Why Do Hedge Funds Have Research Staff?

Why do hedge funds have research staff? Why do they hire all these analysts and traders? Why hire all these people?

After all, if you are a trading using some technical analysis methods, or chart and price pattern methods, then you just look at those patterns.

But why should hedge funds hire all that research staff when they can just look at the chart patterns, price patterns, moving averages, forex robots and just trade off that? A skilled technician, or price action trader can determine by looking at a few charts whether their is an opportunity or not. If you trade daily charts, then it shouldn’t take you longer than a few minutes of analysis per day. The hedge fund manager himself can do the analysis if he wants do. He or she doesn’t need to hire someone else.

What exactly do they have them researching?

The conventional thinking is that all the market information is reflected in the technical indicators ( for technical traders) and charts and price action for the (price action traders).

But if this is so, then why hire all this staff and pay them all these salaries. Why not just not hire them in the first place, and pocket the money? They must be researching something useful, otherwise they wouldn’t be hired in the first place. Everyone is looking for an edge.

The technical indicator and chart/price pattern edge can only take you so far. If you want differentiation, to find a bigger edge, then you need to look at the things that do not appear on the chart.

The hedge funds hire all the research staff and analysts so that they can piece together the information that doesn’t appear on the charts, in order to gain an edge and catch the explosions of volatility that other traders who are solely staring at the charts miss out on.

Now you may say that hedge funds have big research staffs because they are analyzing hundreds of companies in the stock market so they need them. That is true, but similar fundamental, order flow, sentiment analysis can be done for currency pairs as well. And the good news is that there are only 5-10 countries to keep track of.

Back when Soros broke the Bank of England in 1992, he wanted to be physically present on various central bank gatherings in he could. He would attempt to arrange meeting with various central bank officials, even the central bank chiefs if possible. He would try to get a feel for what their view of the situation of the European exchange rate Mechanism and how they would react to various situations. Obviously central bank officials like to speak in coded language, but when you are physically present there and have the experience of a few decades in the markets you can get a better feel for the situation rather than just reading about it in the papers.

Soros did the same thing when he shorted the Thai Baht in 1997. He had his top lieutenants on the ground meeting with high ranking officials from the Bank of Thailand. Soros wanted an information edge. This type of edge that you could not get from staring at the charts. Soros knew that and milked his connections for all they were worth. Soros made over $600 million shorting the Thai Baht.

Now you may say that you can’t fly to another country and meet with central bankers and you can’t afford a research team. Don’t worry they are not needed. If you are trading alone that is just fine as long as you spend your time doing the right order flow research.

Now you may say how does this apply to you? Well the point I am trying to get at is that there is a lot of information that does not appear on the charts. News, economics, global macro, stops, sentiment, market sensitivity. There is a whole host of information you can gather to help you make better trading decisions. There is a whole host of information you can analyze to help you catch the big moves. And no you don’t need any complicated super computers or algorithms to analyze it.

You can absolutely start doing it alone in the beginning. You can keep track of multiple currencies if you want.

Now I am not saying that there aren’t people making money with some other trading approach. I am sure there are some traders making money with technical indicators, chart patterns, elliot waves, kondratiev waves, etc. Trading style is all a choice.

It’s up to you to choose which part of the trading profit ladder you want to be on.

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