Large investors, family offices and institutions risk perception

[Fonz]

Hello,

I have few questions regarding risk perception: Large investors, family offices, and various institutions have different objectives and different definitions of investment profitability. A huge majority of them consider them self, risk averse.

I already know that most of them will consider any Day Trading activity very risky and even incompatible with any serious risk management, even used as a small diversification potential. Of course, I disagree at 100% and being able to sleep at night is priceless for me.

A profitable discretionary day trading strategy (no monthly loss... Yet) can use simple SPX Options, or ES future contracts.

Results for SPX Options:
The maximum risk taken is known at 100%.
It is just call or put purchase. I use a "mental stop" and if wrong, I sell the options usually between 10% and 25% of the purchase price: For a $10 Option Price, I sell between $1 and $2.50.
When a price move is too fast, and if I was not able to get rid of my calls or puts, the Options will be worthless (unusual) and expire the same day or during the next 2 days.
On average, the risk taken is 87,50% of the Option price.
I trade between 0 and twice a day.

Results for ES Future contracts:
An automatic stop loss which act as an emergency exit, is entered at the same time of a long or short position. 5 points per contract is the maximum loss without slippage. ($250 per contract) If I have a large position, I have to scale out this "emergency exit".
My usual stop loss is placed between 2 and 3.5 points of my entry price.
On average, the risk taken is 3.1 points per trade ($155 per contract).
The real potential risk is actually unknown and much higher, in case of a flash crash for example.
I trade between 0 and 4 times per day (more opportunities).

For actually less risks, the futures strategy is way more precise and deliver the most: Less loss, more consistency, and even more profits per risk.

Futures are obviously better and even easier to trade. The odds are clearly in favor of the middle man when buying Options with 0 to 3 expiration days.
But, in case of a flash crash or events worse than 9/11 and I get stuck with a future position for few days (market closed), that would not be great. With a call, no problem I already knew at 100% my risks.

We are taking about millions, not about 1 contract per trade.
So, without any other risk consideration and risk ratios, which trading vehicle for this profitable strategy would be considered less risky from an institution perspective?

Thanks!
Fonz

 

[Traderjohnsblog]

I started trading with a similar strategy. It worked well for me. The only thing I can suggest is stay with the option strategy but consider vertical spreads. The only issue that I have encountered with spreads is the need to roll into a new spread if you get a runner. Its a nice problem to have.

 

[dealmaker]

Hello,

I have few questions regarding risk perception: Large investors, family offices, and various institutions have different objectives and different definitions of investment profitability. A huge majority of them consider them self, risk averse.

I already know that most of them will consider any Day Trading activity very risky and even incompatible with any serious risk management, even used as a small diversification potential. Of course, I disagree at 100% and being able to sleep at night is priceless for me.

A profitable discretionary day trading strategy (no monthly loss... Yet) can use simple SPX Options, or ES future contracts.

Results for SPX Options:
The maximum risk taken is known at 100%.
It is just call or put purchase. I use a "mental stop" and if wrong, I sell the options usually between 10% and 25% of the purchase price: For a $10 Option Price, I sell between $1 and $2.50.
When a price move is too fast, and if I was not able to get rid of my calls or puts, the Options will be worthless (unusual) and expire the same day or during the next 2 days.
On average, the risk taken is 87,50% of the Option price.
I trade between 0 and twice a day.

Results for ES Future contracts:
An automatic stop loss which act as an emergency exit, is entered at the same time of a long or short position. 5 points per contract is the maximum loss without slippage. ($250 per contract) If I have a large position, I have to scale out this "emergency exit".
My usual stop loss is placed between 2 and 3.5 points of my entry price.
On average, the risk taken is 3.1 points per trade ($155 per contract).
The real potential risk is actually unknown and much higher, in case of a flash crash for example.
I trade between 0 and 4 times per day (more opportunities).

For actually less risks, the futures strategy is way more precise and deliver the most: Less loss, more consistency, and even more profits per risk.

Futures are obviously better and even easier to trade. The odds are clearly in favor of the middle man when buying Options with 0 to 3 expiration days.
But, in case of a flash crash or events worse than 9/11 and I get stuck with a future position for few days (market closed), that would not be great. With a call, no problem I already knew at 100% my risks.

