Hedge Fund

[darkhorse]

Originally posted by trader99



Because on the other hand, a steady 6figure salary is really nothing at an IB. They pay new MBAs grads, phds, and even really solid undergar college students that much just coming out of school.

I think that casual statements like this are a bull market phenomenon. That money is not monopoly money. It is coming from somewhere. 1982 to 2000 was the greatest bull run in the history of markets. Ibanks had so much money coming in for the past two decades they were practically lighting their cigars w/ c notes. And at the end of the food chain, in one way or another, Joe Blow paid for it all.

But it just ain't that way anymore. Look at the evidence. Burned investors, Elliot Spitzer, paranoia, slop n' chop, reduced activity, comparisons to the nightmare go nowhere garbage markets of the seventies- the golden days of free cash flow for IB's are over. They are going to go through the Darwinian process and see the weak culled from the ranks just like any other business that falls on economic hard times. And the free cash flow is going to dry up. The well is going to run dry.

In my opinion.

 

[trader99]

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.

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.

It's a well known fact that there is an INVERSE correlation between size and performance of funds. Because naturally the bigger you get the harder it is to move money around faast. And that's why the best fund managers leave these huge complexes like Fidelity, Janus, Barclays,etc. to go work at "small" hedge funds. Because mutual funds by defnition really SUCK. They are 1) not performacne oriented 2) they are too huge to manuever with their hundreds of billions. The last time I check I think Fidelity has like $900B and Vanguard is $600B . Monster elephants.

However, you gotta understand what small means in an institutional world. I would say anything $100M or below is small. After $100M is a medium sized. Despite, POPULAR PUBLIC opinions, the VAST VAST majority of hedge funds are UNDER $100M. So, they can move in and out pretty quickly. The multi-billion dollar hege funds you hear about like LTCM, Soros, Bruce Kovner, Moore Capital,etc. they are actually in the MINORITY. Only a handful, but they get all the attention.

And a $100M is not that difficult to move around to generate even triple digits returns. For example, when we "rebalance" our portfolios of like $250M at a time, it only takes us about
10-15mins. to dump to our brokers then they dump in the market.

So, I think when you get past $100M like $300-$500M then it might begin to be a little more difficult to move lightning fast.

trader99

 

[darkhorse]

Originally posted by trader99



And a $100M is not that difficult to move around to generate even triple digits returns.

What?

No way.

I do not believe this.

Don't bother assuring me its true, because it's not.


p.s. if its so easy, who the hell are you taking the hundred million from????

no offense 99 but a statement like that makes me question your credibility.

p.p.s. if you can get 100% returns on a nine figure sum in your sleep, why in the freakin' freak would you ever touch something as grueling and demanding as prop trading in the first place. that just smells funny man.

 

[trader99]

Originally posted by darkhorse



What?

No way.

I do not believe this.

Don't bother assuring me its true, because it's not.

Here we go again. Oops. What I REALLY REALLY meant to say is this. Gosh, I have to always clarify.

It's not that difficult to move a $100M around. I did NOT mean to say it's not difficult to make triple digits returns on a $100M. of course, it's NOT easy to make triple digit return with any amount of money.

What I was implying was that if there was a supertrader/manager that can theorectically generate triple digit returns, he can do it on a $100M because its size is still small enough to move around.

This does NOT however implies the converse! that is this does NOT imply that a $100M is an easy traget to make triple digit returns. It's a subtle logical inversion but I like to point it out before people jump all over the place.

LOL!

OK. I gotta stop posting on here. I got real work to do peeps! hehe

trader99

 

[darkhorse]

Originally posted by trader99



It's not that difficult to move a $100M around.

trader99

I'm skeptical of this one too.

My guy can spend five or ten minutes working my order for the best average price on a lousy few thousand shares, and yet you can toss a hundred million around like a frisbee?

Again I have to doubt you.

 

[sabena]

Don't put it too black and white, this size
issue.

With the size growing, you have for each
strategy, for each market traded a decrease
in % return.

For the market I trade the E-mini S&P , I have
been able to put this decrease in number
points made caused by the incraese of numbers
of contracts traded into a mathematical
formula.

