A Fund vs. Your Own Money

[Ghost of Cutten]

Quote from Smoker:



It is a really bitch but the only way to get serious money allocated is to actually deliver alpha.

How do you explain Madoff? Pure con artist, raised billions on smoke and mirrors. John Meriwether - no edge, blew up twice, raised billions. John Hussman - no edge, hasn't blown up yet, but raised over 1 billion despite totally underperforming.

What about the mutual fund industry? Just destroys value year over year for a century and manages trillions.

The evidence is clear - Buffett was right, fund management is mostly marketing and BS, performance is only a minority influence.

 

[smallStops]

I think we need to give Smoker some slacks.
Basically, there are con artists on the two sides - from the traders side, AND from those scouting on behalf of an allocator.
The scouter has to be careful, and the traders - I'd say even more the good traders - have to be extremely careful.

 

[Ghost of Cutten]

Quote from Rationalize:

I think the landscape has moved on a bit from there.

It's more like trying to fabricate a silicon chip in your garage, imo.

Need scale to justify the cost of tooling up.

The startup costs of a silicon fabrication factory are enormous. The startup costs of a trader are miniscule. They are not comparable.

The problem for the retail trader is overhead, not startup costs. After tax, commissions, and living expenses, can you grow capital reliably? This is not easy unless you are already borderline rich. For example, 20% per annum with occasional 20% drawdowns is an excellent return, yet after taxes you are talking 11-14% in most civilised countries. So if your living expenses are 100k a year (a comfortable middle class overhead) you need 700k+ in capital to generate that.

Now, one 20% down year and you have 560k. It has just become hard to meet your overhead.

The ways to avoid that are i) higher returns per unit risk (requires extreme talent and hard work) ii) expat to a tax haven to boost your returns by 1/2-2/3 (requires abandoning friends and family, and usually living a soulless existence in a boring place) iii) start a fund and try to enter the big leagues (lots of bureaucracy) iv) find a way to generate good income, rather than return on capital (can be done but usually these edges disappear after a while)

Pick your poison.

 

[Ghost of Cutten]

Quote from smallStops:

I think we need to give Smoker some slacks.
Basically, there are con artists on the two sides - from the traders side, AND from those scouting on behalf of an allocator.
The scouter has to be careful, and the traders - I'd say even more the good traders - have to be extremely careful.

It's ok I saw his other post about pro vs retail money. So let's amend it to "It's easy to raise money from retail investors if you are a good at selling; for pro investors you need good results & method."

Now the question is, if you are good, what is the benefit of pro money over retail money?

 

[Ghost of Cutten]

Quote from Smoker:


I addressed Madoff in an earlier post and explained that the professional asset allocators avoided him like the plague. He couldn’t pass even the most rudimentary due diligence.

If you look at his customer list it is more what I would call retail than professional asset allocators. You see naïve HNW individuals like rich actors, sports people and retirees in Florida, charities and family foundations etc funneled into Madoff by sleezy and also naïve financial planners, brokers etc.

I think I remember several smaller hedge fund/money management guys based in the USA that sent annual letters to the SEC for years telling them he was a crook.

Madoff is a retail based crook and I am referring to the professional asset allocators.

Incorrect, Madoff took down a few professional funds of funds advisers as well.

 

[Ghost of Cutten]

Quote from cornix:

Yes, but if think about it, client redemption occurs as a result of clients not understanding the risk in Graham's sense.

How many people bailed in panic during 2008/9 plunge instead of buying more on the panic peak or at least holding? Their funds would all be in the green by now, especially those invested in "real sector" companies, which inevitably were to recover sooner or later.

So this is more a question of perception of risk. But I certainly agree with you that many clients tend to run away during draw-downs to end up in red cursing the manager while things are back to good...

Is it that simple though? I am sure in 1930 many value investors bought for the same reason they bought in 2008, it's just that the first time, 1931 and early 1932 came along and wiped those value investors (Graham included) out, whereas this time the system held together better and so the value players like Buffett were rewarded instead of crushed.

The fact is that you can never be sure that bad quotes won't become even more bad, and then the fundamentals sink to justify them. Every market can not only go to zero it can stay there, in real outlier scenarios. All people using "Graham Risk" to justify going all-in are just writing very deep OTM puts and gambling with their financial survival.

 

[cornix]

Quote from Ghost of Cutten:

Is it that simple though? I am sure in 1930 many value investors bought for the same reason they bought in 2008, it's just that the first time, 1931 and early 1932 came along and wiped those value investors (Graham included) out, whereas this time the system held together better and so the value players like Buffett were rewarded instead of crushed.

The fact is that you can never be sure that bad quotes won't become even more bad, and then the fundamentals sink to justify them. Every market can not only go to zero it can stay there, in real outlier scenarios. All people using "Graham Risk" to justify going all-in are just writing very deep OTM puts and gambling with their financial survival.

No, not so simple (or rather easy) and neither risk-free for sure. Every investment is a risk, but overall such approach makes sense more often than not. There are many hidden risks in life, which are not less dangerous, just less visible.

 

[Ghost of Cutten]

Quote from Smoker:



Show them the following and you'll be closing sales left and right;

at least 3 year live history
2.5 Sharpe
20-40% CAGR
<10% max drawdown
>$3MM AUM (around $500K internal capital)

If you had that and it was robust ie across time, markets, size etc you would be on your way to being the richest man on earth and in several years you wouldn’t be running any outside money because your own money would have filled your capacity of billions .

That's only if you get over the initial hurdle of raising money in the first place. A sole trader making that would face a long slog to get rich, due to taxes and living expenses. In fact, below say $500k-1 million capital they would not even be increasing net worth much each year unless they were a real miser with their spending.

 

[cornix]

Quote from Ghost of Cutten:

The startup costs of a silicon fabrication factory are enormous. The startup costs of a trader are miniscule. They are not comparable.

The problem for the retail trader is overhead, not startup costs. After tax, commissions, and living expenses, can you grow capital reliably? This is not easy unless you are already borderline rich. For example, 20% per annum with occasional 20% drawdowns is an excellent return, yet after taxes you are talking 11-14% in most civilised countries. So if your living expenses are 100k a year (a comfortable middle class overhead) you need 700k+ in capital to generate that.

Now, one 20% down year and you have 560k. It has just become hard to meet your overhead.

The ways to avoid that are i) higher returns per unit risk (requires extreme talent and hard work) ii) expat to a tax haven to boost your returns by 1/2-2/3 (requires abandoning friends and family, and usually living a soulless existence in a boring place) iii) start a fund and try to enter the big leagues (lots of bureaucracy) iv) find a way to generate good income, rather than return on capital (can be done but usually these edges disappear after a while)

Pick your poison.

With all respect, I wouldn't call 20% per annum a good return for retail trader. If you trade large account, millions of dollars, definitely it is good, but then living expenses are not an issue.

But 20% average yearly ROC with 20% maximum PTTDD on a small account is poor trading IMO.

 

[marketsurfer]

Quote from cornix:

With all respect, I wouldn't call 20% per annum a good return for retail trader. If you trade large account, millions of dollars, definitely it is good, but then living expenses are not an issue.

But 20% average yearly ROC with 20% maximum PTTDD on a small account is poor trading IMO.

LOL! Any other tales of fantasy?---


surf