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

N

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?
 
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
 
Quote from Nagarjuna:

Invest by dollar cost averaging into good companies and hold for the long run.

Have I missed anything? [/B]
More...

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
 
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?
More...

How about, "carry losers at face value and don't mark to market"?
 
I think most hedge funds operate like mutual funds now in terms of strategies. They have longer holding periods..

#4
 
1. Trade only fully automated systems that have been carefully researched and back tested. Remove all discretion.

hedge funds that use automated systems have some of the worse returns in the market. I could only name 2-3 that have proved it to work. otherwise, discretionary props rule earth.


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.

not sure how many MBA's or PHDs you've met, but the most smartest of them are the most humble people I've met in my life. if they're the real deal, you wouldn't even know they have an MBA/PHD. the only people you hear of with MBA/PHDs are those without a good job.

3. Only hire experienced traders with great track records. This can be very expensive.

probably your best point. if you ever visit a prop desk at a top-tier bank, you know what counts. but unfortunately it can take more than just money to attract these people.

4. Don't trade at all. Invest by dollar cost averaging into good companies and hold for the long run.

good idea if you manage a pension fund. buy and hold long-run is not what a hedge fund was innovated for.

5. Invest very heavily in all new traders.

most hedge funds are already paying ridiclous amount of money for very young bright graduates with great talent. if u can invest in them in any other way that guarantees results than you might as well just invest in yourself.

Have I missed anything?

YES. big time.

6. make good friends in the industry. become CEO of any business in any industry. later sit on the boards as non-exec and make friends. AND THEN start a LLP hedge fund. preferably based in some lost place called Cayman or Bermuda.. and now you're really talking business. the only problem is you can't just call people up to be friends. u need to be something first and establish trust for others to want to be ur friend. you'll also need some very good lawyers. ;)
 
Dont forget that hedge funds have the advantage in a bear market. They can invest in non-stocks such as gold, oil, etc. They can also short stocks. They also go way beyond trading the markets at times by investing in such things as movies.

My opinion is that an aggressive mutual fund will do just as well, if not better, then a hedge fund in a bull market.

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
More...
 
Quote from michaelscott:

Dont forget that hedge funds have the advantage in a bear market. They can invest in non-stocks such as gold, oil, etc. They can also short stocks. They also go way beyond trading the markets at times by investing in such things as movies.

More...

I know they can short. But topic was about investing in good companies and being long.
 
survival bias. only the best report and continue. but you are flaws in trying to compare a hedge fund trader to an independent. strategies, trading vehicles, resources are completely different.
 
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