How do Hedge Funds get around the 90% Failure Rate?

Why do 90% fail?

1. You have people who's only traded for 2-3 years, with a 1 year track record thinking they're good enough to start a fund up. Futures are OK. Equities... shady because of the current upward market. FX funds are definite. Sadly enough... less regulations, more failure.

2. Business / Legal issues (non-trading). High maintenance cost. Splitting partnerships causing they're own clients to move with them. Messed up marketers, 95% of rigged money and frauds are done by marketers. Money laundering and regulation issue.

3.... Traders not realizing this is a business and not accepting it. Obvious with the thread replies... no one talks about the business side..

1. + 3. = 85%

So my strategy would be have a solid fund business structure. "Most" of the investment bank owned hedge funds are shitty... but they manage lotsa money.

Reason: Strong marketing and structure.
 
Quote from nitro:

I believe a combination of #1 and #2 is the right mixture. However, a trader that monitors the ATS and can turn off a given symbol based on news etc is my #3.

So I say #1 + #2 + #3. If I had to choose only one, I would always choose option #1, but funnily enough the research should be performed by #2's.

The idea is once you have something that works, automate it, hence #1. In order to get to something that works, you need people that can think critically, hence #2. Finally, there are intangibles that only an experienced trader can see (correctly) as unwarranted risk that a program cannot, hence #3.

nitro
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it is not nearly that complicated what most hedgefund/bank traders have that the average blowout day trader doesnt is a RISK CONTROL MANAGER and bigger limits. from my time as a broker/trader I know that the one thing that gets many to a point of not blowing out is a middle office guy having a word in his bosses ear. the above points that were made are important but simply having to be somewhat accountable to is a big step to not blowing up.

cheers
 
Quote from TSGannGalt:

Why do 90% fail?

1. You have people who's only traded for 2-3 years, with a 1 year track record thinking they're good enough to start a fund up. Futures are OK. Equities... shady because of the current upward market. FX funds are definite. Sadly enough... less regulations, more failure.

2. Business / Legal issues (non-trading). High maintenance cost. Splitting partnerships causing they're own clients to move with them. Messed up marketers, 95% of rigged money and frauds are done by marketers. Money laundering and regulation issue.

3.... Traders not realizing this is a business and not accepting it. Obvious with the thread replies... no one talks about the business side..

1. + 3. = 85%

So my strategy would be have a solid fund business structure. "Most" of the investment bank owned hedge funds are shitty... but they manage lotsa money.

Reason: Strong marketing and structure.
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"Most" of the investment bank owned hedge funds are shitty....

You are absolutely right :

Goldman's Global Alpha Hedge Fund Falls 3.4% Since Start of '07

By Jenny Strasburg

May 30 (Bloomberg) -- Goldman Sachs Group Inc.'s Global Alpha hedge fund fell 3.4 percent in the first four months of this year hurt by losses in the currency markets, according to a report sent to investors last week.

The decline compares with the average hedge-fund advance of 4.9 percent, data compiled by Chicago-based Hedge Fund Research Inc. show. Global Alpha dropped 12 percent since 2005, when it rose 40 percent and attracted more than $3 billion of new cash.:D:D
 
excuse me ... but where are you getting the numbers
that 90 % of HF fail ?

in what time frame ?

that statistic makes no sense to me

just as the sheer number of HF's now out there
makes no sense to me either nor the fee's they charge
 
Quote from Bogan7:

it is not nearly that complicated what most hedgefund/bank traders have that the average blowout day trader doesnt is a RISK CONTROL MANAGER and bigger limits. from my time as a broker/trader I know that the one thing that gets many to a point of not blowing out is a middle office guy having a word in his bosses ear. the above points that were made are important but simply having to be somewhat accountable to is a big step to not blowing up.

cheers
More...

One of the main points of "The Way of the Turtle" ==>> position sizing and risk control were major factors in their success.
 
Quote from Nana Trader:

How to find good companies? I think we need to talk

In bear market years, everything falls, how long you can hold, except you aren't investing your own capital
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We tend to be long "value" and short "growth" - when the market stalls or goes down, the "growth" fall quickly, while the value hold well.

FWIW,

Don
 
Quote from Nagarjuna:

I was wondering if you're a hedge fund and you had to hire traders, how would you get around the 90% failure rate?

1. Trade only fully automated systems that have been carefully researched and back tested. Remove all discretion.
2. Hire only the smartest guys (top tier MBAs, PHDs, etc.). Being very intelligent can cause ego problems and ego problems are the biggest cause of failure in trading. So I don't know how smart it is to go this route.
3. Only hire experienced traders with great track records. This can be very expensive.
4. Don't trade at all. Invest by dollar cost averaging into good companies and hold for the long run.
5. Invest very heavily in all new traders.


Have I missed anything?
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You have to realize that most HF's are simply attempting to "beat the Street" with minimal returns of 10-20% or so, not make a living for an individual trader. The fund makes their money on the 2% "management fee" - and if they happen to do well, they get an additional percentage. Sure, some do much better, but most don't in the long run.

Don
 
We tend to be long "value" and short "growth" - when the market stalls or goes down, the "growth" fall quickly, while the value hold well.

I am assuming that you are talking long term investment here. Are you running your long term investments on a fundemental basis or a technical (even perhaps systematic ) basis? Or a combination?
 
I think that most hedge funds are just looking to rake in the easy management fees without taking much risk, so their goal is just to keep growing assets under management. Why risk a blow up to earn 50% to end up earning nothing once your investors are gone, when you can kick back and relax, earn 10-15%, and collect management and incentive fees, which still add up to a nice hefty sum. That's what I would do.
 
Quote from ananda:

We tend to be long "value" and short "growth" - when the market stalls or goes down, the "growth" fall quickly, while the value hold well.

I am assuming that you are talking long term investment here. Are you running your long term investments on a fundemental basis or a technical (even perhaps systematic ) basis? Or a combination?
More...

Our "family portfolio" actually consists a couple hundred pairs at this point. We actively trade when it's called for, based on pre-determined profit points, while keeping the rest intact until the pairs "mature" - which is a point where we feel there is no longer any more potential profit to be made. We look to make 36%.

Don
 
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