A Fund vs. Your Own Money

[cornix]

Quote from Smoker:

Hi cornixforex,

You know I keep saying this to people on this board that think they are at, or closing in on their strategies liquidity restraints but think of your edge as less of a scalping set up and more of a methodology and it might be a lot more scalable that you currently realize.

I cut my teeth in the 80s in FX interbank market making and then options market making on the CME. Along with market making I used to scalp futures and day trade futures throughout the day as opportunities appeared.

Later when I went into money management my first CTA mentor who hired me as a short term swing guy to supplement his long term trend following angle convinced me to systemize my setups into an algorithm and test them in longer time frames.

It worked out ok and then years later when the floors started to die and high frequency came along my programmer took my swing/day/long term stuff and brought it into high frequency time frame.

So think about trying the same with your scalping set ups and you might get a pleasant surprise and suddenly that liquidity issue disappears over the horizon.

At this point in my trading career unless some idea works all along the time line I drop it since working every where and across most markets is one of my personal litmus tests for robustness.

Anyway it's just a suggestion?

Just to be clear I didn't mean talk to your retail broker who handles your account since he will just hook you up with some of his other retail clients and the car dealer down the road etc.

What you want to do is talk to the FCM institutional desk which handles the big CTAs/Hedge Funds etc. If you have the numbers etc and your track record passes their risk/reward algorithms they are the guys that will pass the reports relating to you onto the institutional asset allocators to see it there is any interest in your profile.

As far as I am aware this is the way that most independent traders get discovered verses coming out of an investment bank prop group or international bank treasury etc.

Best of luck!

Thanks for the insights, Smoker. I really appreciate your detailed and informative responses!

Absolutely agree on the strategy, pretty sure my is scalable into higher (and probably lower on some instruments) time-horizon which would definitely fix possible liquidity issues in exchange for somewhat lower ROI (due to less frequent trades).

 

[Smoker]

Quote from cornixforex:

Thanks for the insights, Smoker. I really appreciate your detailed and informative responses!

Absolutely agree on the strategy, pretty sure my is scalable into higher (and probably lower on some instruments) time-horizon which would definitely fix possible liquidity issues in exchange for somewhat lower ROI (due to less frequent trades).

Just my two dirhams worth!

Speaking of which are you on my side of the plant?

Its 14:00 in on the gulf and 06:00 in New York so kind of early in the day stateside.

Or are you just up early to get scalping the European markets since the US is closed due to a huge freaking storm in New England?

Cheers Smoker

 

[cornix]

Quote from Smoker:

Just my two dirhams worth!

Speaking of which are you on my side of the plant?

Its 14:00 in on the gulf and 06:00 in New York so kind of early in the day stateside.

Or are you just up early to get scalping the European markets since the US is closed due to a huge freaking storm in New England?

Cheers Smoker

Haha... I bet you'll be surprised... Western Siberia, Russia. 17:25 here right now.

I trade London session most of the time, rarely later into the US session after London close.

 

[opt789]

Smoker,
The traders Don and I have seen make good money were using a prop firm, or what some people call an arcade firm since it is not true prop. Firms like Bright and Echo provide traders high leverage to day trade equities, it has nothing to do with futures or an FCM. The trader puts in a deposit and they get a lot of intraday leverage, or some overnight leverage depending on their risk profile. When day trading equities you cannot scale up very far, it is no trouble to scalp a few thousand shares but you can't scalp millions of shares. A small 250 million hedge fund wanting to use just 10 times intraday leverage (which is low leverage at a prop firm) would need to scalp 4 million shares of Apple per trade. My own strategy and the strategy of many of the traders I have seen make money are simply not scalable to hundreds of millions no matter what. I have personally moved many markets using ten million (of other people's money), I can't imagine what my fill would have been on those trades with 10 or 20 times that much money. If someone has a scalable strategy where they can generate a nice perfect looking equity curve, and make 20% a year then starting a fund makes sense. If your strategy is not highly scalable then there is no point is starting a fund. As for the ability to trade your money and OPM money exactly the same, if you can do it then that's great, my point is that it is not the case for the majority of traders.

 

[cornix]

Quote from opt789:

As for the ability to trade your money and OPM money exactly the same, if you can do it then that's great, my point is that it is not the case for the majority of traders.

Opt789,

What do you mean this is not the case for the majority of traders? For psychological reasons?

 

[opt789]

Quote from cornixforex:

Opt789,

What do you mean this is not the case for the majority of traders? For psychological reasons?

An aspiring fund manager has to put together a very smooth equity curve when starting out, you are not concerned with what your exact ROI will be or even how much money you will make. Large investors care more about a smooth curve and small, infrequent drawdowns than about a high return. If given a choice, no institutional investor will take a 40% ROI vs. a 20% one if the high return has a highly volatile curve with large drawndowns. This is completely different than a independent trader using his own money with no one to answer to about anything. Most traders view trading just their own money differently than being responsible for the future, retirement, college savings, etc. of all of their investors. It is usually not the same for a trader when they have a lot of people to answer to for every single decision that they make, and held to the view that their monthly marks matter. When you just use your own money, no one cares at all what you do, and that usually creates a completely different psychological environment. A smooth equity curve, with an ROI that keeps your investors happy enough to stay and brings in new money is your goal when running a fund. The goal of most independent traders is to make as much as they can without blowing up. Those are two different things.

 

[kinggyppo]

Quote from opt789:

An aspiring fund manager has to put together a very smooth equity curve when starting out, you are not concerned with what your exact ROI will be or even how much money you will make. Large investors care more about a smooth curve and small, infrequent drawdowns than about a high return. If given a choice, no institutional investor will take a 40% ROI vs. a 20% one if the high return has a highly volatile curve with large drawndowns. This is completely different than a independent trader using his own money with no one to answer to about anything. Most traders view trading just their own money differently than being responsible for the future, retirement, college savings, etc. of all of their investors. It is usually not the same for a trader when they have a lot of people to answer to for every single decision that they make, and held to the view that their monthly marks matter. When you just use your own money, no one cares at all what you do, and that usually creates a completely different psychological environment. A smooth equity curve, with an ROI that keeps your investors happy enough to stay and brings in new money is your goal when running a fund. The goal of most independent traders is to make as much as they can without blowing up. Those are two different things.

there is the saying " a bird in the hand is worth two in the bush" kinda describes the difference. People who are wealthy (will define it as net worth of 10 million or more) first and foremost don't want you to lose their capital. Of course people value different things, I had mentioned someone I know who has net worth of around 25 million and won't pay for air conditioning, why its not a value.

"One very important result of Kahneman and Tversky work is demonstrating that people's attitudes toward risks concerning gains may be quite different from their attitudes toward risks concerning losses. For example, when given a choice between getting $1000 with certainty or having a 50% chance of getting $2500 they may well choose the certain $1000 in preference to the uncertain chance of getting $2500 even though the mathematical expectation of the uncertain option is $1250. This is a perfectly reasonable attitude that is described as risk-aversion. But Kahneman and Tversky found that the same people when confronted with a certain loss of $1000 versus a 50% chance of no loss or a $2500 loss do often choose the risky alternative. This is called risk-seeking behavior. This is not necessarily irrational but it is important for analysts to recognize the asymmetry of human choices."

http://www.sjsu.edu/faculty/watkins/prospect.htm

 

[rwk]

Quote from Smoker:
>> But a pretty good trader who cannot sell has no chance.
Why do you believe this?

I believe that most guys with a great edge but no selling skills just find someone to do the selling for them. In most cases I know in real life the trader didn’t even need to find a salesman since his FCM did it for him i.e. introduced him to the professional asset allocator world.

This is a pretty accurate description of the majority of the guys that own and/or trade in the hedge fund/CTA business. This is exactly the type of guy the professional asset allocators expect to see in trading and research when they do due diligence on a potential asset allocation and is in no way a disadvantage.

Put the numbers on the board, explain your edge and why it is scalable and can be reproduced going forward and then pass a professional due diligence and it doesn’t matter if you are the Rain Man you will most likely get the allocation.

I was speaking from my own experience both in and out of trading. About 20 years ago I had the benefit of an apprenticeship with a legendary trader. After about a year and a half, I registered as a CTA and went looking for allocations. My mentor's advice was to go on the lecture circuit and establish myself as an expert. Unfortunately, public speaking is something I neither enjoy nor do well. I was genuinely surprised at how little interest there was in seeing my record or listening to my pitch. After a couple years, I withdrew my registration.

I think it is human nature to put off people who come looking for work or have something to sell. I was a computer programmer before becoming a trader, and I heard cries of anguish over the "shortage" of good programmers from my very first moments in the field. But that never made it any easier to find interesting or even steady work. Almost unbelievably, the ability to sell is the key to success in programming, except maybe for the few superstars who wrote a book or an operating system. Geeks have always been held in low esteem by hiring managers.

Even superstars have their issues. Most successful organizations focus on "process" more than on individual performance. They will pay a lot for superstars, but they just want to tap that person's knowledge and experience. They know that superstars have feet, and if they build their business on individual ability, their franchise could walk out the door at any time.

Recruiters/allocators catch a lot of heat if they select a candidate who turns out to be unsatisfactory. There doesn't seem to be any downside to turning away candidates who have potential they later make good on. Even theatre critics and book editors usually find their snarky blunders are only a momentary embarrassment with no lasting career damage.

Smoker, I do appreciate the thoughtful response. This has been a good discussion of the type that keep me coming back to ET in spite of all the dross. This thread has also caused me to take a second look at managing money. I don't know where that will lead.

 

[cornix]

Quote from opt789:

An aspiring fund manager has to put together a very smooth equity curve when starting out, you are not concerned with what your exact ROI will be or even how much money you will make. Large investors care more about a smooth curve and small, infrequent drawdowns than about a high return. If given a choice, no institutional investor will take a 40% ROI vs. a 20% one if the high return has a highly volatile curve with large drawndowns. This is completely different than a independent trader using his own money with no one to answer to about anything. Most traders view trading just their own money differently than being responsible for the future, retirement, college savings, etc. of all of their investors. It is usually not the same for a trader when they have a lot of people to answer to for every single decision that they make, and held to the view that their monthly marks matter. When you just use your own money, no one cares at all what you do, and that usually creates a completely different psychological environment. A smooth equity curve, with an ROI that keeps your investors happy enough to stay and brings in new money is your goal when running a fund. The goal of most independent traders is to make as much as they can without blowing up. Those are two different things.

I hear you. Actually felt this already: with OPM I indeed tried to keep the equity curve as cute as possible and didn't do things I would if traded just my own account. Resulted in less net profit In October than would be had I trade traded for myself.

 

[Klemen]

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