A Fund vs. Your Own Money

cornix · Oct 24, 2012

As I started doing OPM (that's not really a fund, rather a "quasi-micro" one, but much the same experience I believe) I faced quite the new emotions, such as trying to keep the profile cute etc. Things that I never cared about trading just for myself.

It was quite a stress at first. But over time it started to feel like not just trading for the sake of my own pocket, but also doing something socially responsible, helping people to profit off their hard-earned money. Which was a good feeling already.

Not really yet feeling that I "don't risk" with OPM though, frankly it's even more of responsibility emotionally than trading your own $.

Answering the OP question: these activities involve quite different emotions, but both can be satisfying if you manage to experience the positive side of each way.

gmst · Oct 24, 2012

smoker,

One of the very balanced and useful posts that I read in a long time. Sure your postings are very few since 2006 when you joined this site, but its refreshing and useful to read it. Thanks.

minmike · Oct 24, 2012

Very interesting post smoker.

Now I don't know why someone would do it, but in the past, (2005) I have known people who have turned down institutional money. Probably a whole lot less than you are talking about

It was a pretty reasonable deal. they would match what the individual put up 1:1. Profits on the whole account were 60:40 to the trader. So 100% of his profits and 20% of theirs. The rational turning it down was as a floor trader, if you were willing to do 1000-5000 lot, and a 500 lt order came in why would you give any of it away.

Off the floor, it is a different story.

Smoker · Oct 25, 2012

Hi minmike,

Quote from minmike:

Very interesting post smoker.

Now I don't know why someone would do it, but in the past, (2005) I have known people who have turned down institutional money. Probably a whole lot less than you are talking about

Definitely smaller because I have never heard of this kind of deal you outlined being offered in the professional asset allocator worldâ¦..

Quote from minmike:

It was a pretty reasonable deal. they would match what the individual put up 1:1.

How could any individual have personal assets even close to that of a professional asset allocators typical allocation?

Did this guy define institutional money as an asset allocation from his Momâs gardening club?

Assuming the above deal is typical or standard (ie the 1:1 part) there just arenât enough successful traders on Earth that could pass a professional due diligence that also have enough personal assets for the 1:1 ratio who could manage even a few percent of the total professional asset allocator industryâs assets under management.

If the above 1:1 deal was standard my current employer would have to find thousands and thousands of traders to get even a modest percentage of their assets ear marked for alternative investments actually allocated.

The size of the professional asset allocation market makes the 1:1 deal mathematically impossible as a standard.

The minimum allocation in the professional market is in the millions and for the majority in the tens to hundreds of millions. Any less and you are spread too thin and wouldnât have enough qualified people employed to do the required due diligence. You just canât practically manage an external allocation book of thousands of different traders/hedge funds/CTAs etc.

When the standard size of the successful asset allocators pool is in the billions they need to find funds that can pass due diligence and divvy out the cash in blocks of 20, 50, 100 etc million at a clip so they can have an external portfolio of 30, 40, 50 etc hedge fund/CTAs rather than the thousands required by a 1:1 being the standard deal.

Quote from minmike:

The rational turning it down was as a floor trader, if you were willing to do 1000-5000 lot, and a 500 lt order came in why would you give any of it away.

Yes this makes sense if you are on the floor and your edge is primarily making money as a market maker verses taking positions so it is logical you want to keep as much of your market maker spread as possible.

But on or off the floor, if you are making most of your money by putting on positions as a proprietary trader then the more assets you have under management the more you can leverage your edge so I canât think of any universal reason why a successful trader would turn down an institutional asset allocation.

However that said I have been out North America since 1989 when I left the CME floor for London to manage the OTC FX options book during European hours for CRT so I really donât know the type of deals are currently being offered to start up traders that are working out side of the established hedge fund/CTA industry.

And to be frank I donât understand how the nuts and bolts fit together on some of the discussions I read on this site when posters talk of their âdealsâ at what they call âproprietary firmsâ.

For me a proprietary firm is a hedge fund/CTA where it almost appears to me from this side of the world that these posters are referring to a broker as a proprietary firm that âlendsâ rather than âallocatesâ some funds to them?

For me their âproprietary firm dealâ sounds more like the broker is acting like a bookie that offers clients a âbetting lineâ because they know the punter (trader) will bet more (put more trades and size on) and lose more (generate commissions). Thus they get to capture both the traders beginning futures account equity and then on top of that some of his outside savings/funds earmarked for his normal life.

Years ago in London I was drinking with the guy that ran the retail operation for Alpha Futures on the Liffe and he told me the futures brokers had a saying about retail trading accounts: âEquity to Commissions â Six Monthsâ!

I might have an ego the size of a small planet but if I take a hard look in the mirror even I will admit the probability is very high without the trading knowledge, equity, experience and mentoring I got on the institutional size I would have ended up one of those âEquity to Commissions â Six Monthsâ traders.

Then again maybe I would have turned out to be a savant Albert Einstein of Trading if I hadnât had my natural talent stunted by leaning those conventional trading ideas from those bureaucratic thinkers in the professional trader institutions??????

But that is not how I would bet!

All the best!

Cheers Smoker

Hoofhearted · Oct 27, 2012

Quote from Smoker:

Institutional money means you can leverage your talent via a nice fat free call option.

