Hedge Fund

Originally posted by trader99


No, I think working for a GOOD hedge fund should be on your list of goals!


And the media likes to hype things up with a few bad names. The hedge fund universe is now like 6000-10000 funds. SO, of course, there will some bad apples. Just as there are bad traders at IB , bad mutual fund managers, or lawyers, or doctors, or cab drivers,etc.


trader99
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I think it's not just a question of bad apples or criminals running off with your money, although even just that alone is a much larger problem than most would assume. The bigger problem is simple but sheer incompetence of the largest majority of those hedge funds out there.

After all costs - and very hefty costs indeed we're talking about here with hedge funds - only a tiny minority manage to outperform a relevant benchmark, meaning that for all the other investors who chose the wrong outfit it's a pretty effective capital destroyer.


Also, evidence to support the thesis that fund managers can identify either over- or underpriced stocks or other financial instruments consistently enough to cover the trading expenses involved in the effort is in exceedingly short supply. This problem does not go away in the rarefied atmosphere of the hedge funds.


Comparing the performances of hedge funds is difficult, ok. Most hedge funds are private partnerships; many are offshore and thus unregulated by the SEC. The most authoritative work in the field is Offshore Hedge Funds: Survival & Performance 1989-1995 by William N. Goetzmann, Roger G. Ibbotson, and Stephen J. Brown. They found "high attrition rates of funds, low covariance with the U.S. stock market, evidence consistent with positive risk-adjusted returns over the time, but little evidence of differential manager skill." In other words, sure, they’re great diversification vehicles, but trying to pick a manager who can do it consistently well is a crap shoot. Tracking investor returns was complicated by severe survivorship bias: Only 25 of the original 108 funds survived the six-year period of the study!!! Investor returns were not available in the year a partnership was merged, terminated, or went bankrupt. Long Term Capital Management was by absolutely no means a solitary fluke, it's more the rule than the exception.


The last sentence of the Forbes article I quoted here earlier in this thread pretty well summed it up:


Still, you're thinking, aren't there geniuses out there who could make money for me? Didn't Warren Buffett have a hedge fund back in the 1960s, before he bought control of Berkshire Hathaway? I just have to find the next Warren Buffett.

Good luck. You and several hundred thousand other investors are looking for a few geniuses camouflaged in a crowd of racetrack touts.
 
Originally posted by NickLeeson



After all costs - and very hefty costs indeed we're talking about here with hedge funds - only a tiny minority manage to outperform a relevant benchmark, meaning that for all the other investors who chose the wrong outfit it's a pretty effective capital destroyer.

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Nick you inadvertently bring up a good point. I think a lot of funds should come with the disclaimer that "size kills." The bigger you are, the slower you have to move. The slower you move, the harder it is to make a decent return. Since $100 million fund is considered "small," I think its fair to say that the vast majority of the hedge fund world suffers from this problem. Being too big I mean, or at least too big to move quickly.

But then it becomes a chicken and egg thing. These guys who want to do quant strategies and have mega research files have to pay big bucks to assistants, phds, blah blah blah. So they have to get the big dollars under management to cover the nut.

Small is beautiful as far as I'm concerned (IF you can trade pure without the research and the egghead backup). I think that there is a sweet spot for a short term trading outfit, maybe somewhere between 10 and 20 million, where you are big enough for execution costs to be minimal and entries sizable enough to give the market a nice snowball effect when you hit the right inflection point, but still small enough to move fast as lightning and be cashed out before the elephants have even gotten the rest of their position on. None of the problems that come with trying to compensate for plodding girth.

Oh, and your field will always be wide open because your competition on the street will always be monolithic. The quant guys have to be huge because they are going for such itty bitty discrepancies, and the mutuals will always be monsters because you have to be king kong to make money off a lame 2% asset management fee.
 
Originally posted by darkhorse




Nick you inadvertently bring up a good point. I think a lot of funds should come with the disclaimer that "size kills." The bigger you are, the slower you have to move. The slower you move, the harder it is to make a decent return. Since $100 million fund is considered "small," I think its fair to say that the vast majority of the hedge fund world suffers from this problem. Being too big I mean, or at least too big to move quickly.

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I agree, although there are a few, very few, exceptions, take the macro strategy funds of Robertson and Soros, both with something like 20 billion under management at the height of their success, but they still managed an annualised 30% over decades, or same with Paul Tudor Jones with his 10 Billion or Louis Bacon who is closed to new money, and they both are all the way up there, too, couple of others, but then it gets real lonely. But, and that supports your point again, Stanley Druckenmiller mentioned in one of his last interviews before he left Soros that the size had started to turn into a real problem for him.


But one thing with being too small is that the costs that are offset against the assets under management will have more of an impact on performance than if your asset base is larger.

So, I guess finding the optimum size for ones strategy, 10 million, a hundred, one billion, what, is something of a juggling act that you'll probably discover as you're moving along.
 
Originally posted by NickLeeson




But one thing with being too small is that the costs that are offset against the assets under management will have more of an impact on performance than if your asset base is larger.
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Costs? What costs? Execution costs are factored into P&L so don't have to worry about those. There are basic outsourcing costs that you pay for paperwork but the rest can be passed on to the individual accounts as fractional percentage of assets depending on what you work out.

So you mean the two to four grand a month or so that covers software, data feed, data connection, back up connection, office space (if necessary) and paperwork outsourcing to professional accountants? That's less than the mortgage on a big house.
 
Well, last I heard is that it's problematic if you start out with less than 5 million, as overheads will drag down performance by say 1 - 3 % per month, making it harder to attract new funds, thereby creating a potentially life threatening situation for the fund.

Start up legal fees for setting up the hedge fund company and for setting up the offshore fund, systems and marketing as in air fare, hotels, restaurants etc are going to be very high and they are going to be offset against the fund, all in all you're probabaly talking 500 to 750K just to get up and running.

And the running costs determining fund break even, well that's highly individual, although most clients, at least in the beginning when you're still unknown, will expect representative office space etc.

Do you want to do that? Then good luck;)
 
"Size kills"


Well, that is in a much lesser extent true when you trade
the Forex market.

You cannot move 1 billion in Yahoo in a few seconds
but you can in the Forex Market.
 
Originally posted by sabena
"Size kills"


Well, that is in a much lesser extent true when you trade
the Forex market.

You cannot move 1 billion in Yahoo in a few seconds
but you can in the Forex Market.
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that's nice

who cares?
 
Originally posted by sabena
"Size kills"


Well, that is in a much lesser extent true when you trade
the Forex market.

You cannot move 1 billion in Yahoo in a few seconds
but you can in the Forex Market.
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True, and that, together with the fixed income markets, is where all the big macros are playing because of liquidity.

But even then there are limits you'll eventually reach and that are relevant because performance isn't absolute, it's relative to your size:

EG Soros, in his famous play against the Pound where he earned over 1 Billion wanted to build a leveraged position of 20 Billion, but "only" managed 10 billion because time was too short.
 
Originally posted by sabena
Yeah, George only made 1 billion, poor guy.....:0)))))))
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Hehe, I added that in my prior post about performance having to be seen relative to your size.

It's like that PIMCO guy talking about one of his billion days that he'd had, only you don't have those every day, haha, PIMCO has those 2, 3 times a year, if that, and then relative to PIMCOS assets it's not that great a deal.

It's just relative.
 
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