benchmarks headed for extinction- long live absolute returns?

[DT-waw]

Quote from misctrader:

It doesn't help HF or alternative asset class IMAGE that we had huge public BLOWUPS like LTCM, Niedderhoffer, David Askin fund, Barings, Orange County, etc. All the public hear is that hfs play with huge leverage and complex stuff like futures and derivatives

Yes, and public thinks alternative inv. are super risky, only for eccentric, rich individuals. While the opposite is true. Many HFs have lower drawdowns and much lower volatility than MuFus (uhm, great shortcut). Interesting study - http://www.hedgefund.com/abouthfs/why/mutual/mutual.htm

What % of new businesses fail? I saw figures like 80-90%. Sometimes it takes many years to reach break-even point, have the first dollar as a net profit. How fast you can turn company's assets into hard cash, if business fails? You must fire employees, sell machines, equipment, real estate, finish the deals and agreements, etc. - it takes many months. All this stuff is not liquid.

Alternative investment offer much better characteristics. You can reach BEP in 1st month, and you can withdraw all current investment at any time. The mortality rate for all HFs is about 50%, at least indicated by little out-dated studies. How many corporations had 40% return-on-equity (ROE) over the last 10 or 15 years, like few of the best HF managers? None, I guess. Well, maybe one Interactive Brokers Within much broader population - there're tens of millions corporations and only ~10k HFs.

As I said earlier, facts are ignored by most people, image is #1.

 

[drprotrader]

Money gladly follows performance...and if the regulations are relaxed...firms like Fidelity will just get bigger....They have capitalized on the smorgasbord concept...They have the ability to offer funds of the same class which will in effect always produce the best and worst returns each year...All they have to do is advertise the best to get the inflows...

Being able to be long or short will double the numbers in some instances...

Firms like Fidelity will be looking for hot individuals...the best talents...

Prop firms can emerge as the new training grounds for the Fidelity type firms...and thus climb out of their infancy post 2000 reputation...

 

[darkhorse]

Quote from drprotrader:


Prop firms can emerge as the new training grounds for the Fidelity type firms...and thus climb out of their infancy post 2000 reputation...

The problem with prop trading is that you are competing with technology. The more that short term strategies are automated, the less need there is for humans to do the job. In that regard, MIT and CalTech will probably still be the training grounds du jour.

Also, funds like Fidelity are probably too big to mess with intraday plays. Even if their assets declined by 90%, to 50 billion under management, that's still way too much to daytrade.

I hate to say it, but I think the prop shop model needs extraordinarily bullish conditions to remain viable. It was based on a temporary anomaly that by definition couldn't last.

You just can't train traders en masse unless there is a built in edge to support them. Banks can fill rooms with forex traders because they have an edge built into the spread. Floor traders have an edge built into their location and membership priveleges. Prop firms had an edge based on predominantly bullish market conditions. Take that edge away and the old rules apply- BYOE (bring your own edge). Not the same game anymore.

 

[drprotrader]

Darkhorse.......you have great posts.......

The reason for this type of thinking is that some individuals whose strategies are capable of some size will initially find prop useful because of the added leverage.......

The smaller size strategies will like the 100% payouts and will stay prop...

Those that can clearly increase their size while modestly affecting their returns might be interested in the next step...

Firms like Fidelity are marketing machines...and nothing is wrong with capping size constraints...

Perhaps this is wishful thinking but I have confidence that this "lower commission...higher leverage" business will seed the adaption to the circumstances...

Firms will want to be able to show their #1 on a legal...therefore marketing basis...and of course most successful pools get too big for their strategies and thus leave their high performance days of old...

Speed boats outmaneuver large ships...There will always be both...

Part of the reason for prior success was the use of the technology edge such as edat...Schwab and most big publics now offer edat...but cannot match the increased leverage and rates of the props....

 

[DT-waw]

Quote from darkhorse:

Also, funds like Fidelity are probably too big to mess with intraday plays. Even if their assets declined by 90%, to 50 billion under management, that's still way too much to daytrade.

It's obvious. However, as markets liquidity rises, the capacity of short term strategies is also growing.

I hate to say it, but I think the prop shop model needs extraordinarily bullish conditions to remain viable.

IMO, it's volatility which made prop model popular rather than bullish conditions, which are of course better than bearish due to limited possibilities with shorting stocks.

I think development of trading industry isn't much correlated with economic trends, but with volatility, regulations and technology. All three things moved in the right direction in recent years. Sooner or later alternative investment styles will be treated more seriously, not like a dangerous hazard. Trading and HFs are still young, general public needs more time to familiarize with them.

 

[darkhorse]

Quote from DT-waw:



I think development of trading industry isn't much correlated with economic trends, but with volatility, regulations and technology. All three things moved in the right direction in recent years. Sooner or later alternative investment styles will be treated more seriously, not like a dangerous hazard. Trading and HFs are still young, general public needs more time to familiarize with them.

True - good points