This Ex-Poker Pro Built a Hedge Fund by Betting Against Beta – David Orr on Asymmetric Bets

The institutional investor career path requires specific credentials (like Harvard) and is primarily a sales job; without such credentials, attempting this path is futile unless one is exceptional at marketing

“if you went to Harvard and you know you feel like you can uh be a salesman using that credential especially that credential is key. If you don't have that credential I would say just don't even bother trying to go down that path. you will always fail almost always unless you're exceptional marketing.”

The academic teaching that increasing risk increases return is false; the opposite is true—the more risk you take, the lower your expected return in investing, which means the entire backbone of academic investment theory is wrong.

“as I researched um how to do this, I reached the opposite conclusion. It was actually um the more risk you take, the lower your expected return is in investing. And if that whole backbone of this academic way of thinking about investing is wrong, then you know what else is.”

If compound annual growth rate is very high, the portfolio manager's carried interest compounds insanely well versus lower carried interest at lower CAGR, meaning shooting for lower fees and lower growth may actually harm the PM's long-term wealth accumulation

“if you just put in a spreadsheet and see how it works out if your your compound annual growth rate is super super high. Just the way your own carried interest compounds is kind of insane versus like a lot lower fee at a lot lower compound annual growth. It's um you know it's it's not actually people I think are shooting themselves in the foot even trying to uh grow endlessly.”

In poker, the way to get good is to systematically identify which types of bets have negative expected value and cut them out entirely, and this same learning process applies directly to investing—identifying ideas that aren't making money within months or quarters and eliminating them rather than staying committed to losing positions for years.

“in poker there's this term expected value. Um, and so your goal in a bet is to make sure that you have a good positive expected value before making it. And so, um, in poker, the way you got good, or at least the way I got good was I systematically went through each type of bet I would make, and I'd figure out like what was not making money, what had a negative expected value, and I just systematically cut those out. And so, my investing learning process was the exact same thing.”

Successful investors cannot be made by copying other investors; they must discover their own unique talents, perspective, and thinking style, as everyone is 'hardwired differently'

“everyone has a different um like a different um way of thinking about things. We're all sort of hardwired a different way. Uh you can't fight that. And so one thing you can't do is just sort of try to copy what someone else is doing. Um like like a big failure mode is just everyone wants to be Warren Buffett. uh of all that's like half of all funds is just people trying to mimic Warren Buffett. Um so you know I'd say don't do this like you have to actually figure out how you see the world.”

The market tends to go up and momentum tends to work year after year, so if investors believe in theses like AI, they should by definition be long those factors; the real question is why pod shops hedge them out, which Portnoy suspects is as much about building allocator-friendly products as genuine risk management

“the market tends to go up. Um, if you believe in the AI play by definition, you kind of should be long the AI factor. Uh, momentum tends to work um, year after year after year. obviously crashes sometimes, but the thing I'm always curious about is why not just include those in the portfolio? And the answer they typically give is that they don't believe that they have skill in predicting those, which I can kind of see. But what I see more so is the guys on the top, you know, the guy the center book, the guys who see every single PM, I think they can somewhat gain. And then I think the factors and hedging all those out, it's just good for building a product that the allocators like, right?”

Many people fail at investing and then become bitter, angry, and fixated on their failure, wrapping their identity around it on social media—this is avoidable through honest feedback loops and career changes

“there's it's kind of sad these people who sort of um are bitter and angry and they they post about it all day on Twitter about how, you know, they didn't like that they didn't get the job or they saw some other co-orker they thought they thought was stupid who's succeeding and everything and then they're all bitter and angry and their whole identity is wrapped up in this. Like, you don't want to be one of those people.”

Once a business has strong brand reputation for edge and adds value, capital automatically flows to it, particularly benefiting PMs if they believe in the ethical mission of not 'fleecing pensions'

“I think the brand value alone once you get people to trust that you're adding this big edge and then money can kind of automatically that's kind of uh already wonderful for the PM especially if he believes in the sort of ethical side of it like hey we shouldn't we shouldn't just fleece pensions and things out of uh you know billions of dollars a year like that's how I see the other multi-manager jobs today.”

David tells his PMs that he doesn't want to pay for plain beta (1.0 beta to the general market), but he's willing to let them run concentrated factor bets (e.g., 6x beta to AI factor) as long as it's not excessive; the pod shop extreme of zero factor exposure is equally wrong as the other extreme of pure market beta.

“I don't want to pay for beta. I'm not interested in guys like one beta uh to the general market. I don't think anyone should pay for that.' So, I think I think that that extreme is bad, but I also think the pod chop extreme of zero is also bad. Um, especially especially at the individual factor level.”

