Is having your own hedge fund good idea vs. staying as prop.

Quote from USAtrader:

My point Don is that you are stressing the positives of prop, and not the negatives, while doing the opposite with running money. There are pros and cons to each.
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A matter of perspective and the trader's view of him or herself. Some people like the security of a job type arrangement, some are willing to take more risk.

My brother was an accountant for a Fortune 500 company for 10 years when he decided to pack up his wife and 3 young children to move to Las Vegas to see if he could make a good living playing blackjack. After a year of playing small (proof of concept) he moved up his bet sizes and made $millions over the next couple of years. It became more and more difficult to play due to being barred everywhere, so after 3 years he moved his "game" to the Options floor (1978), brought me in 1979. We've been very fortunate, but without that feeling of "risk reward" we would likely still have jobs (I was in public accounting, yuk, LOL).

We had to buy seats of course, but the same business model we engage in now is what we enjoyed back then.

If a person wants to become a trader, I think that the same route Bob and I followed is a good one. Stay independent, get free or cheap use of adequate capital, take some small amount of risk, and work your a$% off for a few years. Much better than attempting the strictly retail course, IMO. As exchange members we were able to do things that retail could not, which obviously helped us. Same today, again, IMO.

Cons of our business model? Depends greatly on the Firm, of course. You have some monthly overhead, and you may have to pay some exchange fees. Overall pretty minor.

And, 99.9% of those who want to get into trading for a living won't be able to find a group with $10million to donate to the cause, again, IMO. It's much easier to start a business with a bit of risk capital (no franchise fees, the money is still yours unless you lose it).

Don
 
Quote from Cutten:

Let's say you can make 15% per annum, with volatility of 30% above and below that figure - for example if you are a reasonable long/short stockpicker, or an average global macro trader.

Try living off that and then compounding it if you have a 500k account. If you borrow $10 mill from Bright, what if you have a down year? -15% and you are now in hock to them for $1.5 mill, not good.

A fund is clearly the way to go. $10 mill and you put your own 500k into it. Pay yourself 50-100k salary from the management fee, and if you deliver the returns then in 5 years you'll have made $10 mill in profit on the original capital, giving you say 2.5-3 mill in incentive fees. You will also have attracted more capital, so your fund will now be 50-100 mill. One 15% year gives you a 3 mill payday. Not bad.
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A trader with $25,000 to risk is certainly not trying to make 15% per year of course. And, if you used even $5 million and made only 10% per year, you make $500k...after a while it adds up. $25k downside, basically unlimited upside with proper scaling and risk control.

(Still a good discussion, I'm won't lose my bias, and I cop to it, but again, we were both on the other side for years).

Don
 
Quote from ProfitTakgFool:

Don,

This is not necessarily true. You can make an excellent living managing a hedge fund. Your earlier points are well taken but you also have to remember that it's hard to put a price tag on "owning your own business" and "being the boss." If you make your investors money they will love you for it and you will have more money coming in the door than you know what to do with. Like anything, it's a great responsibility but anything worthwhile requires hard work.

I could have taken the prop route and probably made more money but I have no regrets. If you start a hedge fund you will meet some very interesting people, and some very strange ones. :p

And...even if you do go prop I suspect you aren't going to walk in the door and have access to $10M of buying power. I would imagine you'd have to prove yourself for a few years before you get to that level? Perhaps I'm wrong, I don't know. Never traded prop.

With a hedge....make your investors money in the first quarter and you'll be swimming in inflows. No reason you can't charge 1, 2 or 3% and 20, 25, 40, and 50% on different profit levels. There's tons of money to be made in the hedge fund business.
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I totally agree about meeting the coolest and strangest people in the hedgie world. every character and international financial rouge with a phone is trying to get a piece of the pie. some real...some far from real but all have tales to tell! this is the greatest business in the world.

however I disagree with one being able to demand those fees just based on performance... it takes more than performance these days to raise capital and demand huge fees....you need an edge and a unique strategy to get anywhere in the hedgie universe. performance without edge is written off as chance or a lark unless its over a very long period of time.

good luck!

surf
 
Don,

What are the requirements for joining your prop firm? Also, under which conditions would you allow a new trader to trade overnight in the futures, forex, options & option futures market?

Thanks,

Walt
 
Quote from jones247:

Don,

What are the requirements for joining your prop firm? Also, under which conditions would you allow a new trader to trade overnight in the futures, forex, options & option futures market?

Thanks,

Walt
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Basic around $20K, Series 7.

Never ever Forex, except for FXE, FXY, etc. for those who like to trade currencies. Options are ok after a very short verbal discussion. Overnight futures? Doubtful, even the Bright's rarely take that kind of risk. Use the SPY, DIA instead.

Don

Edit/Add: Please understand that we simply put together the same business model that worked so well for us for so long. Except our traders don't have to buy seats on the exchanges to get the same benefits. I'm happy to discuss specifics with anyone on the phone, I think we had a pretty good discussion here, on topic.
 
Name a prop which will allow you to take $10MM directional positions and allow 2 months of 4% drawdowns = 800k loss.

Quote from Dustin:

A good trader can get $10M from a prop firm. Why go through the hassle of opening a hedge fund?
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Does Bright allow for $10MM net long or short portfolio and an 8% drawdown = 800k with no money up.

Quote from Don Bright:

If you planning on making money, it doesn't make much sense to both give away 80% plus another 50% for just $10mil. If you don't think you have a solid edge, then maybe.

I know I'm biased, but our guys can use $millions and keep 100% of their profits, it's up to them to develop their edge (with our help, of course).

Now, if it was $150 million or something, go for it, LOL.


Don
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Quote from Don Bright:



And, 99.9% of those who want to get into trading for a living won't be able to find a group with $10million to donate to the cause, again, IMO. It's much easier to start a business with a bit of risk capital (no franchise fees, the money is still yours unless you lose it).

Don
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Now, this IS the MOST important factor here. IMO maybe 1 in 10,000 traders could get 10mm to manage! The other benefit is the hand holding of the prop. Not easy to manage an HF and trade at the same time.
Now on the other hand, what is exactly the benefit of using a prop anyways? I am totally against utilizing max risk. After a couple of decades I have learned to use the Min. possible leverage but to increase the per trade profit. So although I am doing like 2% avg. daily in 08 on a small 10k pilot account but would be excessively stressing myself to increase the capital since the additional leverage and risk would totally cloud my judgment as it has in the past when traded 30 ES contracts.
My other question to Don is, if 95% of traders are unsuccessful then how does that affect your business and the risk of providing them the leverage unless you strictly cut them off period as soon as their deposit runs dry?
 
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