MARKETS: Riding the emotional waves

Hedge fund manager David Hobart says the key to investing is being aware of the emotions that drive markets – and how you manage your own.

When he was 14 years of age and just becoming aware of the money to be earned in finance, David Hobart dreamt of fat bonuses and fast cars. Twenty-seven years later Hobart drives a Suzuki 'Swift', cooks breakfast for his two boys and tries to be home by 5pm to be around them.

Hobart is an executive in the publicly-traded alternative investment group Blue Sky. He runs the company’s hedge fund business that has produced an annual return of 9.4 per cent since 2006, by identifying where and when a herd mentality is reigning among investors. Hobart will wait until an inflection point is reached in a market and then bet against the herd. His worst year was 2009 when the fund lost 1.4 per cent. Its best year was 2008 when it made 20 per cent.

The Brisbane-based fund charges a 1.5 per cent annual fee. Hobart is paid a 20 per cent performance fee only when the fund generates returns above the Reserve Bank cash rate.

The former Bankers Trust and Macquarie Group proprietary trader is an admirer of George Soros. But unlike Soros his ambition is not to break the Bank of England, or at least not be identified as the man who did it. “Soros’ ego seems sufficiently in check to allow him to be flexible to change his view in the face of shifting evidence,” says Hobart. “It’s something that I’m still working on.”

The Gold Coast native looks for asymmetric risk-reward for his own fund. “When our ideas play we generate good returns. When they don’t our downside is limited. We are all about managing our downside risk whilst letting our profits run,” says Hobart. For example, he says, the fund doesn’t sell options but will only buy them.  

Hobart is shorting the Japanese yen and Japanese government bonds. “The market is demanding a higher risk premium for JGBs because Japan’s fiscal situation is deteriorating amid prospects of higher inflation,” he says.

Brisbane is not a finance town but Hobart does not miss being around a community of traders, analysts and fund managers. “It’s good to be reasonably removed from the noise,” he says.

The University of Queensland graduate is up most mornings between 4am and 5am checking to see what markets have been doing while he's been asleep. He will often row for 90 minutes on the Brisbane River before coming home at 7am to cook breakfast for his children. He’ll then read about markets for a couple of hours and get into the office between 9.30-10am.

Since 1994 Hobart has drawn charts that focus on shifting correlations between markets. Such hand drawn charts help him focus, he says, on finding what markets are “out of whack” from their economic fundamentals.

“I manage risk around an idea,” says Hobart. “Markets are driven by crowd psychology, whether overly exuberant or pessimistic or something in between. As part of the market I experience a range of emotions. What I try to do is to manage my emotional capital as well as risk capital.”


Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles