Training Hedge Fund Managers Like Navy Seals

Teaching hedge fund managers to thrive under pressure


Imagine you’re sitting at the bottom of a swimming pool, you’ve got an oxygen tank and your goal is to remain under water for 20 minutes. Doesn’t sound so tough, right? Now meet your instructor whose sole task is to create problems for you: tying your air hoses in knots, removing your air tanks, and other forms of harassment. You cannot panic – you must calmly fix each problem as it arises and remain under water for the full 20 minutes. It’s the hardest test in becoming a Navy Seal, one of the most elite members of the US military. It’s so difficult that candidates are given four attempts at passing and still, out of an average class of 140 recruits, only 36 will make it.

This isn’t a physical test about who can hold their breath the longest; it’s a mental test. Can you override the panic? How much mental control do you really have?

Managing your panic centre
Your brain is hardwired to help you survive. Shortly after your oxygen is taken away the panic button goes off in your brain and you go into fight-or-flight mode. In this case it’s flight. You are half-way up to the surface before you’re even aware what you’re doing. Some people can stave off this panic for a short time, but you must have ninja-like mind control to continuously remain calm throughout this grueling 20-minute ordeal.

Your amygdalae, two tiny little almond-shaped structures that sit in the centre of your brain, are responsible for pressing the panic button when your survival is threatened. When your amygdalae are active you are emotional, fearful, threatened, angry, aggressive and irrational. Your prefrontal cortex, which sits right behind your forehead, is responsible for rational thinking, reasoning, complex problem solving, focus and will power. Your prefrontal cortex can override the amygdalae’s panic system, but it’s not easy and for most people the amygdalae have too much influence on the prefrontal cortex, reducing them to the emotional equivalent of a seven-year-old.

Sensory information reaches your amygdalae just hundredths of a second faster than it does your prefrontal cortex. Your amygdalae don’t know this is a test – they have no reasoning capability – they perceive a threat and respond before you are consciously aware of what’s happening. That may not seem like a lot of time, but once your brain and body have gone into survival mode it’s really hard to dial that back – it takes a lot of mental strength and practice to reverse course. That’s why this is the hardest part of training to become a Navy Seal.

The Navy knew it was losing good recruits that were close to making it, but just couldn’t pass this last test. So they decided to bring in psychologists to figure out how they could improve the candidates’ mental strength, to help them dampen down the alarm bells going off in their brains and remain calm and in control. After they instituted the new mental training they were able to increase the passing rate from 25% to 33%; a 32% increase.

Elite soldiers of the financial world
The world of hedge funds is as competitive and difficult as it is trying to become a Navy Seal; maybe even harder. Very few succeed over the long term. Every year around a thousand or even more hedge funds close their doors.

There are many good managers who, with a little bit more training, could have far greater success. There are also many successful managers who could be even better. Most managers fail because they cannot manage the downside well or even at all. When you see your largest position down 5% and you have no idea why, your oxygen tank has just been taken away. If you panic, you’ll make the wrong decision, killing your performance and your chances of survival – very often one bad decision leads to many.

Hedge fund managers are always in the pool – 24/7 – whether the markets are open or not. Throughout the day, oxygen is constantly being taken away and you are still expected to perform with the rational, reasoning, complex problem-solving part of your brain.

The evolution of your brain
Hundreds of thousands of years ago the amygdalae kept our ancestors alive. As our prefrontal cortex evolved we were able to solve more complex problems, think about the past and imagine the future; that’s what took us from caves to high-rises. But the amygdalae have been around longer, they’re stronger, and they receive sensory information first – they’ve got a distinct advantage. Every day you face multiple battles between your amygdalae and your prefrontal cortex. If you have an untrained mind your amygdalae wins. If you have a well-trained mind, your prefrontal cortex wins and so do you.

Train like a Navy Seal
The psychologists came up with a four-step mental training process for the Navy Seals to improve their mental strength and remain laser-focused and calm in any situation:

  1. Goal-setting
  2. Mental rehearsal
  3. Self-talk
  4. Arousal control

Goal setting
Your prefrontal cortex gets overwhelmed easily – too big goals or too big of anything and it checks out. In the pool, recruits wouldn’t envision the end goal but instead “just make it to the next distraction.” There’s a real benefit to your brain in breaking up goals. Every time you have a new goal your brain releases a neurotransmitter called dopamine – this helps you stay focused, motivated and less inclined to give in to the amygdalae’s panic. It’s far better to have a steady stream of dopamine, rather than one hit that only gets you part of the way. You’ll never accomplish anything without dopamine.

As a money manager one of your worst nightmares is your biggest position pre-releasing so that it will miss the quarter. An elite hedge fund manager has a solid risk control strategy, in which he or she has the utmost confidence and that he or she follows every single time – no exceptions.

