David Einhorn, Jim Simons and Steve Cohen have long loved poker for the similarities they see between betting on cards and investing in the markets, but asset managers may want to look at another game to learn from: bridge.
Brad Moss, a principal at $31 million hedge fund manager Crosscourt Capital Management, is one of the world's best bridge players and partially credits that success with helping produce net returns of 28.7% through October.
“From a generic standpoint, pattern recognition and game theory can be integral to trading success,” said Moss, who mostly trades large cap U.S. stocks and exchange traded funds when the cards are away. “I press my investment ideas when I believe I have greatest theoretical edge.”
So far, so good. Launched January 1, 2008, Crosscourt, a long/short equity fund specializing in options and volatility strategies, was up 0.69% its first year and 34.69% in 2009. Outside of the office, Moss became Bridge World Champion in October with his team of five other players—the "Rosenblum Cup"—and is a ten time U.S. National Champion.
“I believe that the low correlation of our returns points to some of the skills I have honed through bridge,” said Moss, noting behavioral investing and the ability to develop a broad or “macro” viewpoint while not losing track of multiple data points or individual positions.
The game, popular among the shuffleboard set and such financial celebrities as Warren Buffett, Alan "Ace" Greenberg and Jimmy Cayne, never caught on among Wall Street's less antediluvian workers—who continue in their obsession with poker. But poker may well be the simpler game. "I enjoy playing because I have found bridge to be the greatest intellectual challenge I’ve ever come across," said Moss.
"One example I like to give concerns Wall Street’s view of volatility, which I believe overemphasizes diversification and standard deviation as a means of controlling risk," said Moss. "Specifically, from a game theory perspective, one needs to press his bets when theoretical edge exists. Using blackjack as an analogy, by counting cards, one may improve his optimal play. Yet that alone is insufficient to have positive expectancy. It is only through significant bet variations within one’s bankroll parameters can one truly optimize his profit and loss expectations...increased volatility can be a byproduct of this approach but I believe my long term success shows that this is a winning strategy."