“To be truly challenging, a voyage, like a life, must rest on a firm foundation of financial unrest. Otherwise, you are doomed to a routine traverse, the kind known to yachtsmen who play with their boats at sea… cruising, it is called. Voyaging belongs to seamen, and to the wanderers of the world who cannot, or will not, fit in. If you are contemplating a voyage and you have the means, abandon the venture until your fortunes change. Only then will you know what the sea is all about. “I’ve always wanted to sail to the south seas, but I can’t afford it.” What these men can’t afford is not to go. They are enmeshed in the cancerous discipline of security. And in the worship of security we fling our lives beneath the wheels of routine - and before we know it our lives are gone. What does a man need - really need? A few pounds of food each day, heat and shelter, six feet to lie down in - and some form of working activity that will yield a sense of accomplishment. That’s all - in the material sense, and we know it. But we are brainwashed by our economic system until we end up in a tomb beneath a pyramid of time payments, mortgages, preposterous gadgetry, playthings that divert our attention for the sheer idiocy of the charade. The years thunder by, The dreams of youth grow dim where they lie caked in dust on the shelves of patience. Before we know it, the tomb is sealed. Where, then, lies the answer? In choice. Which shall it be: bankruptcy of purse or bankruptcy of life?”

Where has the esteemed Captain gone over the past several weeks? Without getting into the daunting specifics of the matter, I will only say that an epiphany fell onto my lap, as I was struggling to keep our ship sailing in the correct path amidst storms and squalls. In my experience with epiphanatic moments, I have noticed that they mostly come in times of struggle, as these are the times when your senses are the most aroused.

The epiphany I had caused me to stop trading for a period of time until I could correctly wrap my mind around the matter. As I have now come to grasp the various emotions associated with this epiphany, I am again set to resume my real time experiment.

In the days, weeks and months to come, I will be more apt to share the specifics of my stock picks with anyone who cares to listen. If you choose to trade off of my speculative plays, do so knowing that I quickly cut these positions if they do not go my way. Also realize that I take on rather large, concentrated positions to get more bang for the buck. I don’t really like having any more than 5 or 6 positions at a time and that is utilizing 150% + leverage.

It should also be noted that since my letter to the editor was published in “Active Trader” magazine in a recent issue, I have gotten many emails, mostly containing questions about the following topics:

1. Are you managing money now? Yes, some small accounts.

2. Are you planning on starting another hedge fund? No, probably not. I will be happy having a substandard living, flying coach, driving a Hyundai and eating at Chili’s, as opposed to dealing with the various regulatory agencies; whiny clients; accountants; lawyers. Not to mention the fact that if I was to face a double digit drawdown while running another fund, I would probably break into hives and require diapers until the drawdown subsided. And perhaps most importantly, I don’t want to look like this when I get older (continued below)

This is the face of a speculator…a man who has faced one too many drawdowns in his lifetime and you can see it in every wrinkle, line and especially in the eyes. This is Victor Niederhoffer. No offense to Victor, I admire him greatly. In fact, if I was to put together a list of the most brilliant minds in the market today, he would be near the top. The man is a genius, no doubt. He has taught some of the best fund managers today. His articles on his website are fantastic. He is a tried and true speculator in every sense of the word. But you can see every bad trade he has made in his eyes. The pursuit of money on such a hardcore basis does not lend towards a peaceful existence through life. There are some who are fine with turbulence, others who are not. I am beginning to think, I fall into the latter category.

Another question I have received numerous times is from aspiring fund managers. How do I break into the industry? How can I start a fund of my own? How do I build a track record?

If you want to take on the challenge, you do, of course, need an outstanding track record. At a minimum three years, preferably five years. During that time you want to keep volatility to an absolute minimum. If you can keep your drawdowns in the single digits in a five year period, while bringing in 25% + per year, with no down years…you may cause a rise in an investor, fund of funds, fund incubator etc.

At the end of whatever period you choose for your track record, you should have it audited by a reputable hedge fund accounting firm. This will cost you an arm and a leg most likely, but it is well worth it if you are serious about raising funds.

