The Retarded Hedge Fund Manager

FUTURIS PANTHEON FINANCIA

My most important lessons - a preview ...from 15 years at the best performing hedge fund in Europe, over the excruciatingly difficult decade of 2000-2009. Which will be yours after reading my cautionary tale?

Be patient There is never any rush to invest: Study/Wait/Pounce The best way to become poor quickly is to try to get rich quickly Markets don’t move in straight lines; there are always corrections and cycles

A is A Don’t assume, investigate! Trust no one. Learn from losses, don’t hate. Face the Facts, the universe is not out to get you Walk outside the box - an extra hour by the desk never did anyone any good

Always bet on black The market’s memory is extremely short, and lessons/losses quickly forgotten But hedge or downsize when called for Unless you have extremely good reasons to be short (almost never)

Never go all in, always prepare for being wrong Mind the surroundings, clients, black swans, corrections and keep dry powder There are no absolute truths, so you never know enough for “all-in”

Don’t panic, everything moves in cycles - use that It’s never as bad as you think Never so bad you should throw caution to the wind and go all in Opportunities will cycle back, if you sized your risk correctly

Never be cocky - you’re never as good as you think (don’t confuse luck for genius) Valuation and fundamentals are but a small part of investing, and need a trigger Trade, when you can - not when you have to; manage your risks. Don’t be greedy. Don’t repeat the same mistakes over and over again. See example below of how we

tricked ourselves in going round and round in the described cycle of hard work, performance, hubris, losses, and starting over

a) hard thorough work, and b) grinding in a little well earned performance, c) some luck, d) some wins, e) consequent hubris, f) thus too much risk, g) inevitable losses, h) missed opportunities due to risk management, i) misfortune, j) despondence, k) slow recovery and l) regained confidence, and back again to m) hard work gradually paying off.

Be independent - Dare to be contrarian, but also dare to run with the crowd - just make sure you know which is which

But remember to almost always bet on rising markets, with or against the crowd And don’t fight the Fed; Authorities will do whatever it takes to protect their

jobs, in particular the worse it looks and if there are systemic risks (building even bigger risks is of no concern to them - if the crash can be put off to the next term)

TABLE OF CONTENTS

My most important lessons - a preview Karl-Mikael Syding (SpreZZaturian)

Futuris, the moneymaker Home, my safety valve You say retired, I say retarded Stockholm - home Freedom - who is The Retard NOW? Open Sweden - the Swedish parliament Stockholm downtown - my roof top Stockholm - Stureplan (party central) and Humlegården Clowning around Investor’s headquarters, Stockholm city centre Being retarded for a living Searching for investments with a rhubarb umbrella or a dog moustache

Enter Futuris - Pantheon Financia Getting stoked ahead of a party Food and shelter Ronja and the dinosaur gang in my bedroom I Made a Bunch of Money The Master bathroom She has nothing and she is happy Investing Money Was My Essential Ingredient You will lose The Wealth Factory Defining moments for my hedge fund, Futuris, 1999-2014 Where do hedge fund managers come from? SpreZZaturian - the early years How did a computer geek that barely survived his first days in the harsh Jukkasjärvi midwinter become…

Hedge Fund Manager Of The Decade The long-only herd made it possible Grosvenor House, London: Eurohedge 2008 awards

Inception Futuris’ 63 most important tactical positioning decisions

Futuris Stock Market Exposure 1999-2014 Proof is not good enough - you need a story How To Make A Billion (or miss out, as I did) Poor marketing, schmarketing… We won the decade award anyway!

Too cocky, too controversial and unorthodox We were gods... in pain

100% outperformance in 2 years 600% outperformance in 12 years

People matters Futuris was almost thrown out with the bathwater Marooned in realtime

How To Make Nr 1 In The Toughest Stock Market In A Century The Swedish stock over the fifteen-year Futuris era: The bursting of the IT bubble taught me to forget all I knew Lesson: Never go all-in, no matter how good the trade or investment looks. All-in is for gamblers, a.k.a. morons. Going short in Q4 1999 would have been intellectually correct, a no-brainer really. Just 15 months later you would have been proven right. The snag is that the market first appreciated by 80% in a couple of months, wiping out anybody being short. I’m still learning the lesson about valuations

How to Make Award Winning Investments Like A Boss The 1999 mania, one of the worst conceivable markets to start a new fund in This is where the expression PARTY LIKE 1999 comes from How Do You Start A New Fund When Everything Is Overvalued And Soaring? Handling the difficult transition from a wild bull to a growling bear Futuris produced magically good numbers The magic of 2000-2003 - Low Risk, High Return Success bred hubris (and a negative bias) When the bull returned we were wrong-footed When hubris struck, the grim reaper hung in the shadows

Bullied by the Fed - Futuris’ near-death experience Lament to Mammon: Oh why have you abandoned us? 2006 - close to a breaking point Hail Mary trades saved the day - or did they? Don’t let luck or hope be your strategy Personal hubris on display

Redemption - the bear returns Another nerve-wrecking year of extremes Somehow we always managed to see a light at the end of the tunnel The comeback kids And, yet I bought this conspicuous Lamborghini Gallardo Spyder in early 2008 Lamborghini convertible, Midas gialli How a foot in the face can help regain your balance 2008 The year of the rat (for everybody but us) Secretive Managers - Crazy Good Returns What part of “Don’t short” don’t you understand?

Finishing the banner year of 2008 as true professionals

The Lehman collapse eventually came The big bounce and the era of central bankers 2009-2015

March 2009 - we got a mulligan... The Lehman panic lasted less than 6 months The final hoorah A tsunami of money So good we were scary The peak was glorious - the demise unnecessary

Death by central banker Is that a bear I hear? Light at the end of the tunnel It had been the worst of times. We anticipated the best of times Whatever it takes Draghi’s effects on PIGS yields were astounding Our most important client, “Smaug” S&P 500 Index

The Greek disconnect - The Alpha and Omega of managing money Summary: Futuris’ best and worst moments

Single best trades ever Largest gains on least risk Best but least appreciated work Single worst trades Defining moments The giga lesson: the cycle of forgotten lessons: On losses 2014, The stock market in which Futuris was felled Final thoughts on research and investing

The Top 10 List Of My Lessons From Futuris 2000-2015 Epilogue Are you a subscriber?

Karl-Mikael Syding Awards and Nominations for Futuris

Obviously no consequences ahead Reading tips:

Contact Information The Last Party as a hedge fund manager

Hej! My name is

Karl-Mikael Syding (SpreZZaturian) Here's me in Ibiza last summer. (Don't worry, I'm not a douchebag):

In January 2015, I retired as Managing Director of Europe's best performing hedge fund with a double digit million USD net worth. I want to take this opportunity to share my story...

Futuris, the moneymaker I and and one of my colleagues (trader extraordinaire, Patrik J) at the Stockholm office

Home, my safety valve Relaxing outside with The Economist

My safety valve always was reading; books, magazines, newsletters

You say retired, I say retarded I am currently enjoying "retirement" (I turned 43 in January 2015) with my talented girlfriend Patricia (since 2005) & rescue hound Ronja. Having finally had time to let my mind calm down, all the while absorbing the placid beauty that is Stockholm - the city I’ve come to call home, I'm eager to share my experiences with anyone who'll benefit from them. It's difficult to gain acceptance into hedge funds (not many people even know what they are). As such, I felt it proper to deliver a discourse on how it worked out for me.

Stockholm - home

Freedom - who is The Retard NOW?

Open Sweden - the Swedish parliament (and queen Ronja, my German Shepherd-Doberman-Kangaroo)

Sweden probably has the least well guarded prime minister and King in the world. Imagine taking this picture in the US or UK...

Stockholm downtown - my roof top

I spend most of my summer days up there, reading, listening to podcasts, investing...

Stockholm - Stureplan (party central) and Humlegården

Clowning around Investor’s headquarters, Stockholm city centre (Wallenberg’s Investor has been the undisputed #1 powerhouse in Sweden for a

century)

I don’t always goof around, I actually go out for Pod Walks (TED Radio Hour, Discovery, Nature, Brain Science) every day in this beautiful city.

I just want to help - to share my perspective after my unlikely and successful career

I wrote this guide to help anyone who wants to learn what it takes to make & manage a lot of money (especially in high finance) If you give me 1 hour, I'll give you 50 lessons I picked up along our 15 year rollercoaster. I don't profess to know everything (indeed, I often ask if I know anything), but my recount of hits and misses should nevertheless be instructive for an inquisitive mind.

Being retarded for a living I'm not that crazy, just a little bit retarded... so please don't expect anything like "Wolf of Wall Street". This is about as far as I go (publicly):

Searching for investments with a rhubarb umbrella or a dog moustache

Enter Futuris - Pantheon Financia I want to give you the story of how our hedge fund, Futuris/Brummer, came about...

… how we outperformed the stock market 7-fold, during arguably the toughest economic environment since the Great Depression (turning 1 euro into 7, while the market went nowhere via a handful of dizzying booms and devastating busts)

… culminating in becoming European Hedge Fund Of The Decade in 2010 and our wind-down in September 2014.

Here is some of what I hope you can take away:

How to "join the club" of high-finance You can't just "take a job" at a hedge fund - you really have to be hired-in

by virtue of something you've done before. My path to becoming Partner and Managing Director of Futuris was not linear - I hope it can inspire you if you are interested in using the power of your mind in the financial services sector. In a world where you can make huge fortunes from a computer screen, I have to warn you that there is no rose garden.

How our hedge-fund worked Not many people actually know how these magical tools of finance operate, let alone their quirks & strategies. Although I would require a much larger guide to explain everything, I hope you can take away an idea as to what it took for us to generate returns for our fund. We had a good ride, but it was stressful. I don't want to leave you with any false impressions. Personally, I wouldn’t do it again…, but I am thankful for everything I learned (as well as, e.g., my 100 ft long apartment with a roof terrace).

How to deliver performance - What we did in the short term (daily) and long term (annually) to create absolute returns. I want to explain our philosophy. Hedge funds will have their own quirks and ways of doing things. Ours was no different - if you want to create real value, you have to be prepared to go against the grain & trust your individual instincts. I want to give you some of the ideals which helped us become hedgefund of the decade - both from the short-term, and long-term perspectives. These past 15 years have been a tremendously stressful ride, and I now hope to give you a candid glimpse into how "it" works.

Getting stoked ahead of a party

Food and shelter

Ronja and the dinosaur gang in my bedroom

I really am not a douchebag. This is not an ode to money. In fact…

I Made a Bunch of Money ... So What? Before we begin, I need to set the record:

- I am human I have to eat, breathe, work out (I do that 4 hours a week), and relax (here's my sauna - a true Nordic can’t live without a little heat torture):

The Master bathroom

I need to tell you now the only thing that money did for me was help me be comfortable. I know how it feels to be without money, but please take it from me that it's really not such a big deal.

Buying large living quarters and Russian art seemed natural when money came easy, but money is not what defines me

As long as you've got food on the table, tools to use and something meaningful to keep you occupied, you're doing better than 99% of folks throughout the world. Investing (the science of leverage), using larger numbers to build wealth, knowledge, a network, etc, are part of the game... ... the game of life. You don't need a lot of money to "play the game”. Investing is a lot more than just money. This is important… Many people put the cart before the horse - thinking money is the answer to their problems. Money only solves immediate issues (getting a cab, hiring a web designer); it does not solve long term problems, which are the root of most people's

money woes. I don't have to worry about buying groceries, taking my amazing girlfriend out on spontaneous romantic gestures, or helping out students who want to learn from my experience by spending real time with them. I bought a few nice cars, and sold them again. I live well but I have learned that experiences beat stuff every day of the week I've been on massive highs, and terrible lows. But in the end, now that I'm a "retired" (retarded) hedge fund manager, I value nothing more than the lessons I picked up along our 15 year rollercoaster. And my girlfriend and dog of course.

She has nothing and she is happy

If anything, I hope this story shows you that you really don't need massive brainpower, some "magical talent" or anything else to earn a lot of money. You simply need to be yourself, and learn how to invest, how to build value expontentially.

Investing Money Was My Essential Ingredient (it might not be yours) I am proud of my wealth, but am certainly not ostentatious. If you're here for easy money, fast cars & fast women, I'll have to disappoint... I’ve turned off the fast lane. This book, and my entire life, is about investing (in yourself) for the long term

About as crazy as it gets (unless you count ripping off your shirt, bending over backwards and showering in champagne with colleagues and clients) - officially

You will lose If you want to play the money markets, you're likely going to lose. Even the big guys lose. And all that talk... the "macho" chest-beating you only get in the financial world... it's all baloney.

No-one can predict the future.

No-one has superhuman powers.

Everyone loses. Everyone wins.

All in all, the more you invest, the more you'll gain back (law of averages).

It's generally a slow and steady process (although not always the case). Just because someone seems to be doing better than you doesn't mean it is so. In fact, in many cases, people who claim certain things often are concealing something else (their strongest form of defense is attack).

I became wealthy by being myself, focusing on doing the best job I could, and paying it forward.

I help anyone I can.

I wear my second-best asset (my smile) every day. My best "asset" is my girlfriend Patricia.

Truly, my own life is defined by the investments I made, and by that I don’t mean financial investments. In fact, my most ardent advice is to keep investing no matter what. Whether it's reading, working out, testing new strategies, the difference between the best & rest, is the best are always investing (in skills, in sweat, in contributions). They are prepared to go without in the short-term, for compounded gains in the long-term. Financially and personally. I can say hand-on-heart, I believe this is what made our little Stockholm hedge fund the "European Hedge fund of the Decade"...

The Wealth Factory

This is where I made my fortune. Not what you were expecting, was it?

As a "THANK YOU" ("TACK" in Swedish. Pronunciation) for taking time on my site, I want to give you this introspective look at the inner workings of our hedge fund…

In the most difficult stock market in a century, including two career crushing crashes and three meteoric bull manias in just 12 years, we delivered > 600% net return after fees to our clients, while the stock market produced nothing but ulcers.

The last few years were a different story though… Having become a decamillionaire managing money doesn’t change the fact that I

would have chosen a different career, if I could go back 25 years in time. I almost did. Several times. Chose a different career that is, but that’s a different story.

