Michael Platt’s alpha formula is a guide to the top trading lessons for traders.
Michael Platt is a billionaire UK hedge fund manager with a Net worth 4.5 billion USD (2017), according to Forbes. He is the co-founder and managing director of BlueCrest Capital Management, Europe’s third-largest hedge-fund firm.
Michael Platt’s flagship fund has raked in 17 billion USD of trading profits for his investors, or 350% return since its inception.
Michael Platt, the UK’s richest hedge fund manager claims that his fund never suffered an annual loss.
Michael Platt’s made a 57% gain last year on top of a 20% increase in 2016 and he comfortably holds Uk’s heavyweight champion hedge fund manager.
“Michael Platt’s made a 57% gain last year on top of a 20% increase in 2016 and he comfortably holds Uk’s heavyweight champion hedge fund manager”
Michael Platt’s alpha formula to trading entails exiting loss-making trades early before they wreak havoc on the funds bottom line
“I have never hit three percent drawdown” said Michael Platt in his interview on a business network.
Michael Platt’s alpha formula is about not remaining wrong and widening his losses
So a trader’s ego is his Achilles heel, his weakness.
“Ego is how you lose money in this business. I put a trade on and if it doesn’t start working right away I respect the price action and cut it fast” said Michael Platt.
Michael Platt’s alpha formula is then practiced diligently by his trading team
One of Blue Crest’s secrets is to make sure that each of their traders doesn’t go below three percent drawdown, or they are deprived of 50% of their portfolio that they manage,” said Michael Platt.
“Ego is how you lose money in this business. I put a trade on and if it doesn’t start working right away I respect the price action and cut it fast”
What happens if a trader goes below the mandated 3% drawdown?
“Another drawdown of 3% (making a total of 6%) and the trader loses his entire allocation” said Michael Platt. In other words, the trader is fired.
Michael Platt’s alpha formula of no more than 3% drawdown means that his flagship fund has accrued no losses since its inception.
“In the course of making 350% for our investors we have made a maximum drawdown of 4% over 11-year history with no down years” said Michael Platt.
“We are traders and don’t take any credit risk so we are super liquid” – Michael Platt
Another part of Michael Platt’s alpha formula is to remain super liquid
“We are traders and don’t take any credit risk so we are super liquid”
So Michael Platt’s alpha formula entails implementing a very secure trading strategy throughout his fund. Michael Platt avoids credit risk and buying nothing liquid.
Michael Platt also avoids falling into the trap of buying and holding a losing trade and waiting to see what happens.
“Stay highly liquid no credit swaps so that I can sell. or liquidate entire holding within one day”, he said.
Michael Platt isn’t keen on the banking sector in this late stage of the cycle.
“I would avoid exposure to banks if I can avoid it” he said.
So where is Michael Platt investing?
“All our money is in 2 year US government debt, 2-year German debt we have segregated accounts and we are radically concerned about our counterparties” he said.
Michael Platt’s alpha formula for investing in a financial crisis is to remain highly liquid
Highly liquid is how to survive and thrive in the 2008 financial crisis, according to the billionaire hedge fund investor.
“Anyone who had illiquid hedge funds in 2008 experienced runs because people wanted to get their cash, we didn’t get side pocketed with the illiquid assets,” said Michael Platt’s.
“In 2008 I paid out 9 and a half-billion dollars to the street because I was the only hedge that was up a lot and completely liquid” said Michael Platt.
“Big money is made in trading in the aftermath of a crisis,” added Michael Platt. “In 2009 we made 60% with no dawn down on our ten billion dollar master fund” he said.
“We are absolutely traders for me an investor is a short term trader gone wrong” – Michael Platt
“You don’t make your money going into the crisis because when you go into the crisis of 2008 market trades against positions people have a position on and people need to get risk-off” he said.
“All that people think was a good idea start going into reverse” he added.
But Michael Platt has also had his share of ebbs and flows. In early 2000 he opened an office in Hong Kong, only to close it in 2017. An investor is a short term trader gone wrong, according to Michael Platt.
“We are absolutely traders for me an investor is a short term trader gone wrong” he said.
Another factor in the equation to Michael Platt’s alpha formula is to look for an unsustainable trend
Michael Platt noted the requirements for European banks to extend their capital.
Michael Platt believed that this was an unsustainable trend and made adjustments to his portfolio accordingly.
“We are looking for a 3 trillion euro takedown in balance sheets and there is nowhere I can see that we are going to get any growth from,” he said.
“There is no willingness within Europe to share wealth unlike the US where money flows within different areas,” he said. “If California is having a difficult time the rest of the states will send money to California,” explains Michael Platt.
“This is not the case in Europe there is no willingness to transfer funds in a long term sustainable way,” he said.
Indeed, in the peripheral states of the eurozone, strict austerity and high taxes have led to sluggish economic growth. Greece, Italy, and France could be cited as examples.