mentioned here and there as if they had no significance. Africa is such a case right now. You might here of a big IPO in Nigeria, increasing tourism in Mozambique, and a real estate boom in South Africa - but most journalists don't seem to put 2 + 2 together.

For the last two years, I have noticed more and more positive news coming out of West Africa and also Southeast Africa. And in recent months, the momentum is astonishing. Once you start watching out for news on successful businesses and investment in Africa you will notice it is in the news every day - but never as a top story.

Did you know, for example, how African stock markets performed last year? Botswana up 47%, Kenya up 47%, Malawi up 127%!!!, Mauritius up 46%, Nigeria up 40%, Uganda up 72%. If you read the companies & markets part of the FT closely, you will also notice that more and more investment and private equity funds are set up for the sole purpose of investment and Africa - for example Actis Capital , Aureos Capital, or African Capital Alliance, all members of the Emerging Markets Private Equity Alliance.

I'm posting this to encourage you to watch out for positive news and articles on Africa. Also, if you see anything interesting, feel free to post links and info in the comments!