Then you start selling yourself…selling your fund…selling your story…to whomever will listen. If you have a network of wealthy friends…start with them. If you don’t, start knocking on the door of fund of funds. Find out who is incubating hedge funds. Go to industry meetings…network. The better your track record, the easier time you will have getting noticed and raising funds. And if you can’t stick to some outstanding volatility standards, you had better make sure you are bringing in some huge returns. Most of the guys you will be courting hate risk…they want the glory and none of the pain…and expect you to facilitate this for them.

And bear in mind, as the years pass it is becoming harder and harder to break into this industry. When I started my fund in 2002, it was a lot easier than it is today to raise funds….for two reasons primarily:

1. Less competition

2. Less bad press

Now you have thousands of more funds and thousands of negative articles. Not to mention the general sense of the market towards aggressive investments, at present. And it doesn’t matter if you are running a market neutral fund that does pair trades in cereal makers and tire manufacturers…you will be called a hedge fund and will be associated with risk.

Then the question moves to, well, how about working for a hedge fund? In the 80’s, MBA’s were loving the LBO and junk bond trading firms. That Harvard MBA that got a job as a junk bond trader in 1986 was unemployed by 1990. Then in the 90’s MBA’s were loving venture capital firms and internet startups…that Harvard MBA that got a job at a venture capital firm in 1998 was unemployed by 2002. And in the 2000’s, it’s hedge funds and private equity firms. Guess where that Harvard MBA that got a job with a hedge fund in 2007 will be in 2012? There are some that will thrive, but most will die off…consolidation will occur. The giants will swallow the fish. There will be niche’s for the smaller players, but there are still far too many sharks swimming in a sea that doesn’t have very many fish left…and we are well past the point where the sharks have turned on one another…how it will all end and when it will all end nobody knows.

If you still want to pursue a job at a hedge fund, first make sure you have the pedigree. If you are not an Ivy Leaguer, don’t even bother looking to work at the bigger firms (SAC, Tudor, Caxton etc.) since they are able to hand pick from the “brightest” in the country and mold them into trading mutants.

If you don’t have the pedigree, you had better have an “in” at the firm you are looking to be hired at. That is your second best chance of, at least, getting your foot in the door for an interview. Maybe you will blow their socks off with your ideas about how the price of oil and gas is correlated to the wind patterns created by bike riders in the Nigerian capital of Abuja during lunar eclipses and new moons.

If you have none of these, what you can do is write a letter (you had better know how to write well) directly to a managing partner or better yet, the CEO of the firm you want to work at. Deliver the letter via Fed-Ex…include your resume and like I said, the best letter you have ever written and tell them you want to work for their firm, as well as what you bring to the table. And don’t use these crap, corporate catch phrases like, “I bring 10 years of business experience to the table”…”I work well in stressful environments, but also have a softer side and love cats” Have something substantive and material to say or don’t send it. And if you have nothing substantive and material to say, you probably won’t get hired under any circumstances anyways.

I would be happy to answer any other questions you may have, just don’t expect me to be prompt in replying to you. But know that if you ask a question, I will be reply and do my best to be of help.

The venerable Captain has returned and his crew of drunkards and philanderers cannot be more joyful than they are on this day.

- Captain Ahab

Portfolio Position: 15% Long (Industrial Metals/Minerals) 30% Short (Education, Electronics)

Added a small amount of long exposure to the portfolio today to balance things out a bit. I don’t think anyone has a reason to get aggressive in these markets, given the current conditions. It is far too muddled and unpredictable to take on anything other than reasonably sized positions utilizing no leverage.

Playing small ball for now. I can’t see myself getting aggressive with US equities on either side for sometime to come. However, I can see multiple reasons for taking on some good sized positions in currencies (short dollar and especially short british pound) and certain commodities. I am eagerly awaiting a good risk/reward setup to take on some exposure in these sectors.