If you're interested in entering the world of high finance, or want to know what it's like away from imperious Wall Street; or maybe are just interested in how "rich guys" do business, I would hope this guide serves your needs, even if I wanted ‘out’. If you're savvy with financial growth charts, this is our fund, Futuris, compared to the market:

Don't let the compressed nature of the graph fool you. The market exploded upward at the end of 1999, crashed down to less than half its peak 3 years later, tripled, halved again and finally tripled again! Many careers and fortunes were laid to rest during those 15 years. We (although it was very difficult) thrived. I want to share how that happened. By the way, I see another halving coming soon. Don’t get caught fully invested in that one (if I’m right)

This guide is quite long, and it’s still a work in progress (like everyone). First, a quick overview:

Defining moments for my hedge fund, Futuris, 1999-2014

1: Inception. A rocket taking off in Q4-99; >+50% net return to clients in 2 ½ months. x: An agonizing and turbulent sideways year (2000) - had the IT bubble peaked or not? y: The loss of one of the two founding portfolio managers - near death for the young company 19 Sept 2002: One of the two portfolio managers died at the office, but the fund was thriving z: Worst month ever, August 2007: -7% q: 2008, the financial crisis. We were net short, having the time of our lives, but covered after Lehman’s bankruptcy… before the market crashed. W: Wow!, we turned on a dime, March 8-9, 2009, from short to long, at the very trough H: Hedge Fund Of The Decade gala, May 2010 F: Fukushima disaster in April 2011, and three impossibly good trades by Futuris P: Peak of Futuris; >+600% in 11.5 years in a “flat” market D: Near death experience, as we were >100% net long, right before the crisis of 2011 €: June 2012, we were approaching a new peak for the fund, being extremely net short when €CB/Draghi spoiled our party and sparked a fantastic rally by promising “Whatever it takes” s: We were forced to stop our losses in the mid summer 2013 correction (hardly visible) - a de facto death sentence for Futuris, due to subsequent ramifications e: end; Futuris was closed down in September 2014, net long right before the autumn mini-crash ?: What would have happened? A disastrous stop loss or opportunistic and successful buying?

Where do hedge fund managers come from? I was never destined to join a hedge fund. Indeed, hedge funds are very difficult to get hired into, let alone create. Planning a career around joining one just isn't something you can set up from the outset. It's just too volatile - like a girl saying she's "going to marry the prince". The chances of joining a hedgefund are so slim because, especially the small - quirky - ones, are very concealed enterprises. They typically start up in a small back office with a skeleton founding team, threadbare capital accounts, and several founding principles. ... at least that's what happened for us at Futuris.

The legendary Arne Vaagen December 2, 1999 after a fantastic start for Futuris

SpreZZaturian - the early years My journey to this fund was no less covert:

I was never interested in finances.

I didn't want to be Bill Gates.

I just wanted a nice quiet Swedish life - free of the stresses and strains of a "normal" capitalistic existence.

It was only after I was bullied in school, and my attempt to escape their wrath, that I happened onto computers, mathematics, science & numbers. Here's my quick background for you :

Born in January 1972 above the Arctic Circle ... yes, it is as bleak as it sounds. I almost died during my first week of life - we had an issue with our Ford Taunus breaking down half-way between two hospitals (100 miles apart). Thankfully, I made it

I had no financial "role models" when growing up (so it wasn't as if I was preordained to join the ranks of the sharp-suited traders). My dad was an engineer, statistician and programmer. I never really understood what my mother did, apart from being active in the typically Swedish political movement in the late 70’s for “abolishing nuclear power, just not right now”. - I was bullied (quite badly) in primary school by the rich kids.

Since our family was not as well-endowed as my primary school counterparts, they treated me like the whipping-boy; especially when I was wearing cheap clothes and speaking with a funny northern accent.

This pushed me to mathematics and computers as my "escape", actually earning my first money programming computer games when I was 11-12 years old .

In high school, I thought about studying chemistry in college (acing an organic chemistry competition made me honorary member of the Swedish Chemistry Society, and I seriously envisioned going after the Nobel Prize in the future - or just become a chemistry teacher). Owing to my exceptional results in math and physics, I did win a slightly (1/300) smaller award than the Nobel Prize - I received it from the hand of the King of Sweden before a 10-thousand strong crowd (10% of the city’s population) on Sweden's 4th of July (June 6, 1990). Not totally unlike my role model Richard “Dick” Feynman.

Eventually - partly triggered by besting one of my former bullies (now forgiven), and later cemented by reading the novel American Psycho - I chose to study finance at Sweden’s finest university (where no bully I knew stood a chance of being accepted), Stockholm School Of Economics. Much owing to my proficiency with numbers and programming, I graduated at the top of my class in business school. Real skills are always valuable. When it came to grow some balls and get a job, I was picked up by a third tier firm in the struggling Swedish stock broker industry during one of the worst economic slumps (1991-1994) in modern Swedish history. What do you think a royally laureled, top of the class financials major got to do at a lowly third tier broker in Sweden in 1994? I got burgers for the senior staff (it is only in retrospect I am anything but happy)

To be honest, I actually also did some programming & occasionally manned the stock and options trading stations, but I basically started as an errand boy. However, within three months I got to write my first research report on a chemical company called Perstorp. After that my real career in finance commenced. As if 80 hours a week as a broker’s assistant and junior analyst weren’t enough, I worked a second job, building real-time paper industry databases for my father’s company. In 1996, shortly after Netscape's IPO kickstarted the Internet stock mania, I was headhunted to one of Sweden's largest banks to lead the analysis of “hot” IT companies. During my stint there I was ranked 1st in Sweden in Investment Companies and second in IT. That’s how this article came about and nearly ruined my career...

As 2000 approached, I had endured incredible sleep deprivation for 6 years, and was considering joining a small Swedish bank & becoming a bank clerk.

I felt the financial services world had become seriously dishonest. Regardless, when a friend asked me to join a new hedge fund, Futuris - later part of the Brummer & Partners group of hedge funds, I eventually accepted... And was nearly kicked out before I even began, due to the glorifying article above (“The ignorant majority rules”) that was published right before I commenced my employment at Futuris. I became Futuris' IT analyst, and 10 years later, accepted "European Hedge Fund of the Decade" on behalf of the team - in competition with thousands of funds.

This is the account, and lessons learned, of what happened at Futuris during 15 years of spectacular international success, near and real death experiences and our really hard work

This entire book is about learning from your mistakes, picking yourself up and improving, growing and excelling, not despite errors but thanks to them.

And yet, the overarching impression is one of ignored lessons in a cyclical pattern of hubris and despair.

Retarded birthplace: Kiruna, Jukkasjärvi congregation

How did a computer geek that barely survived his first days in the harsh Jukkasjärvi midwinter become…

Hedge Fund Manager Of The Decade In May 2010, the Hedge Funds Review group (HFR) hosted their tenth annual European hedge fund awards gala in London. Several hundred of Europe’s most successful money managers were present at The Grand Connaught Rooms, yearning for some recognition for their hard work. The gala was rather serious, due to the choice of venue and the weight on everybody’s shoulders from ten of the most toll-taking years in the industry. I am hardly ever serious but ambience-appropriately, I was wearing my newly acquired all black Hugo Boss tuxedo. The room was dead quiet, when Gyles Brandreth, former Lord of the Treasury and British MP, several hours into the evening announced the winner of the year’s, actually the decade’s, most prestigious prize, “The European Hedge Fund Of The Decade”:

The Grand Connaught Rooms, London

-“Futuris, Brummer!” All ten of my colleagues at Brummer & Partners, who were seated together at a large round table toward the back of the elegant but packed room, simultaneously rose and roared irreverently. It was the Brummer group’s fifth big, and most important, win that night, ahead of

industry giants such as Winton, BlueCrest, Brevan Howard, MAN, BlackRock, Lansdowne, Marshall Wace, Odey and GAM. And it was mine. I had already been on the stage collecting the prize for “Best Directional Over Ten Years”, dancing a bit of improvised flamenco on the stage (inspired by the dinner act earlier in the evening), since no speeches were allowed. So far, it had been a quiet event, interspersed by raucous expressions of joy at the Brummer table - and my surprising dancing stint. This time, for the big one, for Futuris, I spread my arms like a condor and “flew” in wide arcs around the tables on my way to the stage. I jumped up on the stage, right in the middle, instead of solemnly taking the small set of stairs by the side - flaunting my relative youth, rebelliousness and naturally contrarian character.

I was 38 years old. I had worked at Futuris for a decade, and in the finance industry for 16 years. I was partner, portfolio manager as well as managing director of arguably the best performing hedge fund in Europe, during a decade (2000-2009) that saw not just one, but two stock market crashes of historical proportions. To really drive the message home, I lifted my right heel from the floor and grabbed my ankle behind my back with one hand, in a standing quad stretch position, and pumped the knee back and forth to the music, while jumping on one leg, slowly spinning around like a retarded hip hopper. The Lord of The Treasury, Gyles Brandreth, was a bit taken aback but convinced me he appreciated the diversion.

“Congratulations! Who are you guys?!” - various representatives of our stunned competition wondered after the ceremony; “We thought this was our night but you won it all!”. We soaked up the praise for a while and then decided to go to a nightclub. What really happened is that we took our competitors’ best looking female employee in our taxicab, sped away and went to a gentlemen’s club without them. There were no gentlemen there. No ladies either.

The long-only herd made it possible Okay, so that was the formal pinnacle of my career. To put it into perspective, let’s take a look at the years immediately before and after the HFR ‘decade’ win.

The year after, in 2011, Futuris once again won HFR’s “Best Directional Over 10 Years” award, truly cementing our reputation as Europe’s best long/short equity hedge fund. The decade award, however, was reserved for full calendar decades, as well as only given to one single fund per decade - the one that had the best performance and risk characteristics of all funds in all categories. The 10-year win in 2011 thus actually made the decade win the year before seem even more impressive and important, by creating a reference point. The year before the “decade win”, in January 2009, Futuris took home Eurohedge’s “Best Long/Short Equity Of The Year (over 500 mUSD)” for 2008 - the year of the culmination of the financial crisis. Well, there was no crisis at Futuris, albeit perhaps some hubris brewing...

When I received the latter prize at Grosvenor House, The Great Room, in front of 850 of my hedge fund peers (including Cazenove EEAR, Horseman ES, Odey and Polar Capital Paragon) I had the nerve to thank...: “the long only herd who made this possible - and markets for taking the first step toward sanity. I hope markets take a second step this year. If so, we’ll meet again” (*Applause and laughter* “Did he actually say that?!”) In my view, thoughtless speculation, by “long-only”, “buy-only”, “buy and hold” investors, had created a situation where Futuris could make money shorting the stock market. Consequently, I thanked the useful ignorants for the opportunity.

I bit off a bit more than I could chew with that one, didn’t I, even if we won the 10-year awards the following two consecutive years (including the HFOTD). It’s all too easy to confuse genius and deep understanding with ignorance and lack of perspective, when achieving success on the financial markets.

Grosvenor House, London: Eurohedge 2008 awards

At the time, I considered our strategy, its implementation and timing, not to mention solid fundamental underpinnings, quite straightforward. Now, after several years of fruitlessly trying to time the next big short, I know I was ignorant and overconfident. What follows is my hedge fund’s (short for “me, my partners, analysts, traders and other important people at Futuris over the years) 63 big moves over 15 years - annotated with 50 soundbyte sized important lessons from our hits and misses. Don’t worry, I have summarized the most important lessons toward the end.

Inception The hedge fund Futuris was incepted in October 1999, by the Norwegians Arne Vaagen and Morten Groven. Due to certain legislative quirks regarding money management in Norway at the time, as well as Mr. Vaagen’s connection* with the Swedish financial giant Patrik Brummer, the fund company was founded in Sweden. * Arne was the managing director for the stock broker firm Alfred Berg in Norway. During his five years at the helm in the second half of the 1990’s, Alfred Berg Norway was the most profitable broker firm in Scandinavia. It was Patrik Brummer who hired Arne in the first place (Patrik was the driving force at the parent company Alfred Berg Sweden for several decades, before founding Brummer & Partners, the largest hedge fund group in northern Europe) I owe all of my success in the hedge fund industry to Arne and Morten who started the fund, raised the money, took the risk, and to my closest colleague Mattias, for suggesting me as his stablemate at Futuris. I’ll nevertheless sometimes use the notion “my fund” for short, though it obviously wasn’t my fund; I just worked there and was the second biggest active shareholder/partner (tied with Mattias). This happened...

Futuris’ 63 most important tactical positioning decisions I’m sorry if this gets a bit technical, but we just have to get some financial facts out of the way first. Bear with me for a minute. If you’re tempted to skip a few pages, just take this with you: Futuris was a strange beast in hedge fund land - and simply spectacular. The chart below depicts Futuris’ overall market exposure between its inception in October 1999 and its closing 15 years later, or 180 months, in September 2014. The black line shows the fund’s net exposure (i.e., the net position = owned, long, holdings of stocks minus sold short, negative, positions) as a percentage of total assets under management; AUM). The blue dashed line is the gross exposure (longs plus shorts). The grey area is the 6-month moving average for the net exposure (which makes it easier to spot general exposure trends). A positive reading means the fund should on average gain from rising markets and lose in falling markets. There are 180 points of net exposure on the chart. Of these, 63 can be considered major decision events - repositioning the fund significantly longer or shorter than the previous month.

Futuris Stock Market Exposure 1999-2014

Condensing 180 months of portfolio exposure

can give the illusion of extremely frequent and rapid changes

Most equity hedge funds make sure to keep their net exposure between just 50-75 per cent net long at all times, and never change exposure significantly from month to month. We were different. As can be seen in the chart, Futuris’ range was an incredible -60 per cent (net short) to 150 per cent net long (leveraged long). In addition we changed position quickly and frequently. Not only did we venture above 100% net long (i.e., leveraged long), we had the audacity to go net short too - and not just by a little or for short periods of time. We exhibited full-year stretches of being on average more than 50% net short. For a long/short equity hedge fund, that was tantamount to being just as retarded as I am now; it was almost as if we wanted to go out of business, or as if we knew something others didn’t. We thus presented a serious challenge for any client who wanted to fit Futuris into their investment matrix, since they couldn’t decide what kind of hedge fund we were; A market neutral Long/Short equity? Swedish, Scandinavian, European or global? Short biased? Levered long? All of the above? No matter how good we were or how many years we put behind us, Futuris continued to be a tough story to sell. Spectacular but unwanted, why?

