Quote from heech:
You talk about "diluting his own share" from taking investor funds... where is the dilution? Rather than filling 5 contracts, you now fill 6... if the 6th contract profits, you get a cut. If the 6th contract loses, it doesn't increase your losses.
Why aren't there ANY superior traders sufficiently motivated by greed to accept OPM? You can look at the 5-yr rankings as listed by BarclayHedge (which I can't find online... but I do have their magazine). You atlk about benefit of small scale... even for smaller funds between $1m-$10mm in assets, there are pitifully few managers achieving more than 30% in annualized returns with a Sharpe higher than 1.0.
Good points. I think I know the answer to the dilution problem and your why isnt any one manager achieving super trader statistics.
Anybody with a strong daily or weekly consistancy, is not going to be trading soley the most efficient and liquid securties, more likely he would be diversified and many many securities, identifying inefficiencies, which have liquidity concerns. Say this hypothetical super trader trades vix futures curves because he has identified a strong edge, these are at times a very illquid contract, or perhap this trader has an equities strat. Dilution of profits starts when the later shares or contracts are filled at worse prices, you may be able to fill on your first 5 contracts at the first and very best signals, and now your 6th - 10th contract of OPM is filling at worse prices, but its still profitable just not as profitable as the first 5 cars, so there is a diminishing returns curve.
The "first in trades" are the very best cream of the crop that will go on to generate 80% of your profits, and the end leg of your extra OPM will go on to only generate 20%, but now you have to split your profits 50/50...see the problem with having a strong edge and sharing it with OPM...
e.g. Trader has a super strong strategy where he identifies over sold stock 1 hour before EOD for a quick ultra high expectancy trade with a profit factor that is sky high. On average he may purchase up to 5,000 shares at varying prices, to net about 10 cents per share on average ($500). Now if he were to raise OPM and buy an extra 5,000 shares on top of what was his original 5,000 shares, he may be able to squeeze out a tiny bit more profit with the extra capital, perhaps an extra 1 cent per share for the next 5000 shares ($50). Because you are a legitimate fund which does not front run its clients, you will net only a little more than half of the total profits, instead of keeping $500 for yourself you now only have about $300, you have to share half with clients, but the clients extra money barely made that much more, all because of diminishing returns.
I although far from where I want to be, I can confirm this happens with my own trading. The top 20% of my strongest signals to buy or sell at a limit price generates about 50% of this strategies pnl. The other 80% of my signals go on to make the rest of it up. Imagine, if I only had enough BP to utilize my top 20% of trades, and then I use OPM for the next 80% I would get ripped off.