- Captain Ahab

Listening to CNBC today, I saw they did a piece on hedge funds having their worst quarter ever. This didn’t make me feel any better for my performance, as a good trader should outperform irrespective of market conditions. It did make me think, however.

My thoughts were centered around the fact that my performance was very closely tied to the average loss, as reported by Absolute Return (if my memory serves correct). I believe the number was something around the -4.5% mark for the quarter, with my performance being a couple hundred basis points worse.

The primary question in my mind was am I repeating the same mistakes of the past?  Those mistakes center around one primary flaw in my trading - that being the inability to adapt. If you, as a trader, are using the same strategies as everyone else, those strategies will be a lot less effective. In strong markets where there is an abundance of retail participation, the setups that are not working today tend to do very well, as your opponent is far less sophisticated. However, in a market such as the one we are experiencing today, where retail participation is minimal…those very same setups have a much lower success rate.

This forces one to look at less “observed” setups that, while being profitable, will be missed by the professionals you are competing against. This is a very important point that a majority of individual traders and seasoned veterans seem to miss. They stick to their tried and true methods regardless of consideration for who their current opponent is. To use a sports analogy, if you are on a tennis court and your opponent is your next door neighbor, you will approach the game a lot differently than you would if your opponent is a tour player. Your game has to adjust or you will get run off the court.

The markets are no different…at different times, your competition will change. This change in competition needs to be closely observed and your strategies need to adjust accordingly.

With this being said, I have made several adjustments, which, if successful, should reflect in my performance results in the coming months. The market will hold nothing back in giving me a grade on my observation in rather short order…this I am sure of.

- Captain Ahab

Portfolio Position: 30% Short (Electronics, Education)

The venerable, old captain has launched his frigate on the old path that has provided much of our loot since beginning this journey in July of last year.

I have taken on a small amount of short exposure. I was out of the office on Friday, which denied me the opportunity to profit from what looks like the beginnings of move back to the bottom of the trading range. The possibility also exists that the range we have been in for the past couple of months begins to tighten…a range within a range, so to speak. This would further drive anybody with a time horizon greater than two days into a state of madness, as rhyme and rhythm disappear into the fog.

I am also looking to get short the US Dollar (EUR/USD) at the first opportunity. However, my favorite cross at this juncture is EUR/GBP or GBP/CHF, as I believe Great Britain is the mini-me to the United States current economic woes, and the Pound has not experienced nearly the devaluation that accounts for this.

I will search for a good risk/reward entry point for these trades…so for now, I wait.

That is all for the time being.

- Captain Ahab

The market has had a very nasty habit of taking whatever profits one has and quickly dissolving them…so I took the path of prudence and grabbed my profit on MTL at the close. It was a nice profit from the morning, and these waters are just too choppy not to take off a stock that is up 10% on the day, irrespective of the strength of that particular sector.

Holding onto my position in the financials for the time being.

- Captain Ahab

Portfolio Position: 50% Long (Steel, Financials)

It has been a busy week trading thus far this week, as the choppiness in the markets continues to persist, making life difficult for those who are accustomed to calmer seas.

Yesterday’s action consisted of the portfolio getting churned and while it was looking like today was much the same, I managed to catch the short side of the Nasdaq Futures for a nice trade and also went long MTL early in the morning, which I am holding, for the time being.

Although I am long currently, I am having difficulty seeing how the market indices will break out of their respective ranges with companies reporting weak earnings in the coming weeks. If anything, I would expect to see things deteroriate for the remainder of the month.

I will, of course, follow the currents whichever way offers me the least resistance. No need to complicate an already complicated picture.

- Captain Ahab

Real money portfolio performance data:

Portfolio Inception Date: July 20, 2007
Inception to Date Performance (as of 4/4/08): +22.32% (vs. -10.67% for S&P 500)

2007 Performance: +28.50% (vs. -4.29% for S&P 500)

2008 Performance: -4.81% (vs. -6.67% for S&P 500)

Daily Performance as of 4/4/08: +0.14%

Monthly Performance as of 4/4/08: +3.49%

The old, revered Captain has been spending time as a landlubber as of late…dawning his safety goggles and breaking out the old bunsen burner in search of new discoveries.