Support roles in hedge funds (operations, compliance, CFO work like optimizing broker relationships or structuring trades) are severely underrated and offer good career prospects; there's low competition for these roles (2 applications vs. 200 for analyst roles) and if you add value (saving millions in costs or taxes), you can earn $200-400k+ per year without the chaos of managing money.

“If I put like a job opening for an analyst role, I'd get like 200 resumes in a day or more probably... But if I put like, hey, I want like an operations support person, you know, I get like two... if you do a great job and you're really reliable and responsive and you make the portfolio manager's job easier, they're they're never going to fire you and they'll probably overcompensate you compared to like a similar job... you could probably get yourself in a pretty good two 300 grand a year job... there's not that many people looking actively for those jobs”

Pod shop hedge funds' strategy of ultra-tight stop-losses and near-zero factor exposure was originally smart for smaller scale operations, but now that these firms are massive, the short-term focus mathematically cannot work at their current scale, making their entire model untenable.

“they're playing a game that benefits from a relatively smaller scale and then nowadays they're so big. I actually don't think that their whole super short-term focus can actually work mathematically. Um, so I don't think for that reason it's good. I think the way it used to work was kind of smart.”

Pod shops' neurotic approach to factor exposure and tight stop-losses stems from having too many PMs and worrying about them gaming the system (riding trendy beta factors or taking oversized risks), forcing them to use rigid rule-based constraints because they don't understand what their individual PMs actually do.

“they have too many guys and so they're neurotic about risk both factor- wise, but the other key one is the tight stop-loss wise as well... they're worried that this guy's going to ride a factor bet that can be kind of trendy and he'll take advantage of us that way or he'll take way too big of a risk... Um, so they don't actually under I my opinion is they don't understand actually what their people even do. It's almost like they have a black box and they have a rule set where things actually can't go wrong”

David doesn't copy other investors' theses from Twitter or follow sellside research because you can't generate edge that way; instead, he originates his own ideas by thinking independently and blocking out the noise of naysayers and sell-side cheerleaders.

“you're not going to have an edge copying some Bin Twit idea. You're not going to find all your ideas on there. You just need to like look at ideas genuinely by yourself. Do the work... You shouldn't just like listen to what they're saying. There's a lot of naysayers and everything. A lot of people who say why the thing is broken because they're quoting the sellside research... you just need to block all that out and just do your own thinking truly do your own thinking.”

Even if a fundamental investor is right that cable TV's terminal decline is only 1-2% annually rather than 4%, the thesis will still not 'play out well' over time, suggesting that even correct macro views can be poor investments if the time horizon is infinite or the absolute returns are low

“do you not even see the data? Even if you're right that it is only 1% which this is cable TV we're talking about. Okay. So even if you're right though, like this is just never going to even play out well. And obviously what happens is over the years these people sort of um move the goalposts around and they want to be right.”

Fundamental investors who stay wrong on positions move the goalposts on their thesis over years (e.g., from 'wonderful growth' to 'facing headwinds but multiple compressed' to 'priced for 4% annual decline') rather than admitting error and taking losses, whereas pod shops cannot do this because they'll get fired if performance deteriorates.

“their long charter and then their story just keeps morphing over the years from like, oh, it's this long-term wonderful growth thing to like, oh, it's facing like a somewhat of a headwind, but the multiple so much better. And nowadays, I talked to one recently, smart guy, very smart guy. But I think a lot of these people are smarter than me. I mean that like genuinely, but they they just tricked themselves and like now the story is oh well now it's priced for um only a 2% a year terminal decline... And over the years these people sort of um move the goalposts around and they want to be right. They don't want to admit that they were wrong and take the loss”

Portnoy's solution to PM recruitment for lower-fee structures is offering high equity ownership, large fee allocation to the PM (90% after three years), and major assets from day one, making it economically superior to mega-funds despite lower fees

“I think it's easier to sell people on that if basically you're telling them that you'll be able to raise them a ton of money using the same brand. So that way from day one they they uh get a huge fee, right? And then also you'd offer like a lot more real ownership versus the companies like Citadel, they don't actually pay the talent what they they deserve to. I'd pay them, you know, most of that 1% fee would actually go to the guy running the money.”

Fraud shorts are undesirable because dishonest management is skillful at pumping their story, causing stock to run up 1,000% before the short works, creating excessive volatility and tracking difficulty

“I don't actually like those types of shorts because it's a lot to follow. And these types of man management are very um skillful at pumping their um at their story, right? And then that means the stock could run up on you a thousand% pretty easily. So I'm actually not interested in that type of dishonesty.”