A solid risk control strategy goes beyond reducing or cutting exposure. There should be an opportunity to improve your long-term success with each loss, and that needs to be part of the plan. It should be as detailed as possible, written down and include multiple steps to first mitigate damage and then to discover what went wrong. What part of the original analysis or ongoing monitoring failed? This is not an emotional blame game, it’s recognising the mission was botched, what happened and what you would do differently in the future.

Each step is a mini-goal: as you check off each one (and I mean literally check it off with a pen) your brain releases dopamine to keep you focused and motivated to continue. This also keeps your prefrontal cortex online and your amygdalae under control, so you are thinking clearly, rationally and are able to analyse effectively.

Mental rehearsal
The Navy Seal recruits visualised going through the pool exercise again and again. They saw the oxygen being taken away, the air hoses being tied in knots and they saw themselves calmly executing each task. Your brain doesn’t know the difference between what’s imagined and what’s real – this is what gets most people into trouble – but we’re going to use it to our advantage.

What the recruits were doing was building new neural pathways in their brains of how they could handle each and every harassment. It wasn’t a surprise when it came to the real test: their brains were prepared, as if they’d done it a hundred times.Neural pathways are your habits. If you repeatedly panic when things go wrong, that’s the neural pathway you build – that’s your habit. If you remain calm and in control, even by just imagining it over and over, that’s the neural pathway you build.

Hedge fund managers spend a fair amount of time in damage control – you simply can’t avoid it. So many managers fail because they ignore reality and pretend it won’t happen to them. This is a part of the game, and the more you accept it and prepare mentally for these battles ahead of time, the better equipped you’ll be to handle the losses effectively and stay in the game.

We talk to ourselves at a rate of 300-1,000 words per minute. A great deal of this talk is negative and fear-based – it’s how we evolved to survive in a world where every day (every minute!) we could be killed. In the 21st century, where our lives are not threatened daily, this kind of talk is really damaging. Remember your brain has a hard time distinguishing reality from fantasy. Just saying to yourself, “I can’t do this” primes the brain to believe you can’t – so you won’t.

If the recruit didn’t have control over his self-talk in the pool, he would easily give in to “I can’t do this, it’s is too hard, what if I die?” That’s only 12 words – it just takes a few seconds of negative self-talk for your amygdalae to say “that’s it we are out of here.” Test over – failure.

If you’re saying things like – “How could I be so stupid?, What was I thinking?, This is going to kill the quarter, All my investors will leave, What will my colleagues think?, I’m such an idiot!” then say goodbye to your prefrontal cortex – your amygdalae are now running the show. When your amygdalae take over your IQ drops 10-15 points immediately. Your investors hired you for your ability to manage your caveman brain – not be run by it.

Arousal control
This is the first step when you are faced with an actual crisis. In the moment that headline hits, you have a very short amount of time to regain composure. Remember your amygdalae gets the info first, they will start the stress response before you are consciously aware of what’s going on. You’ve got to dial back the physiological processes that have already begun – an increase in your breathing rate, heart rate, blood pressure and tension in your muscles.

Slow, deep breathing is the prescription here. Do the 4 x 2 breath. Take four seconds on the inhale, expanding your abdomen then your chest and lifting your shoulders, hold for two seconds, then four seconds on the exhale, releasing your shoulders, contracting your chest and abdomen, hold for two seconds and repeat. This will increase activation of the parasympathetic nervous system, which is the opposite of the sympathetic nervous system (stress response), thereby dialing back the stress response and increasing a feeling of calmness and control in a high-pressure situation.

Don’t wait for an immediate crisis to do this. Throughout the day tension naturally builds: it’s part of the business. When you’re in a meeting or on a conference call, just start doing some slow deep breathing – no one will know and you’ll remain calm and focused – remember you need stealth-like mind control to be at the top of your game.

No one trains to be a Navy Seal alone
The Navy Seals have countless instructors, trainers and mentors to guide them through the rigorous process of becoming an elite soldier. The physical programme is hard enough but the mental strength required is virtually impossible to do on your own. Remember that self-talk rate of 300-1,000 words per minute? Some researchers have equated that to anywhere from 40,000-60,000 thoughts per day, and 95% of those thoughts are repetitive, useless and often outright lies.

Yes, your thoughts are mostly garbage and your mind continuously lies to you. This is why it’s almost impossible to train your mind on your own – because you believe the lies you tell yourself. Even right now, your mind is resisting this. So check it for yourself: instead of getting lost in your thoughts, check them to see if they are true. What you’ll find is you are rehashing the same old, boring thoughts over and over again stressing yourself out over tigers that only exist in your mind.

As a hedge fund manager your problems aren’t solved by fighting or running away. They are solved with the rational, analytical and reasoning part of your brain. If you want to be a successful hedge fund manager, to be a part of that very small elite group who makes it, then train like a Navy Seal and stack the odds in favour of your success. THFJ

For more information visit

Meredith Hooke is the CEO of ZenSmarts. She has over 25 years' experience working in the corporate world, in sales, management, and executive positions. She has worked for Merrill Lynch, Barclays Bank, and was a partner and trader in a long/short equity hedge fund for 10 years.