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Saturday, 21 January 2017
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Nov 5 2010 | 2:03pm ET
Wikipedia characterizes bridge as “a tactical game with inbuilt randomness, imperfect knowledge and restricted communication." Could that apply equally well to the ‘game’ of investing? Is playing the markets like playing bridge?
Jeff Sarti and his partner Brad Moss, founders of San Francisco-based Crosscourt Capital Management think it is—in some ways. They’re old friends, both of whom have backgrounds in finance, and one of whom (Moss) has a rather impressive background in bridge.
“I was sort of born into it,” Moss told FINalternatives. “My parents both played, my mother is a world champion, my father is an avid player as well, and they forbid me from learning how to play, so naturally, being the rebellious youth that I was, it was the first thing I went and learned how to do. But I’m pretty convinced it was all a ploy on their part to actually get me to play.”
The ploy worked—Moss is a 10-time U.S. national champion and, with his partner Fred Gitelman (a Canadian whose line of instructional software for bridge caught the eye of a well-known bridge enthusiast—Warren Buffet), is the reigning world champion, crowned this past October at the World Bridge Championships in Philadelphia.
But bridge, for Moss, was more than just a hobby; it was his entrée to Wall Street.
“In the ‘80s and ‘90s, Wall Street was sort of scouring the games world, especially bridge players, for traders,” says Moss. “At one point a shocking percentage of market makers on the floor had come from the bridge world. I don’t know the exact numbers, but I was down on the AMEX floor before I went upstairs and there were...at various different points, 100, 200 bridge players that I knew on the different floors.”
Moss was offered Wall Street jobs out of high school. He says he resisted at first, but in end chose to join a young bridge player of his acquaintance—a “very smart guy”—who trained him. Soon, Moss was leaving to start his own shop, Renata Trading. He personally did well during the late ‘90s, but his fellow traders got caught in the rapidly deteriorating market-making business of this period, and in 2000, Renata closed its doors.
That cloud, however, had a silver lining.
“The time off was great because, it allowed me to meet my wife who was living in California at the time,” says Moss. “If I hadn’t been so free, I would never have been able to court and marry a woman 3,000 miles away. And it also allowed me to rededicate myself to bridge in a very meaningful way.”
He started up his bridge partnership with Gitelman, whom he describes as “a brilliant guy,” and in 2001 he also met his business partner, Jeff Sarti.
Sarti was a portfolio manager at Joel R. Mogey Investment Counsel, overseeing $1 billion in assets. After a stint as a portfolio manager at McKee Investment Management, followed by three years as CIO at Morton Capital Management (an RIA in Los Angeles managing approximately $900 million), Sarti was ready for a change.
“Come late ’06/early ‘07,” says Sarti, “We thought the timing was right to launch our firm because we felt that volatility was returning to the marketplace and being a volatility and options trader, we felt this environment would be conducive to our trading style.”
So, on January 1, 2008 (“an interesting, hectic time to launch a hedge fund”), with roughly $17 million in assets, they launched their first fund.
“We trade the market from a global macro perspective—long/short trading, commodities, currencies, the whole investment universe if you will,” says Sarti. “And where options come into play is [in] how we monetize our view—so we’ll take a view on the market, interest rates, whatever it is, and primarily use options to monetize our viewpoint. We tend to be very contrarian in nature, that’s really our trading bias, so we tend to zig when the market zags and vice versa...we’re definitely a contrarian and discretionary shop by nature.”
And how does bridge come into it?
Moss says in a “generic, abstract” way, both investing and bridge involve pattern recognition, game theory and deductive reasoning. Wall Street, he says, was scouring the games world in the ‘80s and ‘90s because “there’s a pretty good correlation, the skill set is the same for being a trader and a games player—especially a bridge player.”
But gamers, says Moss, also bring a slightly different perspective to the world of high finance:
“Wall Street has its views, its givens and ideas that it takes as biblical—and I think that, for the most part, they tend to be right—but one way in which I think Wall Street sort of has it wrong...is when considering hedge fund returns, everyone looks at risk-adjusted returns and standard deviation. And who can blame them for not wanting to ride out ups and downs? Certainly from an emotional standpoint, it’s very desirable to have a steady return stream. But if you take it from a game theory perspective, it’s probably not right.”
To explain why it’s not right, he offers an analogy—to blackjack.
“If you’re not counting cards,” says Moss, “but you employ perfect theoretical play, you will be a significant underdog. If you count cards perfectly, you can now, by adjusting your play, improve your theoretical likelihood of success, but you will still, actually, be an underdog.
“The way that you can actually be a significant favorite is not simply by adjusting your play but by dramatically varying the size of your bet—when you’re most likely to win, you bet much much more and when you’re less likely to win you bet much much less. And that’s how card counters become dramatic favorites.
“So, in much the same way, from a trading perspective, when the odds are most in your favor, when you have the highest degree of confidence and the most certainty in your plays, you should be betting a much higher percentage of your capital (of course within bankroll/standard deviation parameters). But I think Wall Street has over-diversified away some of their edge and, from a game theory perspective, you really want to have a higher concentration of your overall profit and loss in your highest-conviction ideas. Unfortunately—or fortunately, depending on how you look at it—the by-product of that is increased volatility.”
Today, approaching its three-year anniversary, Crosscourt Capital has a combined $32 million in its funds and an impressive track record. “We were positive in ’08, and then significantly outperformed the market in 2009 and this year as well all in a pretty non-correlated fashion. So we’ve done really well in a variety of different markets—the horrible market of ’08, the up market of ’09 and the choppy market of 2010.”
Asked to describe Crosscourt’s target investor, Sarti says with a laugh, “Basically, we’re a young firm and…even though we’ve done well, we’re eager to grow. So our target investor is everyone.”