Poor management that pays itself excessive bonuses, uses private jets paid by shareholders, or pursues empire-building acquisitions are ideal long-term short candidates because such behavior patterns persist for decades

“management is stagnant. Nothing's happening. Management keeps paying themselves enormous bonuses. They still have a a private jet they're using all the time. you know, the shareholders paying for that. Um, or like another type of dishonesty is just an empire building. Not like they're trying to hype up a false new story, but they're trying to um just do acquisitions for the sake of managing even more and solidifying their job even more. Um, and once you figure it out, like in that case, a management team is bad. Uh, those are really long-term. um you can just sort of stay short that management team um for years. You know, often these guys will keep their jobs for decades.”

Portfolio managers perform better when they can manage risk according to their own judgment rather than be constrained by extreme factor neutrality or arbitrary stop-loss limits imposed by the fund operator

“I want them to be able like you want the PMs to manage their own risk in a way that seems good just by itself. Like, so I want to make it so I'm watching the risk on my side, of course, but I want it so that none of my filters are are sending a big alarm signal, right?”

Large hedge funds like Citadel charge what they call a performance fee but it functions essentially as a second management fee, with total annual compensation (management + performance fee) reaching several billion dollars per fund annually, which is profitable for the fund operators but ethically problematic.

“they call it a performance D, but you know they're it's almost like not that diversified. It's basically just almost like another management fee. And so, you know, they're collecting a few billion dollars a year each one of those shops just sort of every year, year after year. So, for the guys running it, I guess that's brilliant... I find it distasteful to sort of um take the money from everyone else and sort of put in my own pocket.”

If you're not willing to spend 15 hours a day researching investments during the early phase of learning investing, you should quit because investing is too competitive and you won't succeed unless you have that level of initial drive and commitment.

“it's a competitive game. If you're not if you're not loving it to do it 15 hours a day within the first month, just give up. You're not going to win. Not you're not you'll never be a great investor.”

If you have genuine edge and write about it (in fund letters or public posts), people will find you and fund you, even if commenters on the internet say it's impossible; David proved this by writing Militia fund letters starting Q1 2019 and raising capital without a traditional pedigree.

“if you have an edge though, if you have an edge and you just write about it and you like just write it like like you're role playing, you're you're saying, 'I'm a fund manager. Here's my letter. And this is what I basically did in 2019, right? I started writing these things in uh quarter 1, 2019. And um and yeah, I promise if you have an edge, people will find you. They will. And and people like on the internet say, 'Oh, you can't do it. It's not possible.' This and that. These people don't exist.”

Most people on Twitter who give investing advice have terrible track records yet still claim you should 'buy the dip' when prices decline, which indicates they don't understand that market prices going against your thesis is actually one of the strongest signals that you might be wrong.

“Some of these guys, some of these guys on Twitter, man, it's weird. It's like their their track record is so bad and they're still giving the advice of like, 'Oh, well, it's gone down more against you, so you should be buying more.' It's like, 'No, man.' Like, the fact that the market has gone against you, it actually means something. It's like one of the strongest tells there is actually.”

An aspiring investor should open an Interactive Brokers account with $10,000 (or as much as they can scrape together from a summer job), build a portfolio of 30+ diverse long ideas and 50+ short ideas over months, and treat losses as cheap tuition while learning from portfolio performance over reps and seasons.

“you get on Interactive Brokers. You put in whatever 5,000 bucks or whatever you can scrape together... Go get a summer job and get 10,000 bucks and put it in the account and then just like learn to bet small on things... you want to find like 30 genuinely different like long ideas... you really want to find like 30 different things long to bet on... you have like 50 of these and that'll take another few months... if you like lose, who cares? you like lost a few thousand bucks. It's like nothing. It's like cheap tuition.”

Institutions selling to pension committees are not in the performance business; their actual business is marketing a serious-seeming product, and pensions would be far better off buying the S&P 500 than paying for active management from these institutions.

“these institutions, they're not really in the performance business. They're not even really trying to perform well. I I would argue what they're trying to do is is sell a serious seeming product to a committee that's running a pension or whatever. That's their entire business model. And those pensions would be way better off just buying the S&P 500.”

David's long-term plan is to build a vertically integrated financial services business with a lower fee structure (1% management fee on ETF vehicles) and zero middlemen, versus the current standard of 2-4% effective fees with middlemen, which allows him to add more value for clients on a smaller fee.

“my idea is if we can get the cost down to nearly zero and then we charge let's say a long-term like a 1% fee on an ETF structure, that's like really long-term once you're way bigger. then it's a lot easier to actually add value for people in a real way on a 1% fee layer with zero middleman than it is to have, you know, this in practice, it's more like a four or 5% a year fee. Um, with still paying middlemen on top of that.”

You should have a clear idea of whether you want to focus on investment performance, marketing/raising capital, or operations/broker management; choose one path and commit to it honestly, and if you can't perform well in your chosen lane, move on rather than staying bitter and angry.