It is a parabolic function in function of
the average number of points made per trade
and the average sizes at the different price
levels.

I could formulate this for the E-mini's
because you have at each moment true tradeble
prices at the different price levels.

To put this into a formula for for example
the Forex market will require an experimental
approach because the sizes are not known...

But it will probably be similar to a parabolic
function.

 

[trader99]

Originally posted by darkhorse



I'm skeptical of this one too.

My guy can spend five or ten minutes working my order for the best average price on a lousy few thousand shares, and yet you can toss a hundred million around like a frisbee?

Again I have to doubt you.

I really need to get back to work. But here's an explanation to satisfy your doubts.

I guess you have NEVER heard of "principal bid trading" ??? Do you know a company called ITG and their QuantEx trade execution platform? We as well as many quant funds use their principal bid trading platform.

Principal bid trading works like this. We generate a buy and sell list. And we send an ENCRYPTED file to all these competing brokers. They do NOT know the contents of our holdings(i.e. what to buy/sell/short). They just have general portfolio characteristics like liquidity, market cap, and lots of other details but except the names.

Then after a few minutes all the competing brokers send us back their BIDS. We pick the lowest one. And then we send them the password to decrypt and execute the ENTIRE portfolio for us.
And that entire process usually takes about 15minutes.

So, that's how people do program trading! The brokers then worry about dumping into the market. This is all part of "block trading desk" operations. We don't need to worry how they do it. They just do it and they get our business.

trader99

 

[trader99]

Originally posted by darkhorse



I'm skeptical of this one too.

My guy can spend five or ten minutes working my order for the best average price on a lousy few thousand shares, and yet you can toss a hundred million around like a frisbee?

Again I have to doubt you.

One last post on ET for the day! This is such a time sink! hehe.

Perhaps, during the HEY days of '99-00 when we were using principal bid trading it seemed so fast to dump a $100M. Perhaps now it might take a little longer.

Here's an example:

Back in '99, tons of tech stocks were screaming up to $100-$300 and even $800(QCOM unadjusted split).

So, let's be conservative and give an average of $150/shr which was low depending on what internet stocks you were talking about. hehe. those were the days.

$150 * 20,000 shares(position which is still small) = $3M
that's just one stock.

And let's say you have 30-40 stocks in a portfolio that's like $90M-$100M right there. And we are just talking about moving only 20,000 shares block here. nothing big. so during that heyday, i guess we had no problem moving a $100M in 15mins.

I'm not sure what the liquidity situation is nowadays. A lot less seeing from at least an intraday basis.

trader99

 

[Babak]

Originally posted by trader99

Then after a few minutes all the competing brokers send us back their BIDS. We pick the lowest one.

what does the bid represent? I mean it can't represent the price they are willing to excute at (since they don't know what they are)....is it the commission they will charge?

 

[darkhorse]

Originally posted by trader99


I really need to get back to work. But here's an explanation to satisfy your doubts.

I guess you have NEVER heard of "principal bid trading" ??? Do you know a company called ITG and their QuantEx trade execution platform? We as well as many quant funds use their principal bid trading platform.

Principal bid trading works like this. We generate a buy and sell list. And we send an ENCRYPTED file to all these competing brokers. They do NOT know the contents of our holdings(i.e. what to buy/sell/short). They just have general portfolio characteristics like liquidity, market cap, and lots of other details but except the names.

Then after a few minutes all the competing brokers send us back their BIDS. We pick the lowest one. And then we send them the password to decrypt and execute the ENTIRE portfolio for us.
And that entire process usually takes about 15minutes.

So, that's how people do program trading! The brokers then worry about dumping into the market. This is all part of "block trading desk" operations. We don't need to worry how they do it. They just do it and they get our business.

trader99

Fair explanation.

I underestimated your use of technology, hadn't considered the mechanics of principal bid.

Just had a knee jerk reaction at the thought of 100 mil being moved in a finger snap. But if you break it up all over the place and spread it out over dozens of names, that makes more sense.

Though it seems that just trading an index future would be more efficient.

And, now that I think about it, if you are not a program trader that wouldn't work. I would lose my edge with a shotgun approach. But different strokes for different folks etc.