Cheers, Smoker

Dear Smoker,

Would you mind elaborating just a bit more on how using institutional money allows you to leverage your talent via a nice fat free call option? I have to admit that this sounds very tantalizing.

Thanks

cornix · Oct 27, 2012

Quote from Hoofhearted:

Dear Smoker,

Would you mind elaborating just a bit more on how using institutional money allows you to leverage your talent via a nice fat free call option? I have to admit that this sounds very tantalizing.

Thanks

I guess that was an allegory in a sense that managing OPM is like getting a free call option. If you make profits, you get the sweet share, if not you don't risk anything.

Bowgett · Oct 28, 2012

Quote from cornixforex:

I guess that was an allegory in a sense that managing OPM is like getting a free call option. If you make profits, you get the sweet share, if not you don't risk anything.

I do risk your job if you lose a lot of money. People call it "career risk".

cornix · Oct 28, 2012

Quote from Bowgett:

I do risk your job if you lose a lot of money. People call it "career risk".

Probably not the case with money managers who run their own companies. There are so many stories of people who made some decent profits, attracted a lot of money, then lost a lot or literally blew up only to come back soon (and reap their hefty commission in the process).

The story of John Paulson comes to mind first who on average lost the money during the recent years but ended up with the huge profit for himself in commissions during the same time. Makes running a fund looking really cute from manager's perspective, ha.

opt789 · Oct 28, 2012

A hard working, reasonably intelligent, and well educated person can eventually get a job in at least the 75k-100k range. Those usually have reasonable job security, health care, paid time off, and 401k matching. If you are an independent trader with your own money you get zero benefits of any kind and zero job security - and what I mean by that is if something unexpected happens or you just have a bad year there is no salary or safety net for you. You can make an occasional mistake in a job and you still get your salary, and if you do lose it you can get unemployment benefits. All that together means you have to make considerably more in trading for the two choices to actually compare fairly. Everyone would assign different numbers but it is safe to say you would need to make at least in the 100k-125k range trading to be equivalent to having a job.

Obviously this does not address personal happiness or the enjoyment you get from trading rather than being a working stiff, but those are not quantifiable so I am just looking at the numbers.

If you need to make at least 100k and you can average 20% ROI over the years then you need $500,000 in your trading account. How many of you have that? Also take a look at businesses and franchises for sale, you can leverage that 500k to buy a one million dollar business that would make you the boss and should bring in at least a 100k salary.

I have traded my own money, other people's money, and owned a retail business. They are all completely different, and the right one for you is a completely personal thing. I will say that to succeed in any of them you really do have to work hard, so you need to have a personal passion about them. Trading other people's money is a lot harder, and much more work and stress than the uninitiated would expect. Many of your investors will hate you and leave you at the drop of hat if something goes wrong, no matter what your past performance may have been - they literally do not care how well you have done in the past, only what you are doing for them now. That means you have to constantly be worried about getting new investors.

There have also been some studies, which I personally agree with, that show most traders are either better at trading their own money, or better at trading their own money with other people's money. It is very rare to be equal at both.

oldtime · Oct 28, 2012

Quote from opt789:

A hard working, reasonably intelligent, and well educated person can eventually get a job in at least the 75k-100k range. Those usually have reasonable job security, health care, paid time off, and 401k matching. If you are an independent trader with your own money you get zero benefits of any kind and zero job security - and what I mean by that is if something unexpected happens or you just have a bad year there is no salary or safety net for you. You can make an occasional mistake in a job and you still get your salary, and if you do lose it you can get unemployment benefits. All that together means you have to make considerably more in trading for the two choices to actually compare fairly. Everyone would assign different numbers but it is safe to say you would need to make at least in the 100k-125k range trading to be equivalent to having a job.

Obviously this does not address personal happiness or the enjoyment you get from trading rather than being a working stiff, but those are not quantifiable so I am just looking at the numbers.

If you need to make at least 100k and you can average 20% ROI over the years then you need $500,000 in your trading account. How many of you have that? Also take a look at businesses and franchises for sale, you can leverage that 500k to buy a one million dollar business that would make you the boss and should bring in at least a 100k salary.

I have traded my own money, other people's money, and owned a retail business. They are all completely different, and the right one for you is a completely personal thing. I will say that to succeed in any of them you really do have to work hard, so you need to have a personal passion about them. Trading other people's money is a lot harder, and much more work and stress than the uninitiated would expect. Many of your investors will hate you and leave you at the drop of hat if something goes wrong, no matter what your past performance may have been - they literally do not care how well you have done in the past, only what you are doing for them now. That means you have to constantly be worried about getting new investors.

There have also been some studies, which I personally agree with, that show most traders are either better at trading their own money, or better at trading their own money with other people's money. It is very rare to be equal at both.

no kidding, after I blew up my first account and had to get a real job, I couldn't believe, no matter how bad sales were I still got my regular paycheck, no deduction

I thought, "This is great, no wonder everybody likes to do it."

I can screw up as much as I want and still get paid the same!

I know a woman who has done very well as an RIA, and all she ever charges is 1%. She invests very conservatively, mostly asset allocation, and over the years has built up quite a pool, and much of that is due to nothing more than reinvesting and compounding. But she is very attractive, and a good salesmen and a people person.