Proof is not good enough - you need a story I eventually learned a very important lesson, not just about hedge funds or clients or running a business, but about people and life in general: storytelling matters. In my attempts at persuading client prospects, I naïvely thought a good track record of high returns and low volatility would be enough. That however didn’t cut it for “serious” institutional investors, with hundreds of billions of dollars to invest; no-oh-oh, they demanded to see a tangible investment model and evidence of rigorous risk management procedures. If nothing else, just to have something to show their investment boards or end-clients. Well, committees and strict procedures is what landed funds with hundreds of billions of bad housing loans, not to mention fully loaded stock portfolios right before some of the worst market crashes in history. Still, we could really have used a good storyteller. Lesson: Facts and proof never sway people. Narratives do. Humans are made for stories. Our brains make up stories about the world, about past and present events, to make sense of otherwise chaotic and overwhelming stimuli. Just facts are useless in most contexts - unless there is a compelling narrative.

How To Make A Billion (or miss out, as I did) Hold on just a while longer, or skip a few pages if you must, but to get the framework right, I want to go through a couple of observations regarding the business of marketing the fund, in contrast to running it and doing the actual investing. Futuris could and should easily have reached 10x its peak size of 1bn EUR/1.3bn USD, given the fund’s raw performance over more than a decade. That would also have made me a 9 figure net worth in USD (just about a billion SEK), rather than my current 8 figure… The reason we didn’t, is that we never quite did understand how to market the fund. I am the one to blame the most here; Due to my slight autism spectrum disorder (albeit not professionally diagnosed), I never took marketing or reading people seriously, assuming our numbers would speak for themselves. My bad, no billion for me - next question, please.

Poor marketing, schmarketing… We won the decade award anyway! That was fun, winning an award that is, but perhaps not what we needed. Winning unfortunately closed my eyes to the truth, in particular when we finally started to attract clients in droves... Eventually, after the decade win, when Futuris was over ten years old, money poured in, at least relative to our history. We even got within 3% of voluntarily closing the fund for new money. At that time, I thought I had finally struck exactly the right balance of eccentricity and cockyness, combined with a convoluted black box investment model that allowed for a certain pragmatic style drift, not to mention showing up in the 10+ years old funds category.

Much later did I understand that our (admittedly belated) sales success wasn’t a result of my genius and unorthodox presentation and narrative - it was all about performance after all. We simply got so good they couldn’t ignore us (Cal Newport), despite all our flaws (eccentric, cocky, black box, style drift): Mastering one bull market, several bear markets, as well as the 2009-10 BRIC/Fed turnaround was just too much to pass on. We were the best, and when you actually are the number one your style doesn’t matter. The problem is you rarely stay at first place for very long... <== Excentricity wasn’t part of the secret sauce

After mid-2011, when we stumbled performance-wise, it was all too easy to withdraw investments from the “cocky, style-drifting, unpredictable black box” that we had communicated we were. Lesson: Face the facts. Analyze the facts; the actual adequate causality, not just what fits your desire for greatness Don’t get cocky. Analyse what actually went right and wrong respectively, instead of just assuming everything in a good trade is optimized or even right. Our client inflow was despite my marketing style, not thanks to it. The same lesson can be applied to good or bad trades; make sure you know what part was luck and what part was skill. Lesson: If you run a business, run it. Take every aspect seriously. Marketing and communicating is at

least as important as producing. The client is right. Without clients you don’t even have a business. You must be able to explain the product to the client - using their language: Imagine what the client is perceiving. Understand their perspective. In investing you don’t have to be the best, being a nice complement is good enough, but you have to be explicable and marketable. Being #1 is not a long term strategy. You should still do your thing, market your product, but be sure to tweak the communication to fit the client. In retrospect, I know many prospective clients really wanted to invest - which I thought would be enough to close the deal, so I left it at that - if only I had said the right words (such as elaborating on our formal stop-loss procedure, formal investment committee, formal CIO, clear, concise and consistent investment strategy, investment universe and investment process).

Too cocky, too controversial and unorthodox In sharp contrast to playing the part of partner and managing director of a serious financial institution, I all but emphasized our ad-hoc investment style, deliberate absence of committees and procedures, and generally quite naïvely spoke directly from the heart about our unorthodox laissez-faire decision making. I even provocatively used to say things like

“We are a black box. You deal with it. You can’t know what positions we will take or when. We are utterly free from biases and will go net short or leveraged long as we see fit, at a moment’s notice if called for by circumstances”, while smiling in a manner I now guess wasn’t very reassuring. Apparently, I was retarded even before I retired, and the opposite of what Mark McCormack called “street smart” Now, at least YOU know better

“Too weird to live, too rare to die”

We were gods... in pain We beat industry giants* such as Soros, Einhorn, Buffett, Benjamin Graham and Peter Lynch, when it comes to average annual outperformance of the stock market (see chart further down). *Buffett, importantly, of course, kept on beating the market for several decades more than we did. Still, we were gods, albeit ‘only’ for 12 years. Below are the numbers that made us the Hedge Fund Of The Decade. Spectacular performance (but deep darkness behind the surface).

100% outperformance in 2 years Just two years after inception, Futuris had accumulated +100% net return to its clients, while stock markets had gone exactly nowhere. Talk about success*.

600% outperformance in 12 years Jumping ahead, the remarkable progress continued for another ten years: Between inception in October 1999 and the peak in April 2011, the fund hardly missed a beat it seemed, returning a net return of +601 per cent in 11.5 years, or 18.4 per cent annually compounded. During the same time the MSCI Euro and MSCI World total return indices returned 1 per cent annually, i.e., for all intents and purposes they were completely flat. One euro invested in the MSCI indices returned just 1.1-1.2 euros respectively, whereas one euro invested in Futuris grew to more than 7 euros; a 6-7 fold outperformance. * It may look like a walk in the park afterward, but in real-time my subjective perception was radically different. Take for instance the year of 2000. If you look carefully, you’ll notice that the fund’s performance index was trending lower for an entire year. That means that nearly every day, actually almost every minute, or at least every time you checked the stock market or portfolio, you were reminded of how useless you were. To make matters worse, that was the first calendar year in the fund’s history. Futuris’ 17.5% annual outperformance during 11.5 years compares well with the best investors of all time. You would find Futuris right below Kevin Daly, above Peter Lynch and Charles Munger on the chart below. Only Druckenmiller, Rogers, Tepper, Geurin, Daly and Greenblatt outperformed the market by more than we did (Crucially, most of those legendary investors were active for much longer than we were).

Red marker: Futuris at its peak Green marker: Futuris’ full history Blue arrow: Walk of shame 2011-2014

People matters Sharing offices with the grim reaper As if running a fund and marketing it weren’t hard enough, there is a whole other dimension of problems and risks to consider. Narrative and performance are important factors, but to get there at all, you have to have the people. I am an unusually calm and composed person, almost detached some would say (which definitely came in handy during my 15 years in the hedge fund industry), but I still felt a sinking feeling in my stomach tens of times per day, when the performance drifted lower. Deep darkness indeed. In retrospect, the most surprising fact of all is that I didn’t quit much sooner than I did. In the course of just one single month, we bought and sold several important (and painstakingly researched) stock holdings, as well as significantly changed around the overall net exposure (likewise thoroughly discussed, scrutinized and agreed upon), to accommodate the perplexing puzzle of changing market forecasts, macro beliefs, risks and client expectations. That took a lot of very hard work and anguish. And, still, sometimes the end result was a slowly growing loss, and the realisation that we might not even get to celebrate the fund’s one year anniversary before it had to be buried. The eerie silence when the fund

lost another 25 bps (¼ %) was the sound of our careers and wealth going down the drain. Dark. By the end of year 2000, a black swan landed in the company’s premises; one of the two portfolio managers (and founders) decided to leave the fund. He had better opportunities elsewhere, considering the fund’s recent poor performance and subscale Assets Under Management (AUM). Thus, Futuris was at the brink of ruin, despite returning over 50 per cent after fees in 1999, and actually was up by 6 per cent in 2000.

Futuris was almost thrown out with the bathwater What was about to become the hedge fund of the decade (2000-2009), not to mention the star performer of 2001 (and 2002), was more or less ready to throw in the towel in January of 2001, despite absolutely stellar performance in 1999 and actually positive returns in 2000. The market was about to crash and Futuris was set to crash upward, if the founders could just make up their minds on whether to close down business or not... Lesson: Be prepared for unknown unknowns, risks outside the box. We thought we were battling the market, not the level of AUMs or keeping the founders onboard. However, we should have been prepared. Losing one PM out of two, even if he was a founder, shouldn’t have been as surprising and cataclysmic as it was. Funny thing: Morten still feels like an important part of the fund, even if he only stayed on for a tenth of the fund’s existence. Lesson: Mind the employees - the people are the business. As a business manager, take care and manage all levels of the staff. Be proactive. As an investor, stay away from companies which signal poor human resources management.

Marooned in realtime In retrospect, Futuris’ performance looks steady and predictable. But in the heat of the battle, in real time a day felt like a month, a week like a year, and it was hard to fully understand that our clients only cared about our monthly numbers, or the appearance of the performance chart over a year - or even several years. We were marooned in realtime, doomed to experience every minute of harsh reality - unable to fast forward to our glorious future. Not even our golden years were a rose garden; we struggled through a world of pain in 2000, 2003, 2004, 2005, 2006, 2007, 2009, 2010 and 2011, just to mention some of the tough years. Then followed the really bad ones in 2012, 2013 and 2014. Actually, only during three years out of fifteen, the fund was (mainly) a workplace fit for humans: 2001, 2002 and 2008. Mostly, it felt like living on the Vogon planet (in The Hitchhiker’s Guide To The Galaxy), where you constantly get smacked in the face for thinking.

Did I mention that the senior partner, who eventually took over after the founder Morten Groven left Futuris in the beginning of 2001, died of a severe stroke in fall 2002 - at the office in between meetings? So, perhaps those two years weren’t all good. Oh, by the way, in 2008 we made our greatest investment blunder ever, missing out on the trade we had prepared for over nearly a decade. So…, no good years at all then…? So what, who needs good years, when you can have splendid decades. Lesson: Keep a long term perspective - one year is nothing in the investing world. Anybody and everybody experience bad years. One year might feel like an eternity, but feelings are not a strategy.

“The shortest route to losses is pursuing the shortest route to riches”

Lesson: Don’t Panic. Fear and greed should only happen to other people. Be calm and composed. Trust your method, trust your judgement. Make a decision and stick to it without second-guessing. Don’t fret about decisions in shorter time intervals than needed or scheduled. If you let your amygdala take over, you stop being rational and in the stock market you have to be rational. Now, finally, it’s time for my Futuris story and more important life and investment lessons than you can handle ; )

How To Make Nr 1 In The Toughest Stock Market In A Century

The Swedish stock over the fifteen-year Futuris era:

Stock chart 1999-2014 (The Swedish OMX index)

That seems like an easy enough stock market environment to work in, right? - Just a handful of distinct and pretty long moves upward, and about as many and distinct moves downward… In theory, you would have outperformed hugely by buying well after identifying the troughs and selling well after identifying the peaks, by just using a simple X day moving average tool. Easy. However,... Nobody managed to do that. Not even close. No, not Futuris either, despite beating everybody else. All you really needed, to be the best, was to avoid making major mistakes.

The bursting of the IT bubble taught me to forget all I knew In practice, the year 2000 alone had more gruesome swings and opportunities for error and regret, than might seem the entire 15-year period, just judging from the chart above.

Remember that the year 2000 was when the epic IT bubble burst, subsequently all but recovered the initial steep losses, and finished the year with several wild swings up and down. In the chart above, that career-crushing year mainly looks like an inconsequential blur in the top-left. The previous year (1999) had seen an incredible appreciation of stock prices, in particular IT stocks, with a near doubling of the general market in just the final 3-4 months. Hence, most people were primed to buy stocks when rare corrections offered the “opportunity”. If you tried shorting stocks during the IT mania of the late 1990’s, you were carried out on a stretcher in 1999. If you tried it again during the first half of 2000 you soon got kicked in the face, when the market came roaring back after summer. During just the two years 1999 and 2000 Futuris managed these swings unbelievably well, but there were still lessons to be learned. Being optimistic and actually investing 100% of the money on the upside in the final quarter of 1999 proved to be genius, no matter how much glue an investor had to sniff to make sense of valuations. Not going all-in short in 2000, or even 2001-2002, and definitely not 2003 was just as masterly, despite the devastating crash for IT shares that began in March 2000. The trick was to stay level-headed and not make mistakes, not get carried away. Lesson: Trends are self-fulfilling, since rising prices are taken as evidence, by most, of everything being alright even if the proper conclusion is one of danger (just not necessarily imminent). Perhaps even more important, every trend is littered with short term corrections. No matter how crazy the stock market is, it can always take one step further into looney town. Be prepared for being wrong on timing, no matter how right you are in other respects. Lesson: Valuation isn’t everything. Not even close. There are times when valuation is important, but many more when it isn’t. I’ve had to learn and re-learn that lesson over and over again, since I first heard about equity valuation at finance school (Stockholm School of Economics) in 1990 and made my first real investments. Valuation matters reliably only over 10-year cycles or more. On the stock market, a 100 dollars is very seldom just that. A 100-dollar bill can be priced at 10 or 1000 for so long, that anybody betting on the real intrinsic value of 100 dollars will be indistinguishable from being wrong As an important side note, I was ‘merely’ an analyst (one of two, the other one being Mattias Nilsson) and internal speaking partner at the fund during 2000-2002. The founder Arne Vaagen was the real decision maker and value driver, together with his partners (first Morten Groven, later followed by Michael Hasselquist).

THIS IS NOT A HUNDRED DOLLARS (ceci n’est pas une pipe. It might look like a 100-dollar bill, but it’s actually just a picture of one) Lesson: Never go all-in, no matter how good the trade or investment looks. All-in is for gamblers, a.k.a. morons. Going short in Q4 1999 would have been intellectually correct, a no-brainer really. Just 15 months later you would have been proven right. The snag is that the market first appreciated by 80% in a couple of months, wiping out anybody being short.

I’m still learning the lesson about valuations In early 2012 I privately started shorting the Swedish stock market, mirroring what we did in the fund. I kept selling more on bounces all through the mini euro crisis of summer 2012 as well as gradually during the “ECB/Draghi” surge in the second half of that year. I’m still hanging on to the trade, which currently is 1.5m USD under water. The only reason I didn’t lose much more is that I had learned to size investments carefully. Thus, I didn’t go all-in, and what I did invest I punted gradually and was thus prepared for (albeit not predicting) large losses. Lesson: Size your investments deliberately and carefully. Even when going all-in (which you should never do), at least don’t do it all on one single day. In your heart you know you can’t time the market perfectly. Heed that intuition and average into an investment over several days or months (years, even). The main lessons from the first years at Futuris all circle the same theme: Don’t make irreversible mistakes, trust nothing, never bet the farm.

How to Make Award Winning Investments Like A Boss

The 1999 mania, one of the worst conceivable markets to start a new fund in Things were crazy in 1999. The market was crazy, roaring back after the Asian currency crisis and the LTCM crash. Technology stocks were crazy. I was crazy. During fall and winter of 1999, before joining Futuris, I thought valuations of “internet” companies were ridiculous. In addition, even as an IT analyst, working 70 hours per week on average, I had trouble keeping up with all the new notions, metrics and three-letter abbreviations. Nevertheless, I privately invested in an ordinary information technology consultancy firm, because I “just had to” get in on the action. “Everybody was doing it” - much like today (2015). The consultancy’s P/E valuation was on the high side, but the value per employee was just 10-20 per cent of what some so called internet consultancies were worth, despite providing higher quality services as well as reporting sustainable profits. Just a few weeks after I invested, the consultancy was acquired by one of the hottest internet companies around (Framfab) and proceeded to increase by 500% in three months. Nota Bene: My trade was not unique or genius in any way. Everybody was booking gains like that. In particular inexperienced private individuals. I sold my shares after exactly 3 months (the minimum holding period allowed for a financial analyst). That very day, the stock closed at a new all-time high, albeit still slightly lower than my selling price. Talk about perfect timing: I sold above what became the recorded all-time high closing price for the stock that came to personify the IT bubble in Sweden. I almost wonder why the SEC never came knocking... Three years later its stock price had fallen by 99 per cent. Another private investment I made (Wkit/Effnet) increased by 5000%, but lost half of that before I could sell, due to technical factors preventing me from selling. But still. It’s easy enough trading like a drunken sailor with your own money, in particular when everything seems to be going one way - up. But how do you start a new fund with other people’s money in that environment?

This is where the expression PARTY LIKE 1999 comes from

The Nasdaq composite index (peaking in March 2000) increased +1000% between the end of 1992 and the beginning of 2000. The last doubling, i.e., the last 500 %-points, took place in just the final 3 months of the rally. Crazy.

How Do You Start A New Fund When Everything Is Overvalued And Soaring? While I was busy writing positive research reports and issuing “Buy” recommendations on (overvalued) internet consultancy firms (and taking wild punts privately), my soon to be colleagues at Futuris were cooking up their own variation of crazy. In just two and a half months in the end of 1999, they managed to rack up a 64 per cent return before fees (51 per cent net of fees) by going 100 per cent net long in some of the most explosive IT stocks* that traded publicly - very close to what later would prove to be one of the greatest stock market bubbles and worst crashes ever. Had the crash come sooner, Futuris might have perished before turning 1 years old. Fortunately, the crash came later and being subscale Arne Vaagen and Futuris needed spectacular gains to make a viable business. Lesson: Sometimes a crazy risk might be your best bet as a business owner The arguably zaniest and most risky investment decisions during the fund’s existence are the very reason Futuris ever became anything at all, not least a place I could work at. Nota Bene: Previous rules about sizing and not going all-in still apply, since a crazy bet is still a crazy bet.

A serious investor should never make such bets, even if it might be necessary for a manager during the start-up phase. Thus, beware of who you trust with your money. Lesson: There are no new paradigms Eventually the long overdue crash (“normalization”) came. Tread very carefully when valuations and business models need new notions, new words, new key metrics etc. to be “explained”. During the IT mania years, just adding the word “WAP” (simplified web pages for mobile phones) or ”.com” to a press release regularly made a stock appreciate by 5-10 per cent in a single day. Whenever you hear “new paradigm” arguments, keep your wallet close and your mind clear. After a few years of that madness, I almost lost my own way and capacity for independent reasoning. On the other hand, don’t take shorting in a mania lightly, since trends tend to be self-fulfilling and bull markets full of bear traps (short term corrections). * I later invested privately in one of those stocks Futuris traded in in 1999, and subsequently lost half of my investment by holding on to the story long after the fund had sold.

Handling the difficult transition from a wild bull to a growling bear Many had anticipated the turn (downward) of the market. Many way too early - based on valuations, previous market peaks and other theoretical work. Our approach was more pragmatic, gradual, balanced and refined. Our way was award-winningly good. During the four years of 2000-2003, we kept the fund’s net market exposure between just -15% and +50%, and the gross exposure modestly between 25% and 115%. In retrospect that was a stroke of pure genius, and earned us several Morningstar awards, including Gold for 2001. The low market exposure contributed to a low standard deviation (which helps increase the Sharpe ratio - a key measurement that was even more important when choosing Futuris for the hedge fund of the decade award). These measures are just unimportant statistical mumbo jumbo that tell a prospective client to what degree a fund’s monthly returns were positive and stable. The fund was composed of long positions in unloved “old economy” stocks in construction and forestry, and short positions in incomprehensibly overvalued, but ‘loved’, IT companies. It took several years to unwind their extreme valuations. Those years laid the foundation for the fund’s reputation as a great market timing vehicle - and with low risk to boot.

Futuris produced magically good numbers During the cataclysmic end to the career-devouring epic IT bubble, including the final 3-month surge in 1999, the intense gyrations in 2000 and the seemingly bottomless plunges of 2001 and 2002, Futuris delivered a return series of +51%, +10%, +27% and +22% net of all fees. In addition, it was done with an average net exposure of less than 20% net long, and a standard deviation of just 0.055. Unparalleled. The market’s standard deviation was many multiples higher and with hugely negative returns of course.

The magic of 2000-2003 - Low Risk, High Return

Futuris low risk approach during 2000-2003; the green ring of High Sharpe Ratio As a side story, in 2002 the investment bank Merrill Lynch held a Casino Night at Grand Hotel in Stockholm. All guests wore a tux and were given spoof money to play with. I and my colleague had so much confidence from our winnings in the market (and free booze) that we managed to break the bank at the roulette wheel and the black jack that evening. Twice. We used our winnings to clean out the prize table (the fake money could be used for buying ML merchandise, but they didn’t expect just two people to clean the table) and then ran around handing out hangers, calculators and other stuff to the less fortunate.

Success bred hubris (and a negative bias) Unfortunately, our confidence came to border on hubris (You don’t say? Was it the antics at ML’s Casino Night that gave us away?). In addition, winning big on the downside and racking up awards made us negatively biased (albeit based on knowledge and deep understanding, but still dangerously biased and overconfident).

When the bull returned we were wrong-footed Hence, we all but missed the BRIC rally between 2003 and 2006, when growth in the emerging economies of Brazil, Russia, India and China fueled exports of capital goods in the rest of the world, and thus rapidly growing GDP and corporate profits. We also partly changed our investment style from controlled risk and a balanced portfolio to a more erratic position taking, ventures into less liquid stocks, and three times as large overall net and gross exposure to compensate for (and take advantage of) low market volatility. We simply tried everything we could come up with, to adapt to a new and bewildering world of extremely low interest rates and the once-in-a-century transformation of the developing world (foremost the BRICs: Brazil, Russia, India, China). Now, let’s finish the recount of the extreme year of 2002.

When hubris struck, the grim reaper hung in the shadows

Same pose, different tools

With the worst timing possible (in hindsight), one of the two senior portfolio managers died at the office, in the fall of 2002 (he had a severe stroke in between two meetings), not long before the BRIC rally took off and our performance waned. To clients, our success in 2001-2002, and our troubles the following 5 years, seemed closely linked to both our changes of style, as well as gaining and losing a portfolio manager. Consequently, after Michael’s passing in 2002, the loss of this true nestor in Swedish industrial life caused withdrawals to impact our assets under management, simultaneously with mediocre performance.

Bullied by the Fed - Futuris’ near-death experience

Lament to Mammon: Oh why have you abandoned us? During 2003-2006 we kept trying to short the market, to time the peak we constantly expected to manifest itself just around the corner. We mainly shorted index futures and capital goods companies, interspersed by more or less forced long positions, to compensate for the accumulating losses in indices and cap goods. We never held out for long on the upside, always more vigilant regarding negative news and risks than opportunistic on the upside. We thought we knew what we were doing. I mean, we got both the bull of 1999 and the bear of 2000-2002 right, so we must be right again - it was our legacy, our birthright. We had a framework of thinking that worked, right? We read more, we thought more, we worked harder and smarter than everyone else. We were bound to succeed. We had fought the Fed before - and won. Now we were at it again... It’s just that it didn’t work in the bull of 2003-2006. Realizing we were wrong hurt, in particular psychologically. Imagine feeling really stupid almost every day for 4 or 5 years in a row. Not even being bullied through middle school felt that bad - back then I at least knew I was smart, albeit unfairly treated. We actually did deliver decent returns during 2003-2005, certainly for a negatively biased fund and one that had more than protected its clients’ wealth during the IT crash. However our performance was definitely in the lower end of the range of what we aimed for. “Decent” just wasn’t enough in an indecent industry. I’d rather just forget about those years (2003-2005, not to mention 2006). They were filled with endless phone calls, infinite reiterations of macroeconomic ruminations, countless painful stabs of successive little losses - and too little time off the market. By January 2005 I despaired so much I blogged “I need a game plan to endure”, seriously mulling leaving the industry any day. At least those years drove home one of the most important lessons there are: don’t go all in, no matter how sure you are. By all means, make a serious commitment, be invested - just not all in.

On the other hand, I was made partner in 2004, and 2005 was when I became Managing Director, albeit against my will while in an induced coma. Yes, true story; nobody wanted to take the helm. We all just wanted to manage money, not the firm. Hence, Mattias and Arne took a vote when I was in surgery… Such was the retarded process that made me managing director of The Hedge Fund Of The Decade. Well, why not? I was writing our reports anyway.

2006 - close to a breaking point By mid-2006, in addition to the three previous years of mediocre performance, we were down by 6 per cent that year (our worst first half performance until then), thus losing money, eroding our reputation and leaking clients at the same time. Every little setback forced us to cut back on our positions, pause and start over. Over and over again we took one step forward and two steps backward, “prudently” stopping our losses and then had to start from the beginning again, slowly accumulating losses and eating away at the positive returns we did produce in our best holdings. The end appeared nigh for Futuris. Again. What’s worse, 2003-2006 were my first years as a partner, managing director and portfolio manager with a relevant mandate. Mattias and I (and Roland, who left the firm in 2005 and also died just a couple of years later) had taken Michael’s place after his untimely death, and this was how we handled our giga responsibility… As useful as a hole in the wallet. It actually felt as if the universe was out to get me. And you have to understand it never is. The universe is just what it is. A is A, and reality is reality, as Ray Dalio says. You have to deal with reality instead of blaming it - or, even worse, attempting to school reality. Lesson: Investigate reality, don’t try to lecture it. Don’t get mad or try to get even. Open your eyes. Take the consequences of the facts. Analyze! Lesson: It’s never the market’s fault you’re losing money. It’s yours. Don’t blame the world for not dancing to your tune, blame yourself for not listening and understanding.

I bet they felt like golden gods a minute ago And what did I do personally? I bought this water scooter in the first half of the year (2006), right in the face of our worst performance ever:

“Where are the customers’ yachts?” Well, mine (pictured) measured around 8 ft so don’t get too excited

Hail Mary trades saved the day - or did they? Thanks to a handful of the firm’s best trades ever - in shipping, Korean shipyards and oil rigs - we survived the period 2003-2006, albeit just barely (2003: +9.9%, 2004: +6.5%, 2005: +13.7%, 2006: +6.3%). Investments in oil rig companies and Korean shipyards that increased 10-fold in value (of which we pocketed half) covered losses on index shorts and short positions in capital goods companies. Capital goods stocks constantly looked expensive to our negatively biased minds (affected by our spectacular performance during the IT crash which taught us to be skeptical about high growth and high valuations). At the time, we just couldn’t comprehend the rise of the BRICs or understand just how long it would take before the US housing bubble would burst. In October 2006, we once again threw caution partly to the wind, and finally accepted the market rally, as well as bet on the the pattern of a stock rally the last few months every year. In addition we saw a slight opportunity to get back to a decent return for the year, despite having been hit by the five worst trades during the firm’s existence, all within the space of 6 months. The Hail Mary gambit paid off; Not only did markets surge upward, some of our disaster trades also roared back to life (as an added bonus we had doubled up in a couple of those, where we were particularly convinced the market would soon see the same value we did).

Don’t let luck or hope be your strategy A hidden danger with Hail Mary stuff, however, is that you can confuse luck with skill, not to mention trying it again as if luck were a strategy. In addition, mitigating (or hiding) losses with other winnings, in particular based on chance, can make you complacent and unwilling to scrutinize and question what’s going on in the loser’s corner of the portfolio. This time it worked... Lesson: Leave room for a better opportunity down the road Doubling up in a halved stock or worse may seem risky and reckless, but thorough analysis and understanding of drivers and true value is and should be the foundation of fundamental value investing. You never know when the market is going to provide you with an even more incredible opportunity so never go all in from the get go. Actually, never go all in. Period. Always leave room for being wrong, or for the market going against you in the short term. Leave room for doubling up. My own personal breed of hubris involved buying this Hublot Big Bang Rose Gold in February 2007, despite our near death experience in 2006 right after buying the water scooter:

Personal hubris on display

5 years earlier I could have sworn I would never ever be this stupid

Redemption - the bear returns It’s not that I am a permabear. I’m not eternally negative to stocks. None of us from Futuris are, or were. It’s just that during the entirety of Futuris existence, the economy was fragile, built on air (debt upon debt, cheered on by the Fed) and stock valuations were extremely lofty. Anything could and would topple the house of cards… given enough time. The question was just how much time, and what would be the catalyst. By the way, I could say exactly the same thing today, in February 2015. The writing is on the wall - and it’s a carbon copy of 2001 and 2008.

