CTAs/Hedge Funds Drawdown Recovery & The Business of Trading

C

CPTrader

Some have said that severe drawdowns (greater than 20%) could be the 'kiss of death' for CTAs/hedge fund mangers. However looking at the iasg.com database, one does see examples of spectacular recovery in terms of assets under management (AUM) and performance by some traders with severe drawdowns.

Take R.G. Neiderhoffer who recovered from a 41% drawdown in 1999 and less than $100M AUM to now close to $1B AUM. http://www.iasg.com/SnapshotPT.asp?ID=249

So my question is what prevents a severe drawdown from becoming a kiss of death and just a temporary stumble. For example, if R.G. had lost all his investors in 1999 would he have made his comeback? So I guess a part of his recovery was due to the fact that he could still stay in the game as not all investors abandoned ship during the major storm he faced.

I am interested in all thoughts on this issue and ancillary issues like- managing investors expectations, managing investors during drawdowns, managing yourself as the trader during a drawdown and managing the business of trading.

Thanks.
 
Just my two cents...

I think managing expectations is the key. You mention a 20% drawdown as a key level, but I don't think you can really put a number on it. Some CTAs with high volatility may see several double digit down months per year and still have a big up year.

As long as your partners are expecting that kind of volatility from the start, they should be able to stomach the swings. Obviously there are drawdown levels that one could not easily return from...much greater than 20% though. If you are never in the double digit monthly returns on either side, then a 20% drawdown may be cause for concern.

Aaron had a big drawdown earlier in the year and came flying back from it beautifully thru August. I'm sure he could speak to the scenario you mentioned, although I wouldn't blame him if he didn't after the undeserved abuse he received earlier on these forums.
 
Just thoughts:

I would guess the process started initially with selecting investors.

Possibly majority its investors were such as institutions and fund of funds who all are mature and knowledgeable enough to understand extremely well market dynamics, investment strategy, and rational projections.

Perhaps staying with the fund as is could be the best decision during the period of time, whereas abandoning it (with realised losses) would be comparatively a quite worse option. :confused:
 
There's a paper by Fernando Diz with the promising title "How do CTA's return distribution characteristics affect their likelihood of survival". If you are interested post me.

The short facts are:
*) survival is linked to performance but not necessarily performance linked to survival (meaning high returns don't guarantee survival but low returns secure a quick end)
*) Maximum monthly returns positive affects survival, as does sharpe ratio and the average monthly winning return
*) High Mgmt fee negatively effects survival
*) Systematic traders have a higher chance of survival

Regards, Oliver
 
My system is 100% automated, position trading stocks with a minimum liquidity of 80,000,000 price x volume. I wasn't using my system during the drawdown but feel I can live with it. Can anyone else post their drawdown graphs? I find worst-case scenarios fascinating and only get to see ones based on my system. I'd love to see others.:eek:
 

Attachments

Quote from DK_:

My system is 100% automated, position trading stocks with a minimum liquidity of 80,000,000 price x volume.
More...

What data feed, software, and broker do you use to automate your strategy? I'd like to be able to automate my trading.
 
I position trade, in at the opens, out on closes 2-15 days later. I did all the programming myself and use EOD data from msodata.com. The portfolio moves get sent to my firm where they get executed. All I do is click "update".
 
Quote from olintner:

There's a paper by Fernando Diz with the promising title "How do CTA's return distribution characteristics affect their likelihood of survival". If you are interested post me.

The short facts are:
*) survival is linked to performance but not necessarily performance linked to survival (meaning high returns don't guarantee survival but low returns secure a quick end)
*) Maximum monthly returns positive affects survival, as does sharpe ratio and the average monthly winning return
*) High Mgmt fee negatively effects survival
*) Systematic traders have a higher chance of survival

Regards, Oliver
More...

It appears the paper can be found here, including a few relevant ones. http://www.tradefactory.com/

:cool:
 
You must log in or register to reply here.
Back
Top