“Figure out what you're going to do. Like if you want to perform well, just focus on that. If you want to focus on marketing, focus on that. And if you want to focus on the operation side... then do that. Um, and you know, have an idea of like, do you actually want to do it? If you don't actually like want to do it, there's going to be better ways to make money anyway... try doing what you're doing and then if it's not working you know find something else to do... it's kind of sad these people who sort of um are bitter and angry and they they post about it all day on Twitter about how... don't want to be one of those people.”

By the time an investor has 500-1,000 reps (position trials), they will have genuine evidence of whether they can generate real edge and succeed at investing

“By the time you have like 500 or a thousand reps in, then you'll start to have an idea if you you can even have a chance at this. And you'll actually have a real chance of generating real edge doing it this way.”

If institutional path is pursued cynically as marketing, an analyst can use AI (ChatGPT) to generate boilerplate model sections while focusing energy on marketing/salesmanship, treating the analytical work as performance theater; Portnoy considers this 'reprehensible' and advises against it

“I would just um I'd say almost just like pretend like you have to pretend like you're doing the model and everything. That's part of the job. But man, you could just have Chachi PT write up some slot for you and then you could focus on like building up your marketing skills. I per for me, I think it's reprehensible. I would say don't do it. just go do something useful.”

Airports are a simple business with a long-term thesis: they benefit proportionally from increased travel, have no real competition (typically one per city, sometimes two), and new airports only get built when demand has proven the investment worthwhile, making them suitable for multi-year or even decades-long holds.

“airports for example that's a pretty simple business they just benefit the more people that travel the more profit they make... airports are really simple um so it's easy for me to see how this business can keep growing growing at say 5% a year long term. They're not going to have any competition really because airports typically there's one per city maybe two. Usually if there even is a new airport, you know that implies really good things have happened, right? It means that the demand has gotten so damn big that your your investment has already killed it like four times over.”

Warren Buffett's approach (value investing, long-term holds) is so widely copied that probably half of all hedge funds are trying to mimic his style, making it a crowded trade and a failure mode for aspiring investors.

“everyone wants to be Warren Buffett. uh of all that's like half of all funds is just people trying to mimic Warren Buffett. Um so you know I'd say don't do this like you have to actually figure out how you see the world.”

David's vertically integrated broker dealer and operations vision requires finding support people passionate about optimizing finance operations (understanding 50+ brokers, structuring trades, managing financing relationships), which is a much larger job scope than typical hedge fund back-office roles.

“in my firm, they're going to be figuring out, well, how do we actually structure this in a way that's going to maximize our investors edge? And there's no way I can juggle all this, right? It's just too much. You have to like know who the 50 brokers in the world are. You have to understand what types of services they're good and bad at providing and why, how that's changing over time.”

Japanese corporate governance is improving due to government intervention forcing small companies to treat shareholders better, and this pattern is already clearly working with companies reacting in real time, not theoretically, making it a valid theme for multi-year or decade-long holdings.

“Japan as a whole, that's another theme I'm long today where the corporate governance is improving and the Japanese government keeps doing things to force um these small companies to treat their shareholders better and they're really taking real and it's not just a show and it's a clear pattern and companies are actually reacting. It's not like I'm I'm theorizing that this might work. it's like already very clearly working today”

In 2020, Portnoy had no knowledge of how to bet on inflation or interest rates until a friend mentioned Eurodollar futures options, which he discovered offered asymmetric payoffs of 200-to-1 odds on inflation, prompting him to risk 0.5-1% of capital on that bet

“I didn't even know how to bet on inflation being possible? You know, what what are the odds that people are going to pay for this? So, I just wanted to see what it was. I didn't even really intend on on betting, making the direct bet, right? I was sort of more curious about how this would fit into the other bets I was making at the time. And then one of the guys in our chat was like, "Oh, you know, you can bet on this thing called the Euro dollars futures option. This is kind of esoteric thing, right?" I had no idea what this was. And then I was looking at this. I'm like, "Well, wait a minute. This is is this right? This this says that if we get inflation within a few years, this thing will pay 200 to one."”

David shorted Nvidia in 2023 going into May, initially thinking he was shorting a crypto miner, but was blindsided by their earnings result showing the massive opportunity in AI. After understanding the technology and their competitive position, he realized Nvidia could become the most valuable company in the world, a call that came true.

“one of my better calls was I was actually short Nvidia in 2023, uh, going into the May when the people started realizing just how big of a deal AI would be. And I, back then, I was just short because I thought I was shorting like a crypto miner. Um, but then I got, you know, I got pretty blindsided by this, uh, their earnings result in May 2023... And then I took time and I, you know, understood what the technology was. I'm like, 'Oh, this could totally work.' And then I a couple months later I posted, you know, Nvidia could be like the most valuable company in the world. And then that ended up happening”