Generating Productive Returns
''The most productive thing a manager can do is read a lot, think for himself and ignore the financial media and consensus thinkingof success for them.''
An Interview with Michael Lewitt
CEO - Third Friday Management
Our special interview on Productivity with Michael Lewitt, CEO of Third Friday Management, LLC, returns to the exciting world of fund and investment management, as Executive Global ask our expert on what it takes to successfully provide strong, market neutral, risk-adjusted returns to high net worth institutional and private investors worldwide.
The Credit Strategist
EG: What would you say are some of the archetypal characteristics of the most productive and successful fund managers?
Michael Lewitt: The most successful managers are avid readers of all types of materials related and unrelated to markets; are obsessive workers; are highly disciplined; are fascinated by markets; are highly competitive; are less interested in money than in competition and being correct intellectually; are unaffected by crowd thinking; and are generally difficult personalities because they are under high stress and have little patience for nonsense.
EG: You have successfully invested on both long and short sides of debt markets, managing hedge funds, collateralised debt obligations, (CDOs) and mutual funds. How can high net worth individuals and institutional clients benefit from your expertise in this area?
ML: Right now I am managing the Third Friday Total Return Fund, L.P. which just celebrated its 10th anniversary without experiencing a losing year, including 2008 when it managing a very small profit while most funds (other than short sellers) suffered huge losses. Third Friday is a true market neutral fund that sells at-the-money options straddles on the S&P 500 index and hedges them by purchasing out-of-the-money puts and calls. We use no leverage and invest our collateral in income generating securities. The strategy is time-tested and market-tested and does not rely on market direction – we are extracting the time value embedded in options premiums from the market. This is an excellent strategy for investors looking for high single digit returns over long periods of time with minimal risk of loss. On a risk-adjusted basis these returns are extremely attractive and compare favourably with other strategies and funds.
EG: You successfully forecasted the crisis of 2008 and the credit crises of 2001-2002. In your opinion, what single most productive measure do you think executives should really take to actively prepare for the next global financial crisis that looms on the horizon?
ML: They should avoid spending too much time with people of the same social status and political thinking as themselves. They should spend time in parts of the world where people are completely different from them where they can gain insight into how economies work and try to avoid the cocoon that affluence and elitist media builds around successful people. They are not going to learn anything spending time in New York or London but they will learn a great deal in small towns where people are suffering from opioid addiction and unemployment and runaway healthcare costs.
EG: As a 25 year veteran working within the securities industry, what would you say are generally the most productive activities that may increase returns?
ML: The most productive thing a manager can do is read a lot, think for himself and ignore the financial media and consensus thinking. There is no bigger waste of time than listening to the pundits on television talk about the market. You need to seek out independent and original thinkers who are also managing money successfully who are beholden only to themselves and their clients who are willing to speak truth to power. Returns come from being willing to see the truth about the markets and the economy and by avoiding the traps that markets set for those who think that investing is about feeling good when it is really about feeling uncomfortable 100% of the time.
Michael has spent the last 25 years in the securities industry and the last 20 years in the investment business. In October 2012, Mr. Lewitt formed The Credit Strategy Group, a registered investment advisory firm, where he manages several credit-oriented hedge funds and separate managed accounts for individual and institutions. He continues to write and publish The Credit Strategist, which he views as an essential tool in formulating his investment ideas and strategies.
Michael co-founded Harch Capital Management, LLC (HCM) in 1991, where he managed separate accounts, hedge funds, collateralized debt obligations and mutual funds focused on below investment grade debt for institutional clients and high net worth individuals. Michael successfully invested on both the long and short sides of the debt markets during this period. Over his 20 years at HCM, Mr. Lewitt led an investment team that generated consistent market-beating returns.
Since 2001, Michael has also written and published The Credit Strategist, a newsletter that covers economics, politics and the financial markets and that is widely read around the world.
Mr. Lewitt was recognized in the Financial Times as having been one of the few investors and strategists to forecast the financial crisis of 2008, and also predicted the credit crisis of 2001-2002. This allowed him to protect his clients from the large losses that hit many credit funds during those periods. Michael also serves as a regular financial columnist for the Spanish newspaper El Mundo and has written for The New York Times, The New Republic, Trusts & Estates and other publications.
In May 2010, Michael published The Death of Capital: How Creative Policy Can Restore Stability (John Wiley & Sons), which was received favorable reviews and was included as part of the curriculum in economics and history courses at the University of Michigan and Brandeis University during the 2010-11 academic year. The Spanish edition of the book, La muerta del capital, was published in June 2011 by the Spanish publishing house La esfera de los libros. Mr. Lewitt is a frequent media commentator on the financial markets. Mr. Lewitt graduated from Brown University (Magna Cum Laude; Honors in Comparative Literature and History); was a PhD Candidate in Comparative Literature at Yale University; and also graduated from New York University Law School (J.D.; LLM in Taxation).
EG: Do you think there are opportunities for investors to capitalise on potential market volatility that may come from the Federal Reserve raising interest rates?
ML: It would be a rare event were the Federal Reserve to raise rates without causing a rise in volatility and some kind of market disruption. Volatility has been unusually low for an extended period of time – on July 14 the CBOE Volatility Index hit its third lowest level ever at 9.51 while political, geopolitical and economic risk in the US continued to rise. This disconnect is likely to lead to opportunities on the short side of the market as well as for nimble volatility traders. But right now there are a lot of new-born volatility traders who are going to get burned because they are massively short volatility at precisely the wrong time. The other side of that trade is going to profit enormously when volatility breaks out and wipe out whatever paltry gains have been earned by those who have been selling volatility as a substitution for other yield investments.
EG: Third Friday has never experienced a negative year, offering 90 day liquidity to investors. Why do you think you have been so successful in these markets?
ML: Humility. We know that nobody knows whether the markets are going to rise or fall. We follow our disciplined strategy month-after-month regardless of what the markets are doing. Our unique way of earning returns is always available in the markets as long as we stick to our strategy and remind ourselves that the markets are always ready to teach you a lesson. EG
For further information, please visit:
About Third Friday Management
Third Friday Management, LLC is an investment
management firm that was named "Hedge Fund Manager of the Year" in 2016 by Wealth & Finance magazine in the UK. It manages The Third Friday Total Return Fund, L.P., which was named "Best US Options Hedge Fund Strategy (Since Inception)" by BarclayHedge in November 2016.
About Michael Lewitt
Michael E. Lewitt is widely recognized as one of the top credit strategists in the world. He's been a major player in the money management business for more than 25 years, and his Third Friday Total Return Fund ranks among the best in the hedge fund industry. The Financial Times recognized him as one of the few analysts to correctly predict both the credit crisis of 2001-02 and the financial crisis of 2007-08. Since 2001, Michael's The Credit Strategist newsletter has influenced many of the world's leading investors. He also writes Sure Money and contributes to Money Morning.