In spending my entire adult life trading the markets, I have come to know my strengths and weaknesses. One area where I have been weak in the past is my ability to adapt to changing market conditions. There are times where profitability will be severely hindered as a result of market conditions. This is true for any system of trading.

I have, over the years, studied numerous systems for trading the markets…from longer-term trend following systems to shorter term, intra-day systems. When developing a system of your own to trade, the most important factor is compatability with your own personality and tolerance for risk. If you take a system that Paul Tudor Jones was using in the 80’s that led him to multiple one hundred percent up years and attempt to trade it yourself…it may not work out, due to the fact that you are not wired like Paul Tudor Jones. The system one chooses to invest in the markets is as much a journey in self-discovery, as it is a journey in market-discovery.

Knowing this and knowing my desire to prevent disasters such as what I experienced last month from occurring, I have been developing a system to trade the market indices intra-day. This fulfills my desire to reduce overnight risk, while creating the type of risk profile I desire…not to mention the abundance of liquidity and choices that exist for implementing such a system.

I originally developed the system for trading currencies intra-day, but it seems better adapted to the indices. I implemented the system today in real time for the first time. I plan on trading this system exclusively during the month of April…meaning I will be staying away from individual equities, futures and currencies, as I have high expectations for this system and want to focus on it exclusively.

It backtested extremely well…and thus far in the day, during my first day using it the portfolio is up more than 3%.  I am hoping these results will continue throughout the month.

So you see there greenhorns…the old Captain is on the seas again. Only this time, sailing a new frigate, as these seas demand constant attention and ability to adapt to prevailing conditions.

- Captain Ahab

For the month.

The month of March has taken all the objectives I had for risk control and turned them into chum. In the back of my mind I knew that the possibility of a double digit down month existed - only under one condition -  that condition was met this month……..twice. Two times this month, I was on the opposite end of an opening gap that blew right through any risk parameters I had. One time with a buyout at a 50% premium of a company I was short and the second time a surprise Fed intervention before the markets opened, while being 100% short. Both of these surprise moves combined cost me a total of 900 basis points in the month of March. The remainder of the month was spent attempting to navigate the fog that is a sideways market.

So as of today, I am down a tad bit more than 10% for the month, which is a disgusting number. I don’t see myself having a month like this again for the remainder of 2008, as I feel this month was an anomaly for many different reasons. The foremost of which was the lack of fundamental balance that reverberated throughout the economy and Wall Street for much of the month. I have never seen volatility such as what we experienced during this month…and needless to say, I have never seen the Fed in the markets as much as they were during the month.

Will I have a month where a stock I am short or long gaps up or down 50% again due to some surprise fundamental news? Odds are yes, but I would be very surprised if it happened again this year. Unfortunately, these types of events are unavoidable. I figured given my high turnover rate in the portfolio that I would be nimble enough to avoid such bad luck and that this type of event would hit once every three years roughly…so hopefully, this was my one time.

Will I be on the wrong side of a Fed intervention or some other fundamentally significant economic move before the market open? Absolutely yes. While not being as devastating as having an individual stock gap heavily, such moves still are painful.  The only move to make is to control losses immediately following such an event, which is what I did.

I am disappointed in one facet of my trading recently, that being my discipline. When you are facing a drawdown one of the first casualties is your system of trading…at least for me, that is the way it usually is. I try to get “smart”, which is actually very dumb. I try to come up with new and ingenious ways of making money in the markets, which never work. What I should be doing is nothing. When you make your living trading that is extremely difficult to do, but often times it is the only move to make.

I can, however, tell that I have come a very long ways, as these types of “smart” moves used to cost me a lot more than they do now. This month they cost me a little over 100 basis points of performance, which while being disappointing is a small price to pay.

So this is how it ends…the pain in the arse month that was March. I look forward to sunshine, calm winds, and a steady flow in April.

- Captain Ahab