Another nerve-wrecking year of extremes 2007 turned out to be a pivotal year for us, including our best first half, our highest risk ever and all-time worst month. It also marked the market peak and the beginning of the global financial crisis in the wake of the popped housing bubble in the U.S. In 2007 our risk taking increased even further, with wild swings between 0-150% net long; and gross exposure close to 250% (!). I guess we were encouraged by our risky comeback in Q4 2006. The fund had never before and would never after exceed those numbers. During the first half of 2007, we managed to time both ups and downs with uncanny precision, mainly buying and selling index futures for billions of dollars. It worked like a charm and we were up by an unprecedented 25 per cent by mid-year, in a volatile but flat market. Ahhh, the sweet feeling of success, of being smarter than everybody else, of showing we still had it. But hubris soon got us again. Right at our all-time peak exposure (+150% net exposure) stock markets plunged; August of 2007 turned out to be one of the worst months on record for hedge funds - and the worst month out of 180 for us specifically. - That’s not particularly bad luck by the way. It’s bound to happen if you keep increasing your risk taking. Lesson: Avoid hubris at all cost. Remember that big wins always are part luck, and big losses are due to part gambling, part tough luck. We mistook our winnings in 2001-2002 for work of pure genius. We also mistakenly thought we understood the downside better than everybody else. Our performance in 2001-2002 and the resultant hubris, and negative bias, first caused us to miss the BRIC rally of 2004-2006... Hubris (and greed) then, in 2007, made us ignore the rule about sizing and avoiding unnecessary risk. Success with excessive risk taking in the first half of 2007 made us take on even more risk. We didn’t have to bet the ranch, but we had the buffer, we thought - and got impatient and greedy for really spectacular returns. “What if we can turn these +25% into

+40% by the end of the year? That would show ‘them’..., and make us rich”. To put the decision into perspective, consider that I personally would have doubled my net worth that year, if we had closed all our positions at that point. Lesson: Don’t change a winning recipe. Be patient We changed our style and took on too much unbalanced risk. That cost us both clients and performance. We should have kept our patience, as we did in 2000-2002. Actually we manifested a certain kind of patience in 2006 as well, when we doubled up in certain losing positions. This time, sadly we demonstrated a lack of learning from our own hits and misses. Lesson: Know yourself. Analyze yourself, your M.O., your successes and your failures thoroughly. Be willing to learn, to question. We had a winning style in 2000-2003. We should have seen and acknowledged that, rather than try to fix unnecessary mistakes by taking even more risk and changing investment styles. Lesson: Manage your risk level according to the opportunities. It’s not always a good time to go heavily long or short; most often it’s a grey zone. Size your risk accordingly. Wait out good opportunities and don’t take unnecessary risks when in unchartered territory. Reserve big bets for situations where you have more control. Always keep some dry powder and leave room for error. Lesson: Reposition when risk/reward calls for it, not because you feel lucky/unlucky. Neither a winning streak nor a losing streak is reason to increase risk or change style. Future risk-adjusted return potential and client mandate are. Lesson: Manage risks when you can, not when you have to Make sure you get to stay in the game for the next round. Don’t take risks that could cause irrecoverable damage to your capital or your clients’ money, or force stop losses causing permanent loss of capital. This lesson applies to all aspects of life - always do ‘it’ while you can, not when you have to. Hope is not a strategy. Lesson: Never rush to get rich You never have to bet or bet big. Go for controlled risk and a long string of single digit percentage points wins. Occasionally (think in terms of once a decade) a super opportunity arises for which you should be ready through long-term thorough studies and deep understanding.

This is the magic formula for long term stock market success:

Study Wait Pounce

We eventually clawed back a decent performance figure for 2007, and somehow actually felt pretty good as New Year’s Eve of 2008 approached.

Somehow we always managed to see a light at the end of the tunnel

The long dark tea time of the soul (mobile pic from one of my afternoon podwalks in Stockholm)

The comeback kids In 2008, the stock markets crashed. The epic downturn, that has been called the worst since the 30’s depression market, commenced almost instantly with the new year. In the coming 15 months, the US stock market would go on to lose all its outperformance vs. government bonds all the way back to 1995.

Thus, it turned out we were right all along; the bear did come growling back - and with a vengeance. Nevertheless, we could easily have been wiped out anytime during 2003-2007, not least in 2007 just on the cusp of success, if we hadn’t been as careful as we actually were, considering everything. The rest is history. We killed it the following year, in 2008, just as we had done in 2001-2002. When everybody else was struggling and suffering, we had the time of our lives. Personally, I bought a yellow Lamborghini Gallardo Spyder (convertible) in April 2008 on my way back to the office from lunch; the hubris monkey was never far away... Lesson: The situation is never as bad as you think. Pick yourself up, take a deep breath and deal with one issue at a time. Most important of all: don’t panic. If you panic, get back to ground zero, neutralize everything and start calmly and methodically from the beginning; there’s never a hurry. I thought we had reached the end of the line in 2006 but just 12 months later, I was beaming with pride and newfound riches (virtual) as the fund was up by around 25% intra month in July or August, 2007. Lesson: Easy come, easy go and vice versa As confident and happy as I was in July of 2007, as miserable I was a few months later when we had lost it all, touching break for the year intra-month after being up by 25% year to date. Did I mention we booked our performance fees annually?, meaning all the virtual dividend I was counting on evaporated in the space of a few months in the fall of 2007. In July, it amounted to more than my entire net worth, and before the autumn leaves hit the ground it was back to zero. The end was nigh. For Futuris as well as for me. Again. We had made our final* foolish gamble and lost…

And, yet I bought this conspicuous Lamborghini Gallardo Spyder in early 2008

Lamborghini convertible, Midas gialli

* Lesson repeated: The situation is never as bad as you think. The coming 9 months (January-September 2008) were to be our best ever - a good fit to my newly acquired sports car. Those 9 months all but secured our most significant trophies during our 15 years in operation: the Hedge Fund Of The Decade award and the 10-year awards (Best Directional) as well as the 2008 Eurohedge win (L/S Equity HF of the year). They also laid the foundation for my own private wealth and eventual retirement. For all intents and purposes, 2008 made The Retarded HF Manager. Remember that just one year earlier, ‘all was lost’ and my net worth had halved compared to recent expectations.

How a foot in the face can help regain your balance The big losses we incurred during the correction in August 2007 made us reconsider the risk of a hard landing for the economy, rather than just a benign mid-cycle slowdown scenario.

In August, wrote in our monthly investor letter that we “had become evenly divided between a crash and a slowdown”. Apparently our worst monthly losses ever had shaken us out of our stupor. Consequently we reduced our extremely positive net exposure. But already in September, we increased our positive exposure again (despite writing about housing and banking troubles and the risk of recession in the monthly comment; we were trying to outsmart ourselves. It was a kind of symptom of the curse of knowledge, trying to be contrarian rather than being independently contrarian). We sold all the way down to a slightly net short position the following month, in October, (mostly selling beneficiaries of the BRIC rally: capital goods, basic industries and oil related stocks) but bought again (!) in November. By then we were back in the ‘managed slowdown’ camp (i.e., slightly bullish and smack in the middle mainstream). Those rapid portfolio turns took place several months after what would prove to be a major peak, before a crash of historical proportions. In addition, the writing really was already on the wall after HSBC’s subprime warning as early as in February 2007, not to mention the sudden market correction in August - which showed just how uniformly positive and unprepared all investors were for a downturn. We, however, had finally all but given in to the relentless upward march of stock markets in the five years since the trough late in 2002/early 2003.

Hence, just as in 1999, we were walking a fine line, betting hard on an upside and a trend we had logically dismissed as irrational. And we did it right at another generational peak in the stock market. Fortunately, the foot in the face in August had stirred something deep within, awaken the slumbering bear that knew that once the right dominos started falling, everything was at risk. And so came one of our handful of defining moments, when we in December of 2007 sold shares within basic resources, oil and oil services, shipping and financials, on concerns about a US recession and profit forecast reductions that we assessed couldn’t be mitigated by easier money. Oh, so right we were, and oh so much money we made for our clients and ourselves - and yet would be proven so wrong with the exact same analysis a few years later on. Lesson: a lesson isn’t always the lesson you think it is. We could be forgiven for drawing the fatally flawed conclusions that it’s risk free to fight the Fed, or that logic and persistence work. However, we should have seen that the market had already shown its weak hand in August 2007, and that was why it was possible to make money in 2008 being short, despite a very dovish Fed. The lesson from 2002 and 2008 was not to take fighting the Fed lightly or that fundamentals ultimately triumph over trends and authorities, but rather that it takes exceptional circumstances and particular catalysts to go against the will of central bankers. In the beginning of 2008 we added index puts and sold futures, as well as sold more financials and services stocks, to benefit from a possible market correction, as we acknowledged an onslaught of negative data that had so far failed to move markets. It soon would.

2008 The year of the rat (for everybody but us) Thanks to our research, and lessons learned, during the previous 5 years, on the US economy in general and its housing and banking issues in particular, once we banked that first win, in the first quarter of 2008, we regained our confidence. We then dared trust our own research, draw logical conclusions of which domino would be next to fall and likewise dared to actually invest (short) accordingly and hold on for longer than most (just not all the way, it turns out...) Or was it just luck? Again?! We in the wrong again just a few years later, so who can tell? No matter future misgivings, with 2008 as icing on the Futuris performance cake, we (albeit belatedly) got some well-earned recognition:

Secretive Managers - Crazy Good Returns

Sweden’s most respected business magazine: “Low Key Managers Whooping Stock Market Ass” or “Secretive Managers - Crazy Good Returns”. The entire article can be read in Swedish here.

Lesson: Trust your analysis but wait for the right timing. We were eventually proven right, regarding our view on housing bubbles, imbalanced economies, excessive debt, leverage and risk. Our sound analysis, repetition and refining over 5 years had prepared us for the big event when it finally came. We dared time it once catalysts were present. Unfortunately we had to get hit hard first (in August 2007) to realize what was going on. Later, the years 2012-2015 have taught me once again, that it takes something extraordinary (like August 2007) to break the back of a strong bull market before it has run out of money. . Lesson: Bet on black, always bet on black, unless you have pretty much all the reasons in the world to go short (red). Futuris knew this instinctively in 1999-2003, applied the lesson with discipline, and treaded very carefully despite our strongly negative views. Due to the steep market plunge of 2001-2002 we partly forgot the lesson and became somewhat negatively biased. We relearned to almost always bet on the upside during the BRIC and Fed rally of 2003-2007. In 2011, 2013 and 2014 we actually applied the lesson but got stopped out, due to excessively high positive net exposure during the sudden corrections (and recoveries) that typically occur during bull markets. It’s ironic that the demise of Futuris was due to being too bullish and too highly exposed on the upside, when most outsiders think Futuris was a permabear infested cave of eternal pessimists. I think I’ve got it now - always bet on black - (it’s just that I think I currently in February 2015 have all the reasons to go short, so here I am with my private investments - owning gold and being short the stock market). So, no, I still haven’t learned.

What part of “Don’t short” don’t you understand?

Banging your head against a wall repeatedly is not good for you - not repeatedly going short during bull markets either.

Finishing the banner year of 2008 as true professionals Spooky precision in 2008 We even managed to use previous lessons learned (“the market never moves in a straight line”) and with uncanny timing increased the portfolio exposure from -50% to +50% in July 2008 and kept it there for just two weeks, while the market bounced after a period of heavy selling pressure. After the bounce we sold back down to -50% again in August. Lesson repeated: Markets never move in a straight line. In fact there usually are more 15%-bounces during a bear market than there are 15% streaks in a bull market Bailing out of Lehman Brother’s bankruptcy - why, oh, why?! We repeated that particular lesson a little too well; After Lehman’s bankruptcy we held our shorts for a week or two, but when markets didn’t keep falling we decided to reverse our shorts and go long - on gut instinct (“if stocks prices don’t crash on this, they must be due for a bounce”). That was actually incredibly and uncharacteristically mature and professional of us. It’s just that...

We were wrong Contrary to a relief rally or a dead cat bounce, the fourth quarter of 2008 saw the largest drop in the market during the entire grand 2007-2009 bear market - and we missed it! It was the prudent thing to do, very professional, and in the end we hardly actually lost anything more than a great opportunity and no hard cash, but we still felt like the biggest doofus in the business: We, Futuris, the fund that had stayed more or less bearish during the entire BRIC rally (2003-2007). We, who had discussed the risks of the US housing bubble for five long years. We, who had been net short the entire 2008 - on exactly the factors that eventually took down a Wall Street behemoth and caused the big leg down in Q4 2008... We missed profiting from the biggest mammoth kill in a century, the one kill we deserved together with a select few esteemed and likewise foresighted business peers.

Homicidal psycho on the left, doofus on the right In the end we managed to avoid losses (oh, the irony) for that quarter (by selling again toward the end of the year). But, in all fairness, we really should have made 15 percentage points more return that year. On the other hand, we had almost compensated for the dick move in Q4 with our perfectly timed quick in-and-out in July-August.

We still won the Eurohedge award for the best large (500+ mUSD) Long/Short Equity fund in 2008, as well as laid the foundation for the Hedge Fund Of The Decade award a year later, which speaks volumes about what a difficult year it had been for all investors. We completely botched* the one trade we should have gotten right and still was the best hedge fund in Europe in 2008 (as well as for the entire decade 2000-2009)

The Lehman collapse eventually came

A career-ending year if there ever were one *We were perfectly positioned ahead of the event, Lehman did fail, and we… covered (or should I say cowered) our shorts just because stocks paused during a couple of weeks. Lesson: Follow your strategy, not a sudden gut feeling, when so many variables are in your favor. We should have been able to smell the fear on everybody else. On the other hand, it’s always better to err on the side of caution than the other way around. I think we once again became victims of the Curse Of Knowledge; we thought everybody else had already finished selling, that other, irrational, investors would buy aggressively when markets didn’t keep falling after Lehman’s demise. Or, just maybe we actually didn’t understand or dared believe just how cataclysmic an event it was. The end result was the same, we played the irrational part and bought stocks like drunken sailors just before the collapse that (quite predictably) ensued.

