Fundseeder - my experience
- Thread starter globalarbtrader
- Start date
Because they rank by FS score not returns by default. In the end you can adjust returns to taste by raising or lowering leverage. FS score, which seems to be based on the probabilistic Sharpe ratio, will be very very high for a bank account: no down days ever, very little variation.
It always come back to: what's the point of hedge fund like performance characteristics? It should always be about what makes the returns uncorrelated with other asset classes. If you correlate highly with cash or a stock index then why would anyone pay for that? It's not about high returns!!! It's about correlation.
The term "bank account like structure" implies very low returns with very low risk. Indeed, up until recently, the #1 rated FundSeeder account had 2 years of history, with an average annualized return of 2%. It appears that FS has changed the ranking formula, as this account is no longer in the top 100.
The reason to penalize such accounts is that, as the term "bank account" implies, you can get such return distribution with an FDIC-insured certificate of deposit at a bank. It does not make sense to invest in the capital markets (i.e. stocks, bonds, futures, options) if you are targeting a 2% annualized return.
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Thanks Quiet1 and nonlinear5. Sounds like its just some funky FS ranking. I'm just saying that any account that just earns 2% annually IMO should natually not show up on any kind of reputable leaderboard, no need to penalize it further. But if FS has some rankings where it does show up as a leader I could see penalizing it to get it out of there. But in that case I would change the underlying ranking structure, sounds wack.
Ranking return distributions is a non-trivial exercise. There are some 100+ investment performance metrics in existence, but there is no consensus on which one best measures the "true skill" of a fund manager. The industry "standard" is the Sharpe ratio, which has numerous flaws. These flaws have been well researched and documented.
As Quiet1 mentioned, FundSeeder uses the so-called "probabilistic Sharpe ratio" as the base for their rankings. It's described in this paper:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1821643
My personal opinion is that the probabilistic Sharpe ratio has some good properties (such as adjusting the raw Sharpe by the length of the performance record), but I am less convinced with its use of skewness and kurtosis in evaluating the shape of the return distribution.
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He lives in the land of EliteTrader institutions. Clearly all the big names in the industry are "shunned" because they have 5%+ DD.
https://ctaperformance.com/wntn <<<--- If you want a dose of reality of some big names in CTA industry.
Index and direct equities are treated differently from investments in absolute return vehicles like CTA programs and hedge funds.
Pensions endowments like CALPERS, etc. Pension funds and endowments with tens of billions in AUM.
I see institutions that are looking for stable return of 7% annually from their Alternative Manager investment. They are happy with these returns.
I know hedge fund investors that would yank all their money out if the HF closed down -10% for the year. They would take their money and leave.
No, I don't think you do, and if you do they're not CALPERS size investors.
Large institutional investors invest in hedge funds for uncorrelated returns, not minimizing drawdown. As was pointed out to you, most of the hedge fund universe wouldn't exist if your assertions were true. I don't doubt that there's an institutional fund out there looking for a max drawdown of less than 10% and the corresponding very low risk adjusted rate of return that provides for part of their portfolio. However it's ignorance to claim that this is the role that the majority of institutional investors use hedge funds for, as it clearly is not.