Hedge Fund New Money Troubles

[Ghost of Cutten]

Quote from Ripley:

New money coming into my fund is negatively affecting my fund performance.

This is so because if I'm holding onto a stock at an average price of $20, and when the new money is coming in, the stock maybe worth $25, and I would have to add more of that share at a higher price. Or on a profitable short position, I would be adding more onto a profitable position at a lower price.

How can I keep my performance up while adding new money coming into the fund. Any thoughts or ideas on this would be greatly appreciated.

If you are already long at $25, then adding more at $25 (proportional to your net inflow) should not affect your performance, except if it's an illiquid stock or market where slippage is an issue.

In terms of trading performance, there is really no such thing as being 'long from' a price. You are long at the last tick - trading is mark-to-market.

If the trade no longer makes sense at $25, you should be out of your whole position. If it makes sense at $25, it makes sense with the extra new capital that you just got given by an investor.

 

[Ghost of Cutten]

Quote from Ripley:

Y
If I'm a buyer of a stock upto $20, and the stock is at $25 in my portfolio, and my price target is $30, and I don't want to add more at $25 since the risk reward isn't worth it.

If the risk/reward is not worth it, then you should not be long any size at $25. Yet you are long - therefore you think the risk/reward is worth it.

 

[Ripley]

Quote from Ghost of Cutten:

If the risk/reward is not worth it, then you should not be long any size at $25. Yet you are long - therefore you think the risk/reward is worth it.

Here, you are making a wrong assumption that a potential trade could be broken down into black and white; and can be quantified fully. A trade is never a sure thing, and you are betting money on a supposition that could go either way. Thus, as long as you are holding onto a profitable position, the risk on the position would be diminished due to the mere fact that you are in the money from your break even point. And by increasing that BEP, you are increasing your risk.

</END> I have figured out a way to do what I wanted, to get the maximum performance while adding more AUM.

 

[ElectricSavant]

Ripley...I think there is something called Capsules....or something or other...

ES

Quote from Ripley:

Here, you are making a wrong assumption that a potential trade could be broken down into black and white; and can be quantified fully. A trade is never a sure thing, and you are betting money on a supposition that could go either way. Thus, as long as you are holding onto a profitable position, the risk on the position would be diminished due to the mere fact that you are in the money from your break even point. And by increasing that BEP, you are increasing your risk.

</END> I have figured out a way to do what I wanted, to get the maximum performance while adding more AUM.

 

[Ripley]

Quote from ElectricSavant:

Ripley...I think there is something called Capsules....or something or other...

You mean a separate account to keep the new money coming in?

 

[Ghost of Cutten]

Quote from Ripley:

Here, you are making a wrong assumption that a potential trade could be broken down into black and white; and can be quantified fully. A trade is never a sure thing, and you are betting money on a supposition that could go either way. Thus, as long as you are holding onto a profitable position, the risk on the position would be diminished due to the mere fact that you are in the money from your break even point. And by increasing that BEP, you are increasing your risk.

</END> I have figured out a way to do what I wanted, to get the maximum performance while adding more AUM.

The risk isn't altered at all. Open P&L is identical to capital. The breakeven point on any position is the last price quote. If your fund NAV is worth $10, and $2 of that is open P&L, then your NAV goes back to $8, then you just lost $2 or 20%. Investors won't care if that 20% loss was open P&L or initial capital, it's still a 20% loss either way. Or for a single position, if it goes from 25 to 20, you just lost 5 per share regardless of whether you got in at 20 or 25.

 

[ElectricSavant]

I saw it once in a disclosure. You start several streams. But perhaps there is another CTA here that can clarify...it has been too long ago for me.

ES

Quote from Ripley:

You mean a separate account to keep the new money coming in?

 

[Ripley]

Quote from Ghost of Cutten:

The risk isn't altered at all. Open P&L is identical to capital. The breakeven point on any position is the last price quote. If your fund NAV is worth $10, and $2 of that is open P&L, then your NAV goes back to $8, then you just lost $2 or 20%. Investors won't care if that 20% loss was open P&L or initial capital, it's still a 20% loss either way. Or for a single position, if it goes from 25 to 20, you just lost 5 per share regardless of whether you got in at 20 or 25.

Thanks for clarifying this. There are many trades that would fall into this category, and at the same time many trades that wouldn't either.

 

[RCG Trader]

Quote from Ripley:

You don't understand the issue at hand.

If I'm a buyer of a stock upto $20, and the stock is at $25 in my portfolio, and my price target is $30, and I don't want to add more at $25 since the risk reward isn't worth it.

But, with the new money coming in, I would be forced to add more to a position I wouldn't want to add more.

Well, you shouldn't. Benchmarks should be calculated based on money at work, not idle money. Accumulated money sits until your strat indicates that is should be deployed.

 

[newwurldmn]

Quote from RCG Trader:

Well, you shouldn't. Benchmarks should be calculated based on money at work, not idle money. Accumulated money sits until your strat indicates that is should be deployed.

Returns should be calculated on total assets whether deployed or not. Choosing to deploy assets is part of the fund managers job and nothing would annoy someone is getting an investor letter saying, you invested 100,000 and I made 50% and your account balance is 101,000 because I invested 2,000.