The big bounce and the era of central bankers 2009-2015

March 2009 - we got a mulligan... In March 2009, we positioned the fund net long mere hours before the market turned sharply upward. Once again, with at least as otherworldly timing as our selling 9 months before.

The Lehman panic lasted less than 6 months The market was plunging in panic after Lehman’s recent bankruptcy, the world economy stood still in the first quarter of 2009, but we caught the falling knife perfectly. Everybody and their computers were selling with both hands; The consensus was that it was the worst time to hold stocks since the 1930s, but at Futuris, we turned around the entire portfolio on a dime and bought stocks, futures and options for a hundred per cent of our assets under management on a single day, based on the same kind of hunch as in July 2008 (“never a straight line”). We got it right again, and one day later many others had to play catch-up and were buying like crazy! When markets roared ahead the following few days, we felt were invincible.

However, we were still in the bear camp and went short just a month later, this time selling 100% of AUM in a few days. As per the last day of February, March and April 2009 our net exposure was -30%, +50% and -50% respectively. Imagine this; some clients used to ask if being three PMs made it difficult to take decisive action… -In your face!

Unfortunately the decision to sell again in April 2009 turned out to be utterly wrong. Markets have never looked back since then, more than tripling in a straight line, between the first quarter of 2009 and the first quarter of 2015.

It may have been the theoretically correct thing to do, in the aftermath of Lehman Brothers’ bankruptcy, but in hindsight, it was one of the worst moves we have ever done. By then, the extreme stimulus programmes in the US and China had just started to impact the world economy as well as the stock market. Perhaps, we should have understood that this was not the time to fight the Fed (The Federal Reserve, the U.S. central bank). Once a large enough market bounce had been orchestrated, investors’ risk aversion just melted away and the abundance of cash that was sloshing around was seen as an inferior asset due to extremely loose monetary policy and short term interest rates near zero. Stocks crashed upward while we were more than 60% net short (-60.1% officially by the end of June 2009). Scarred and wisened by the 2003-2007 experience, we reasonably quickly changed our minds, and repositioned the fund to neutral (-9%) on a correction in July 2009 and then boosted the net exposure to +80% net long in August. In contrast to the short-term opportunistic move in March 2009, we were now building a strategic investment portfolio for the long term. That was the plan anyway... Lesson: Actually use the lessons learned along the way. Write them down and use them as a check list now and then. Lesson: Don’t fight the Fed. Investors usually learn this rule first of all. We however had experienced two 50% stock market plunges while the US Fed was pushing the interest policy gas pedal to the floor. That taught us that it can be very profitable to fight the Fed (under the right circumstances). The recent 6 years, since the bounce in early March 2009, have shown that central bankers only have one tool - a hammer - and they are going to pound things with it until they get their way. It doesn’t mean their method works, quite the opposite actually, but they can temporarily sway short term investors to shun cash and chase yield irrespective of compensation for true risk.

Leave it to guys like this to fight the Fed, unless you are very certain it’s worth it:

Lesson: Markets can suddenly turn decisively and commence a trend that lasts many years, no matter what valuations are Just as John Hussman has written time and again: after a very large downturn improving market internals is enough to propel the market upward and even start a new mania, even if stocks are not outright cheap (they actually were cheap when we first bought in March 2009, but soon rocketed into neutral territory. Since ‘slightly cheap’ or ‘neutral’ isn’t characteristic of post-bubble behaviour [usually touches “very cheap”] it took some time for us to come around). We’ll see in 2015 who has learned the inversion of the following “market internals” lesson:

John Hussman, Dec 22, 2014: “Market history, including the series of bubbles and crashes over the past 15 years, does not teach that valuation is irrelevant, but instead that a key distinction affects whether stability or instability is likely to prevail. When rich valuations are coupled with tame credit spreads and uniform strength across a broad range of market internals and security types, one can infer that investors remain tolerant

toward risk. In that environment, risk premiums may be low, but there’s no particular pressure for them to normalize, even if the speculation is driven by mindless yield-seeking.” “Trend uniformity and well-behaved credit spreads are an indication of risk tolerance, which allows overvalued markets to remain overvalued without immediate consequence. In stark contrast, increasing dispersion across securities and sectors, deteriorating market internals, and widening credit spreads are all subtle but observable indications of growing risk aversion – icebergs that can easily rupture the Titanic of severe overvaluation. Monetary easing then no longer supports risky assets, because risk-free liquidity is no longer seen as an inferior asset. This risk-aversion creates upward pressure on low risk premiums, which normalize not smoothly but in spikes, resulting in air-pockets, free-falls and crashes.”

Despite our belated bullishness, starting in August 2009, the sum of all our efforts during January 2000 to December 2009 was enough to earn us the award for “European Hedge Fund Of The Decade”, which I proudly accepted at the gala in London. It’s probably a good thing no speeches were allowed, considering how euphoric as well as vengeful I was feeling (due to the humbling experience of 2003-2007. There is probably a lesson to draw from my hatred toward that period, not least since I had to partly relive the experience during 2010-2015): Anger, resentment, hate and fear are closely related and lead only to suffering (and the dark side). Ask instead what you did wrong, and how you can change to keep a cool head and win - never against the market, always with the market. Lesson repeated: Stop hating, start learning

Vader, schmader; Bah! - Yoda should have seen the BRIC rally of 2003-2007

Not long after the prize ceremony, our “long term” bullishness wavered already by April 2010 (-37% net short at the end of that month), and we stayed skeptical until a year later (March 2011), with zero average net exposure for the period. Worth noting, however, is that I did write a letter to my two PM colleagues and partners, from the beach of Vietnam in fall of 2010, calling that specific market correction “an all-in opportunity to buy”. That letter, which was based on my taking advantage of being in a completely different environment and rethinking the big picture, as well as being physically removed from my two colleagues, at least contributed to reducing the selling Futuris was just commencing in Stockholm. The markets soon after surged strongly upward in a move that could have been disastrous for us. If I hadn’t had the calm and solitude to rethink our position, to start from scratch, to polish my arguments in a written statement, and the guts to phrase my contrarian bullishness so strongly (“all in”), I probably would neither have come to the conclusion to buy, nor have been able to convince the others to hold off from going neutral or net short. Lesson: Move, take a walk, change environment, reset, start from scratch, rethink everything. It’s easier to think outside the box, if you are outside the box. Never mistake sitting still for hours in front of your spreadsheets and notes for productive work. The brain is made for moving. The thinking part is just an unintended consequence of analyzing movement. Lesson: Allow for divergent ideas, structure your workplace and its forums to create unbiased discussion and take advantage of the fact that different people think and communicate differently. Manage your own brainstorming too in case you are your own committee. Lesson: Hold your own, stand up to yourself and your ideas, nobody else will. But make sure you have good arguments, and are willing to succumb to factual evidence.

The final hoorah As it were, we wavered back and forth, alternating between net long and net short for about a year (most of it during 2010), without making any money. At the end of February 2011, we were net short again, this time cautiously so (-16%). Our main downside protection consisted of index put options, just as in the beginning of 2008. Index puts are a nice way of inching into a position you are not entirely certain of. The worst thing that can happen is that the market doesn’t move at all for a couple of months and your options expire worthless.

A tsunami of money In March 2011, after 12 months’ walking in the desert performance-wise (client-wise we were more than fine, actually preparing to close the fund for new subscriptions after a 100m USD subscription by a single client), we were rewarded by a triple whammy in the stock market: Bond yields in southern Europe rose ominously, ahead of the upcoming bank stress tests, the spring revolution in northern Africa escalated with a no fly zone over Libya causing increasing oil prices. On top of it all, Japan was hit by its own catastrophe-triplet: an earthquake/tsunami/nuclear meltdown. During the week following the tsunami, we first booked profits by selling the puts and buying back previously sold futures - right at the height of the Fukushima crisis. We subsequently sold net short again with perfect timing, just a few days later when the stock markets had recovered almost all of their losses. But it was hard to be happy, or show happiness during such a tragedy.

It was like watching my worst enemy crashing my Lamborghini Finally, with just as uncanny timing as in June 2008 and March 2009, we bought even more (eventually going to 115% net long) during the second Fukushima market meltdown. In the space of around ten days we had started out with the perfect put/short position and made three equally perfect trades (Buy, Sell, Buy).

We gained 9% in March 2011 alone on an average exposure close to zero. Try to beat that Sharpe ratio! (We were so good it was scary - for most other investors, March 2011 was one of their worst ever, rivaling August 2007) Thanks to the one single large client that had recently invested and thus was in the money, for March 2011 we booked our last performance fees of any significance - and my dividend for that year became my last big payday (even if 500k/year after that in annual compensation is nothing to sneeze at) One single large client, a tsunami and three perfect trades during the space of two weeks was enough to earn me my fourth biggest dividend ever - my last hoorah (fourth biggest by the way… in all fairness it was rather tied second).

So good we were scary

Futuris portfolio managers straight out of the Japanese uncanny valley?

The peak was glorious - the demise unnecessary At the end of April 2011 Futuris reached what would become its recorded all time high with a +601% net return after all fees and costs, while our most relevant stock market benchmark (MSCI Europe total return) was flat over the same time period. Fueled by hubris after the Fukushima trades we had taken the portfolio to its second highest net exposure ever and kept it there month after month. By then, we behaved as if we understood exactly how the world and the stock market operated. We thought we had learned

so much during earlier crashes and recoveries and now it was our time to really shine on the upside, proving we were not negatively biased - just smarter and more nimble than everybody else.

Four months later, the euro crisis was about to return with a vengeance.

One crisis meeting in Europe after another, credit downgrades of Spain and Greece, the threat of intensified austerity, a warning for the U.S. (regarding its credit rating) and a string of negative surprises in macro numbers,including U.S. GDP, as well as prices of oil, gold and VIX exploding upward - nothing deterred us from staying long. “It’s all in the price already”, was our standard dismissal of negative news (and separation from our younger, more bearish, selves?).

We hesitated selling to the very last moment, since we had just begun getting comfortable and cocky in our newly acquired positive views. Nailing the Fukushima event so perfectly; buying while staring a nuclear meltdown right in the eyes had us convinced other investors were still in fear mode, thus discounting too much negativity. However, the deluge of negative data eventually, reluctantly, pushed us into selling futures and buying puts as a precaution.

The timing was once again right on the money. Actually, we were a bit late to the bear party, but not least the put options saved the day by reducing our net positive exposure with every new down day, eventually even making us net short. Without the puts, we might have racked up a new record monthly loss, perhaps in the double digit range. Many other hedge funds did. The near death experience on the downside, just days after being over 100% long, kicked us back into bear mode, just as August 2007 had done 4 years earlier.

Zombies, robots and Futuris’ managers almost look like normal people, but there is just something slightly, and very disturbingly, wrong

On the 9th of November 2011 we sold heavily and repositioned the fund from significantly net long to significantly net short.

Our bearishness was supported by extreme market volatility, growth and credit downgrades for southern Europe, rising bond yields and CDS spreads for the PIGS.

As late as by November 25, 2011 our positioning (still) looked genius…, until unexpected and coordinated emergency measures by several central banks triggered an intense stock market rally. Stock markets rose by 10% in just three days in the end of November 2011, turning an unusually good month into a really bad one for us, and an ordinary year into a flat one - obliterating the magical performance from March that same year (Fukushima). We still didn’t budge. On the contrary we kept selling more toward the end of 2011, and then further into the beginning of 2012; eventually going 50-60% net short. We figured central banks had more or less already gone full retard without any tangible effects on the economy. Banks and governments in the PIGS countries (Portugal, Italy, Ireland, Greece and Spain) were still not solvent, and rising bond yields made matters more urgent by the day.

So close - looking like a perfect kill just 3 days out - before the end of November 2011... To us this looked like a perfect repeat to 2008; the writing was already on the wall, optimism was equally rampant and unwarranted. We positioned the fund accordingly (as we perhaps should have done during the Lehman meltdown in Q4 2008, i.e., kept our short positions) and actually mirrored the street-smart tactic from January 2008 by buying put options rather than selling index futures outright. Again, using puts introduces an element of automatic risk reduction in case markets rise instead of fall. We had learned we actually might be wrong, and thus used put options to reduce our risk of big losses. However, our greed and hubris eventually made us go aggressively short (-50%) in addition to buying the put options. In the instances of 2000 and 2008 we were positioned

more or less neutral vs. the market - with the puts only more as an insurance, on a slightly net positive portfolio, rather than a punt. This time our gambit resembled something more akin to ALL IN!

Death by central banker So, Futuris was around -50% net short for the first half of 2012. Around mid-June of 2012, Futuris appeared to be on the right track. We were up on the year, were heavily negatively exposed at around -60% net short, which was a new record net short position for the fund, and negative data poured in from all over the globe. It seemed all but certain that the U.S. would slip into recession (if it hadn’t already but just didn’t show up in the statistics yet) and the eurozone would break up, wreaking all sorts of havoc. A sliver of hope still lingered in 2012

Another Stockholm picture from one of my afternoon podwalks

Is that a bear I hear? Finally, we thought, after 3 years of torture, pain and mocking of the Nordic permabears (a misnomer regarding Futuris, considering our performance in 1999, our well-timed buying in

July 2008, March 2009 and not least after Fukushima when we took the net exposure to 115% with a long-term intention). Finally, we would be redeemed and avenged for missing the market plunge in the fourth quarter of 2008, after Lehman Brothers, and for the artificial run-up since March 2009. This time we would stay short over the breaking up of the eurozone! The power and reign of the central banks were over, it seemed. Growth came crashing down, government debt burdens exploded upward and bond yields surged. The confidence in the monetary magic, or rather madness, of the Italian (Draghi) at the ECB and Bernanke at the Federal Reserve eroded quickly. We had waited, we had endured, we had spent endless days on research and navigating central bank infested markets. It had been over 12 months, 250 trading days, without a new high for the fund. The psychological and mental toll on all employees and not least the three partners and portfolio managers was immense; inconceivable for an outsider, for anyone not living through what had been one minute in hell after the other.

