Hedge fund shrink says success is all in your head

NEW YORK (Reuters) - Hedge fund managers may want to get their heads examined.

We’re not talking Rorschach tests and distant memories of parents. Rather, psychiatrist Ari Kiev has helped hundreds of star traders improve their market performance by increasing concentration, managing stress and being well prepared for bad situations.

Needless to say, Kiev’s phone has been ringing off the hook following months of plunging markets, mounting losses and a record wave of hedge fund investors withdrawing their money.

Kiev tells clients they need to get in a positive mental state, work hard to get prepared, find ways to get relaxed, and take calculated risks. Most of all, they need to focus on winning rather than avoiding losses, he said.

“More often than not, people are reluctant to take risk. They hold on to losing positions when they should be getting out,” Kiev said in an interview. “The best guys cut their losses, even if they believe in the stock. And they’re really swinging for the fences when they think they have an edge.”

Kiev is the author of more than 20 books, including “Mastering Trading Stress” and “Hedge Fund Leadership.” Initially he taught his performance-enhancing techniques to Olympic athletes in the 1970s and ‘80s, but took his practice in a new direction when superstar hedge fund manager Steve Cohen became a client.

For more than 16 years, Kiev has coached and counseled traders at Cohen’s SAC Capital and other firms on ways to manage stress and develop winning strategies.

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Not counting all the “black box” computers doing buying and selling, securities trading is a human and highly emotional business. Day in and day out, people have to overcome fear, channel their greed, and try not to be overwhelmed, Kiev said.

Too often, fear of losses prompts bad decisions.

“It sounds simplistic and easy, but human beings are not easy,” he said. “They tend get in their own way.”

Many thousands of people have become traders over the years, but few really know what they are doing, he said. Lack of knowledge and preparation becomes more evident when markets boil over, as they did in the past year.

Like Chesley “Sully” Sullenberger, the pilot who landed an Airbus A320 in the Hudson River two months ago, traders need to train for times when markets do not go their way, overcome emotion and avoid panic, Kiev said.

“That pilot who landed in the Hudson River: that was 30 years of training, preparing for that one moment. When it came, he had three seconds to make a decision that saved everybody on board.”

By trusting their abilities and their research, traders can beat peers who hedge their bets. Likewise, traders should not get emotionally attached to losing positions. Kiev counsels his clients to plan ahead and know their strengths.

“You need a goal, to set the framework for what you’re going to do,” he said. “You can’t focus on the target; you have to focus on the process.”

Kiev also recommends finding ways to manage stress, such as practicing yoga or meditating before the trading day. Besides sometimes being a little abrasive and irritable, good traders tend to be resilient, highly self-aware individuals, he said.

Among the biggest mistakes in the current down-cycle, he said, are hanging on to bad bets, blindly hoping things will get better, and trying to pick a bottom. Traders need to do their homework and then trust their efforts, he said.

“The best traders have the ability to trust their own emotions and their own responses,” he said. “Then they can use that to interpret what other people are going through.”

Editing by John Wallace