Light at the end of the tunnel In June of 2012 we saw the light at the end of the tunnel of torment and dared hope for greatness once again. We were up on the year, and close enough to the fund’s high watermark to start hoping for performance fees and dividends...

It had been the worst of times. We anticipated the best of times

Whatever it takes The light happened to be an oncoming train. This is the sound it made:

“We will do whatever it takes to save the euro, and believe me: it will be enough”

Those words have haunted me for two and a half years and will probably linger in my mind for decades more. Mario Draghi’s promise to go full retard, to literally do whatever he could possibly get away with, to make sure the euro didn’t break up, turned markets around. The yields of PIGS bonds fell on the promise of central bank buying and stocks rose in relief of an end to bank panics. In the real world, artificially low interest rates and subsidies to banks and bankrupt countries would be seen as band aid on broken bones. In the world of confidence, stocks and money, however, it was seen as genius.

No holds barred for Super Mario OK, now I’m hating again. (I guess the Greek are too, who have paid a dear price for staying in the Euro, and now look set to finally leave it)

Draghi’s effects on PIGS yields were astounding

The Spanish 10 year bond yield - the gift that keeps on giving It took six months of heavy losses, and our worst year ever (-7.8 per cent return), to force us to buy into the rally. When we finally did, we were hit by a market correction (sic) ,but nevertheless had the mental strength to keep buying; by January 2013 the portfolio was 18% net long. What’s worse is that right before Draghi’s Whatever It Takes-speech in June 2012, we were planning to go long tactically, and perhaps even strategically, exactly on the grounds of potential ECB money printing. So close. Woulda Coulda Shoulda… But no cigar.

Despite worsening fundamentals including Europe officially being in a recession and the US on the brink of following suit, we kept buying and by the end of May 2013 we were 69% net long (half way into June we had kept buying on downticks and reached 90% net long). Quite reminiscent of the dreadful summer of 2011, in June 2013 we were buying heavily while the world was falling apart. “It’s already discounted”, we said. “It’s just like last summer, and ECB and Draghi will come to the rescue; they really are that desperate and stupid”, we hoped. We were right, the central bankers really were that desperate. They did eventually come to the rescue, it’s just that in the really short term... ...the stock markets plunged by 20% in China and 10% in Europe. Talk of a reduction of money printing in the US and its effects on Asia had triggered a currency crisis and a wave of selling. Rising tensions in Syria and renewed debt ceiling issues in the US, contributed to the perfect storm. We were intent on staying long but on midsummer’s day the pressure passed a definitive threshold and we were forced to stop our losses, selling at the worst possible opportunity, right before the bounce, thus de facto locking in our losses and tying our hands behind our backs going forward. After that exposition of perfectly poor timing, we had used up all our confidence and mandate to take risk. Nota bene, we once again were punished hard for being too bullish (just as in 2011, not to mention August 2007 and the first half of 2006). Lesson: The market doesn’t punish you Only losers think that way. The Universe (or the stock market) doesn’t care about you the least bit. It was our timing and sizing that was off, not the universe or the market. Lesson repeated: Stop hating. Learn! We had wanted to be long, albeit perhaps somewhat against our true long term beliefs, and it had been right (since stocks soon roared back to life and new highs), but we were forced out on timing and having a weak hand from previous losses, as well as being dependent on one very large client. We lost some 10 percentage points of performance due to the stop loss and its immediate ramifications, thus delivering zero return for 2013, instead of a quite good +10%.

Striking out after rightfully (stocks roaring back, remember?) betting on the “other” side (somewhat contrarian to our true beliefs) was particularly painful. If it hadn’t been for (the most dangerous words in investing) the ill-timed stop loss (due to fear of losing concerned clients) we would have ridden the ensuing rally being 100% long instead of 6% short. Apart from much better performance, we also would have had more confidence, not to mention mandate, to maneuver in the markets. If it weren’t for that stop loss in summer 2013 Futuris would probably still be around, and prosperous at that. Woulda Coulda Shoulda. Maybe I would still be working there too - not being retarded. We spent the following 9 months slowly rebuilding our long positions, gradually buying on almost every dip (not least in January and March 2014), as well as our mental health and confidence. At the turn of the year the fund was 59% net long. By May 2014 we reached 117% net long and 175% gross exposure, actually rivalling the highs of 2007 and 2010. During this build-up, the US government shut down due to debt ceiling negotiations and Russia had invaded Crimea. In addition the US Fed seemed set on slowly exiting its quantitative easing program, despite temporarily negative macroeconomic data due to poor weather. Futuris PMs, however, much like in the aftermath of the Fukushima crisis, discounted a gradual dissipation of these worries and stayed fully long. Our major investment themes were focused on a (south) European recovery, shipping and clean energy (mostly solar energy related stocks). Just as in 2011 and 2013 we were buying right into the face of danger. Quite correctly so, albeit with a little too much bravado. Any little correction could do us in, no matter how right we eventually turned out to be. We were playing with fire. Well, to be perfectly clear, I wasn’t playing with anything at all but myself; I resigned as portfolio manager in February 2014 and only stayed on as Managing Director to make the transition smooth for our clients.

Our most important client, “Smaug”

The extreme net exposure was automatically reduced to “only” 90% long in June 2014, when the call options expired. Not long after, a correction in August, that troughed on August 8, took a heavy toll on performance, as well as on our nerves. However, “we” held steady and participated fully in the recovery that soon followed. -Right again. And avoided being stopped out..., but perhaps we had awaken Smaug… testing his patience. Nevertheless, or possibly triggered by our being back above flat for the year, three weeks later on August 27, our largest client (“Smaug”) announced it was withdrawing its entire investment. Without Smaug’s treasures (and likely other coming outflows, triggered by Smaug’s withdrawal) Futuris would become subscale. Hence, Arne and Mattias decided to close down the fund. We waited until the end of the month (end of August 2014), in order to be able to sell in secret, and then started to divest the portfolio. Over 5-6 trading days we sold all our holdings

and then on September 9 announced we would be shutting down by the end of September 2014. Soon after a serious market correction commenced:

S&P 500 Index

Chart from MarketWatch Over September and October 2014, market corrections of 10-15% in the US and Europe, respectively, were followed by a rapid V-shaped bounce to new all time highs. We will never know how Futuris would have reacted during those intense months - with perfect timing or the opposite (forced stop loss again?), since by September 9th we had closed up shop after 180 months in operation.

RIP Futuris October 1999 - September 2014

Lesson: Dare to be wrong. Dare to think differently, be contrarian. (just remember it inevitably means you will be wrong every now and then), so choose the size and timing of your biggest bets very carefully. Don’t expect trying to be contrarian will create positive returns, but if you actually think differently, dare to act on your inherent contrarianism.

Lesson: Mind your surroundings. Other factors than your core value drivers are sometimes more important than your actual business. Our risk level wasn’t crazy, and as it turned out we were right in our market call. However, we were in a weakened state, due to having been underwater for a long time, a recent and very costly stop loss, and most importantly we were dependent on one large client. Lesson: There is never a need to rush to be rich Be persistent and patient. There really is no need to rush to be rich or to take extreme risks once you are up and going. Pace yourself. Futuris’ demise was due to taking too much risk at the wrong time, rather than waiting for the right opportunity. On the other hand, Futuris’ fantastic history only ever happened, thanks to the outsize risks its founders took on the outset - both in changing careers and the actual investment decisions during the first few months in 1999. Lesson: Question yourself Challenge your beliefs, look for evidence to the contrary of your current convictions. You inevitably will be wrong often, internalize that fact and actively look for weak points in your research and arguments

The Greek disconnect - The Alpha and Omega of managing money 95% of the work I performed at Futuris was focused on researching individual companies, a.k.a. creating alpha (return independent of the market; beta), i.e., reading company earnings reports, visiting management and conferences, talking to analysts, modelling cash flow in Excel etc. The objective was to acquire a deep understanding of business models, underlying value drivers, risks and opportunities and based on that calculate a warranted long term value as well as a mid-term likely value. The latter was based on the general market sentiment, current valuation environment as well as price trends. Every day was jam packed with meetings, reading and modelling in Excel, as well as constant discussions on tactics and single stock investments, around the table where the entire staff was seated. In addition every morning before European stock markets opened, an hour or two into the day, we gathered in a separate conference room to take stock of overnight developments and discuss the more long term strategy of the fund. Just 5% was spent on overall market exposure, so called beta considerations, but that measly 1/20th defined Futuris externally - and in retrospect is the only thing visible in the 180-month chart of market exposure. I spent so much time fielding client questions about beta in meetings, explaining in my monthly written comments how market gyrations had affected our performance, and so much mental energy on an average day, fretting about previous and upcoming beta decisions, even though 95% of the work was supposed to be - and actually was - focused on single stock considerations; alpha. That disconnect only grew with time, and toward the end I was deeply conflicted regarding what I was doing - as a portfolio manager, as managing director, as partner/owner and as an analyst. Lesson: Stay true to yourself Take a good hard look at yourself and own what you see, instead of pretending to be something else. Analyze yourself, tweak what you don’t like, then market that which you are and do. Integrity and consistency are important. You will only last so long if constantly dissonant. Lesson: Be aware of different vantage points, different perspectives. There are definitely more than just yours or your current one.

Actively seek different perspectives and sense of time. Perspective of details and big picture, top down and bottom up is important but difficult, when caught up in the torrent of events in real time. Group think and myopia - partly forced from the outside led to loss of way, loss of perspective, loss of confidence, loss of mandate in a self reinforcing feedback loop. Lessons for the current market environment: check the big picture and the underlying drivers. What is your perspective vs. others’ (scope in time, geography and asset classes e.g.) and what are you willing to risk? A good rule of thumb for any investment is “if you can gain 25% you can lose 25%”. Below, I’ll summarize and conclude this book by reminiscing some of our high and low points during 180 intense months in arguably the worst stock market in a century:

Summary: Futuris’ best and worst moments

Single best trades ever During 2004-2006 our handful of holdings in Korean and Chinese shipyards increased 5-fold in value, during the time we held on to them (10-fold in total, i.e. +1000%). At the peak we had 25 per cent of the portfolio in Asia, confusing our clients even more than usual. Through successive buying and profit taking as well as a more than quadrupling of the stock price, our investment in Transocean simultaneously grew to 18 per cent of the portfolio and our non-European part of the portfolio to almost 50% of AUM. Oops! Our statutes said we were a European fund with Scandinavian focus and complementary positions in the rest of the world. The lawyers gave us a green light though. There is no telling what would have happened to Futuris, hadn’t it been for those trades of genius (Arne). We might have been wiped out (client withdrawals due to poor performance) by negative performance, or on the contrary, been quicker to change our negative bias (unlikely, but possible) and been better off for it. On the other hand, if shipyards and rig companies would have suddenly collapsed, when we were at peak exposure, it’s all but certain clients would have lost their confidence in us. Doubling up on the big losers Premiere and Tallink in summer 2006, after their stock prices had halved in value, turned out very well. We earned back all our losses and then some. The Fukushima 3-in-1 shuffle: selling our put options and buying futures at the market bottom after the Fukushima crisis in 2011. Not to mention having the put options in the first place, when a tsunami caused a nuclear meltdown in Japan. Selling the futures after the powerful bounce, then buying again at the second Fukushima bottom.

In 2012 and 2013 we made huge gains on an uncharacteristically large holding in a single OTC listed shipping company, Frontline 2012. That single position mitigated losses stemming from our index and stock shorts. As it were, that single trade saved us from complete failure - and gave us a fighting chance, despite the forced stop-loss in June 2013 that sealed our death sentence. On the other hand, if we had experienced larger losses, we might have proceeded more carefully and thus not been caught almost 100% net long during the 2013 summer correction. Lesson: Be schizophrenic. You have to be both short term and long term. You have to forget the past and only consider the future, at the same time as you draw lessons from a century of market data. You have to focus on both micro and macro - understanding both the particulars of single company data as well as the big picture; how micro and macro interact and when they decouple. Try to understand everything, but never believe you actually do. Investing is an art. Be Van Gogh (brilliant and retarded).

Largest gains on least risk

Our balanced L/S portfolio of 2001-2002, making big gains on repeatedly going short term short IT stocks mainly around their reporting dates or after bounces, while keeping a slightly net long portfolio thanks to long positions on old economy stocks (construction, forestry, real estate).

Best but least appreciated work

Grinding it out 2003-2007, despite a negative view, thus managing to stay in the game for the next round.

The gains from outsized bets on shipbuilding and deep sea oil rigs, as well as our

comeback in the second half of 2006 were astonishing. Or, should have been - but from the outside those accomplishments simply disappeared among our losses on sold futures and on shorts on capital goods companies.

Single worst trades

Increasing the (until then winning) short position on financials after the market trough around mid summer 2013 and keeping it for the entire second half of the year (my bad)

2006: Four worst trades ever within a few months: iSoft, Bull, Tallink, Premiere:

unusually large positions, unusually illiquid, unusually prone to political risk and single large clients

Defining moments

Long technology in fall of 1999, capturing the final euphoric moments of the IT boom, right before the epic crash; Futuris’ biggest gain

Going 150% net long at the peak of the market in August 2007 when the writing was

already on the wall, after the subprime warning shots in February - thus going full retard long, when the housing bubble we had discussed since 2003 finally had matured enough

Revisiting our views in December 2007-January 2008, of an imminent Minsky moment,

after 5 years of being mocked as perma bears. We almost missed the crash we had been waiting for, due to almost 5 years of end-of-year rallies and a constant BRIC pull upward. We almost missed becoming the Hedge Fund Of The Decade.

Worst consequence: Hanging on to over 50% net short in mid 2012 after Draghi’s

Whatever It Takes-speech, which triggered an epic stock rally (ongoing three years later). We averaged -50% net short for 2012 - our worst year ever, the only one with more than 1% negative net return during our 15 years

Single worst decision ever: Going from 90% long to slightly negative on a forced stop

loss procedure at the bottom of a mini-crash June 2013. The stock market soon rebounded, leaving us behind. The risk taken in a weakened state almost paid off but ultimately became our downfall due to the ill-timed stop loss in June

Going 100%+ long in 2014 after 5+ years’ bull market and several years without even

a single proper correction of 10% in the S&P index. It was the right move, but clients finally lost confidence in us.

The giga lesson: the cycle of forgotten lessons:

in 1999 Arne Vaagen and Morten Groven, the founders of what was to become the European Hedge Fund of the Decade (2000-2009), Futuris, masterly demonstrated their insights into how far a stock market mania can progress. Lesson: start shorting much later than what appears sane. The problem is that as soon as you start contemplating shorting, you are not part of the mania and thus probably way ahead of everybody else

1999 also taught us that a crazy risk (large long positions in loss-making innovation

companies with stratospheric valuations) might be necessary (from a business standpoint) from the onset to get going at all

In 2000 we learned that high valuations eventually come down, albeit we learned it a

little too well. First impressions last longer than warranted. Key word is “eventually”, which often means “much later”.

In 2001-2003 we learned the value of being contrarian, of trusting our own valuation

work and the magic of a balanced Long/Short portfolio and bursts of “guerilla” warfare shorting that combined strong returns with very low risk (laying the groundwork for our low long term Sharpe ratio, that probably just about inched us ahead of Nektar in the competition for European Hedge Fund Of The Decade)

However, during the violent downturn of 2001-2002, and our huge returns those years,

we forgot the lesson from 1999, of how far markets go before they peak

In 2004-2006 we did not heed the lessons from 1999; of markets staying irrational and surging far higher and longer than the arms of a strait jacket. We had to pay dearly in stress and money to relearn that lesson.

In the meantime we learned valuable lessons about (not) taking excessively large

positions in single stocks, in particular mid-caps with low liquidity and high risk (one-product companies, one-decision companies, one-client companies, companies with political risk). We felt in a hurry, forced to chase yield - like many do today…

Those lessons were simultaneously neutralized and forgotten, due to excessive gains

on extreme positions in Korean shipyards and US/Norwegian oil rig companies that more than made up for the losses on the illiquid midcaps iSoft, Bull, Tallink and Premiere.

In 2007-2008 our bearish lessons from 2001-2003 were reinforced, but due to our success we forgot about keeping a balanced portfolio at all times, instead creating the illusion of balance through unrealistically well timed hedging, i.e. luck

In 2009-2011 we focused too much on our bear lessons from 2002 and 2008, instead

of seeing the opportunity for a longer term advance like the one 2003-2007. Our arguments for ignoring the BRIC wisdom were sound; the BRICs can’t rise again, interest rates are already at zero and China looks unbalanced (stimulus, investments, real estate bubble, (bad) debts, shadow banking etc). We failed to take into account just how badly the authorities needed markets to rise, rather than the actual economy.

During the Fukushima crisis in 2011 we practiced our insights about buying on dips,

revelling in being contrarian bullish for once (March 2009 and July 2007 being the other notable exceptions). The hubris that instilled in us, made us forget to be wary of the extremely poor macro and sentiment and almost made us perish in the August crisis of 2011 (we were 115% long right before stocks fell through the floor - bet decided to hedge with puts rather than buy opportunistically on dips, thus profitably ignoring the lessons from just a few months back in the Fukushima crisis).

The renewed lesson about sudden corrections, air pockets, from almost going under in

August 2011, resonated with the lessons from 2001, 2008 and August 2007.

However, we also forgot how dangerous hubris is. Timing Fukushima and just barely escaping the August crash of 2011 made us feel invincible as well as deeply convinced bears again.

During the first half of 2012, our bearishness and general confidence were reinforced

and made us completely forget previous important lessons about central banks and politicians willing to do exactly whatever possible, as well as the market’s willingness to play along. We thus failed to see the importance of Mario Draghi’s “Whatever it takes” speech and failed to heed the lessons of March 2009 (when we turned round the portfolio from heavily net short to just as long in a single day, in the midst of crashing stock markets).

Actually, we came very close to time the market equally well in June 2012 as back in March 2009, but Mario Draghi beat us to it by a few days - and we weren’t quite prepared to imagine a third repeat of the rallies of 2003-2007 and Q1 2009 - Q1 2012. We had the templates, we had lived through them, but hubris, the habit of perfect timing and winning, and anger over missing out on a perfect trade made us slow to make amends - albeit faster than at previous occasions

Actually, we did see the potential (“risk”) of a prolonged rally (lessons learned in 1999

and 2004-2006), and we were just about to buy when Draghi interfered. After that, it

simply took some time to get used to the idea of a continuation, not to mention buying this late to the game. In January 2013, we finally demonstrated the ability to act according to lessons learned - perhaps due to the fact that we had had too much risk on and lost more money in a year (2012) than ever before. We all but had to try something new.

However, we had already forgotten lessons about excessive risk (large single stock

positions in 2006, August 2007, August 2011, the whole of 2012), the importance of keeping a balanced portfolio and taking into account our clients’ perception of our operations and risk taking.

By gradually approaching almost 100% long in 2013, while the fund’s performance was still far under the high water mark set in April 2011, any little setback would cause significant losses and rattle important clients. Hence, a few intense weeks, around midsummer’s day of 2013, was all it took to seal our fate. Our fully invested portfolio and large mid month losses attracted attention and forced us to stop our losses just hours before markets commenced a rapid recovery.

Once again our performance, confidence and mandate had all been crushed in one single blow, a blow we had asked for, by going too long in the face of danger (worried clients, our own underperformance and an erratic market that was due a decent correction)

In March 2014 we lived through and withstood a similar correction, thanks to a much

lower market exposure. However, we used that correction to increase our exposure and then increased it further during the market plunge in early August 2014 - flagrantly exposing our disregard for the lessons learned in summer of 2013 (the importance of risk management and appearances). Three weeks later our largest client withdrew its money and that was the end of Futuris.

Lesson: Losses aren’t all bad Losses point out where you are wrong and reinforce that lesson. Losses can make you change bad behaviour earlier, thus saving you from losses of more significant consequences.

On losses “To accept it without arrogance, to let it go with indifference” “It’s not what happens to you, but how you react to it that matters” “It’s not how you fall, it’s how you pick yourself up”

2014, The stock market in which Futuris was felled

picture from ZeroHedge

Final thoughts on research and investing Macro is not a science, that’s why there is no Nobel Prize for economics, just the Swedish central bank’s prize in memory of Alfred Nobel. Macro is art and psychology. Pricing stocks is even less of a science and mostly just guesswork. We were in business for 180 months and made 63 major changes, i.e., on average just one every quarter. Several clients still wondered how we could claim to be fundamentally driven and yet execute so many large and frequent portfolio changes. In real-time, however, to us it felt as if we worked toward and prepared for a major move every day. Lesson: Know your clients - be mindful of different perceptions We should have seen and acknowledged both our de facto modus operandi earlier (quarterly moves rather than daily), and taken into account that our clients, even by that low frequency, were surprised by our (too) frequent trading.

Lesson: trading often is a loser’s game. High Frequency Trading may be a winner’s game, to the very fastest microsecond trading (front running) machines for now, but anything between a millisecond and a month’s turnaround time is for losers. With my own money I would aim for a major repositioning around every three years and minor changes once every three months. Lesson relearned: A is A Ray Dalio talks about facing reality for what it is. I think we repeatedly failed to do so, even if we got it more right than everybody else. Sometimes we took an almost moralistic standpoint regarding, e.g., money printing. At other times we called ourselves long term and fundamental but traded all over the place. To our credit, we openly admitted to these errors, even calling ourselves “chicken little” (an erratic little creature), but still sometimes failed to correct them. Lesson: everything can be wrong ...and everything can be right in the markets, depending on timing, sentiment, environment and other people; extrapolating trends, going with the crowd, contrarian, focus on micro, focus on macro, long term, short term, concentrating your risk/portfolio, diversifying etc. There are no absolutes or hard truths in investing. Lesson: Investing is a holistic art, not a science. It’s at least as much about psychology (herd behaviour, e.g.) and guessing trends, as it is understanding value drivers, businesses, economics and accounting. You can’t know it all, can’t take everything into account, and the market doesn’t either - so don’t even try. But don’t go all Dirk Gently either:

Dirk Gently postulated that everything in the universe was related one way or another. This holistic approach allowed him to do exactly anything in order to solve a case. Lesson: Work smarter not harder (a classic Dilbert management cliché), but there is some truth to it: There is too much information to handle anyway. There is no way to deal with it by applying brute force, doing more. Instead, walk, move, enter investigation and learning mode. Sitting still and “working harder” is counterproductive. Walking frees the mind, whereas sitting inside all but guarantees stolidness, group think and poor creativity.

The Top 10 List Of My Lessons From Futuris 2000-2015 “The best way to become poor quickly is to try to get rich quickly” - Mark Spitznagel

Be patient There is never any rush to invest: Study/Wait/Pounce The best way to become poor quickly is to try to get rich quickly Markets don’t move in straight lines; there are always corrections and cycles

A is A Don’t assume, investigate! Trust no one. Learn from losses, don’t hate. Face the Facts, the universe is not out to get you Walk outside the box - an extra hour by the desk never did anyone any good

Always bet on black The market’s memory is extremely short, and lessons/losses quickly forgotten But hedge or downsize when called for Unless you have extremely good reasons to be short (almost never)

Never go all in, always prepare for being wrong Mind the surroundings, clients, black swans, corrections and keep dry powder There are no absolute truths, so you never know enough for “all-in”

Don’t panic, everything moves in cycles - use that It’s never as bad as you think Never so bad you should throw caution to the wind and go all in Opportunities will cycle back, if you sized your risk correctly

Never be cocky - you’re never as good as you think (don’t confuse luck for genius) Valuation and fundamentals are but a small part of investing, and need a trigger Trade, when you can - not when you have to; manage your risks. Don’t be greedy. Don’t repeat the same mistakes over and over again. See example below of how we

tricked ourselves in going round and round in the described cycle of hard work, performance, hubris, losses, and starting over

a) hard thorough work, and b) grinding in a little well earned performance, c) some luck, d) some wins, e) consequent hubris, f) thus too much risk, g) inevitable losses, h) missed opportunities due to risk management, i) misfortune, j) despondence, k) slow recovery and l) regained confidence, and back again to m) hard work gradually paying off.

Be independent - Dare to be contrarian, but also dare to run with the crowd - just make sure you know which is which

But remember to almost always bet on rising markets, with or against the crowd And don’t fight the Fed; Authorities will do whatever it takes to protect their

jobs, in particular the worse it looks and if there are systemic risks (building even bigger risks is of no concern to them - if the crash can be put off to the next term)

Epilogue Was it difficult? Could anyone have done it, given enough effort? How long is a piece of string? Who is John Galt? Make no mistake, it was difficult, it was hard work, there were no fixed methods or office hours, no guaranteed income (and very high alternative costs, considering other career alternatives). And, no, I definitely don’t think just anyone could have succeeded the way we did. On the other hand, it took a lot of luck as well, but then again, serendipity is there for whoever gives it a chance (through ambitious and intelligent effort and preparations). Futuris’ downfall, 8-9 months after I decided to resign, I personally think was taking too much risk the wrong way at the wrong time, rather than relying on gradual changes and surroundings-aware risk management. Market-wise the decisions were correct, but unfortunately that is not all that matters in the short run. The most important aspect of investing and trading is always keeping dry powder for the next round not to mention minding auxiliary factors; Live to fight another day even if you are wrong (or your partner or important clients abandon you). Nota bene: You can always be wrong, no matter how well-informed you are, so never, ever go all-in. Even if you are right, others’ ignorance can make you temporarily wrong for so long that your “right” doesn’t materialize before you are down and out permanently. /Karl-Mikael Syding, The Retarded Hedge Fund Manager - SpreZZaturian PS: I used to say that staying ahead of the market was too difficult, too much work. I opted for staying one step behind instead. If decisions were just between up or down anyway, I should be correct just as often with that strategy of being retarded.

Are you a subscriber? I’ve poured my heart out here for your benefit. If I can ask you just one thing it’s that you recommend the book and my website to just one other person. I also hope you have subscribed for future off-site material, that I’m sure will be more refined and valuable (after I’ve had the chance to hone my writing skills during a year or two :)

If you happened upon this book by other means than me e-mailing it to you, please visit my website:

mikaelsyding.com

and subscribe to future off-site material, by supplying your email address there.

Karl-Mikael Syding Former Partner, Portfolio Manager and Managing Director of Futuris Asset Management AB, in the Brummer & Partners Group of hedge funds (2000-2015) Futuris was awarded European Hedge Fund Of The Decade (2000-2009) by Hedge Funds Review

Awards and Nominations for Futuris

Nominering = Nomination/Short Listed Vinnare = Winner Brons = Bronze/Third place Guld = Gold/Winner

Obviously no consequences ahead

A final word: I would have loved trying to time the coming crash at Futuris (see chart above, and draw your own conclusions), but I’m still glad I decided to leave the industry. Here’s why: Every year of my 43 years (in January 2015) has been better than the last. Every new year has turned out to be my best so far. However, I think I had to leave finance, in order to guarantee that 2015 has a fighting chance to surpass 2014 - the year I started blogging, got a dog, quit finance, snowboarded naked and sold my last sports car (Lamborghini) among other things. Thank you for reading. Now forward this e-book to your brother, father, sister, mother, friend or enemy

/Karl-Mikael Syding, a.k.a. Sprezzaturian

Reading tips: The best book ever written about the economy: “How An Economy Grows And Why It Crashes” by Peter Schiff The best sci-fi book series ever: “Post-Human” by David Simpson My Newsletter ; )

Contact Information Facebook: Karl-Mikael Syding Instagram: Sprezzaturian Twitter: @TureMasing (Sprezzaturian) Pinterest: Sprezzaturian (Karl-Mikael Syding) Google+: Karl-Mikael Syding Spotify: Karl-Mikael Syding Linked In: Karl-Mikael Syding/Sprezzaturian e-mail address: mikael.syding@gmail.com

The Last Party as a hedge fund manager

Brummer & Partner’s Christmas Party at Grand Hotel, Stockholm, December 2014

THE END