We are taking about millions, not about 1 contract per trade.
So, without any other risk consideration and risk ratios, which trading vehicle for this profitable strategy would be considered less risky from an institution perspective?

Thanks!
Fonz

Family Offices trade like a pension funds very long term 10, 20 year investment outlook and trade the economic cycle. Day and swing trading is not in their radar and they usually outsource their trading related activities.

 

[wintergasp]

Hello,

I have few questions regarding risk perception: Large investors, family offices, and various institutions have different objectives and different definitions of investment profitability. A huge majority of them consider them self, risk averse.

I already know that most of them will consider any Day Trading activity very risky and even incompatible with any serious risk management, even used as a small diversification potential. Of course, I disagree at 100% and being able to sleep at night is priceless for me.

A profitable discretionary day trading strategy (no monthly loss... Yet) can use simple SPX Options, or ES future contracts.

Results for SPX Options:
The maximum risk taken is known at 100%.
It is just call or put purchase. I use a "mental stop" and if wrong, I sell the options usually between 10% and 25% of the purchase price: For a $10 Option Price, I sell between $1 and $2.50.
When a price move is too fast, and if I was not able to get rid of my calls or puts, the Options will be worthless (unusual) and expire the same day or during the next 2 days.
On average, the risk taken is 87,50% of the Option price.
I trade between 0 and twice a day.

Results for ES Future contracts:
An automatic stop loss which act as an emergency exit, is entered at the same time of a long or short position. 5 points per contract is the maximum loss without slippage. ($250 per contract) If I have a large position, I have to scale out this "emergency exit".
My usual stop loss is placed between 2 and 3.5 points of my entry price.
On average, the risk taken is 3.1 points per trade ($155 per contract).
The real potential risk is actually unknown and much higher, in case of a flash crash for example.
I trade between 0 and 4 times per day (more opportunities).

For actually less risks, the futures strategy is way more precise and deliver the most: Less loss, more consistency, and even more profits per risk.

Futures are obviously better and even easier to trade. The odds are clearly in favor of the middle man when buying Options with 0 to 3 expiration days.
But, in case of a flash crash or events worse than 9/11 and I get stuck with a future position for few days (market closed), that would not be great. With a call, no problem I already knew at 100% my risks.

We are taking about millions, not about 1 contract per trade.
So, without any other risk consideration and risk ratios, which trading vehicle for this profitable strategy would be considered less risky from an institution perspective?

Thanks!
Fonz

So how much money can you manage? Institutions (not family offices) will like to be 5% to 10% of your asset base and usually have a minimum ticket of 25m meaning they won't give you less than 25 and you need to be managing 500 for them to give you that.

1. Do you have 500m?

2. Can you manage 1 or 2bn with your strategy?

 

[Fonz]

1. Do you have 500m?
2. Can you manage 1 or 2bn with your strategy?

1. I don't have [yet] 500m.
2. I estimate than 1 trader can manage up to 350m with this strategy.

To be more precise with my question: When "large investors" think about diversification, asset allocation, and especially alternative investments, which vehicle used by a hedge fund or CTA would be perceived as the less riskier: Options (simple calls or puts) or futures?

 

[Martinghoul]

Hello,

I have few questions regarding risk perception: Large investors, family offices, and various institutions have different objectives and different definitions of investment profitability. A huge majority of them consider them self, risk averse.

I already know that most of them will consider any Day Trading activity very risky and even incompatible with any serious risk management, even used as a small diversification potential. Of course, I disagree at 100% and being able to sleep at night is priceless for me.

A profitable discretionary day trading strategy (no monthly loss... Yet) can use simple SPX Options, or ES future contracts.

Results for SPX Options:
The maximum risk taken is known at 100%.
It is just call or put purchase. I use a "mental stop" and if wrong, I sell the options usually between 10% and 25% of the purchase price: For a $10 Option Price, I sell between $1 and $2.50.
When a price move is too fast, and if I was not able to get rid of my calls or puts, the Options will be worthless (unusual) and expire the same day or during the next 2 days.
On average, the risk taken is 87,50% of the Option price.
I trade between 0 and twice a day.

Results for ES Future contracts:
An automatic stop loss which act as an emergency exit, is entered at the same time of a long or short position. 5 points per contract is the maximum loss without slippage. ($250 per contract) If I have a large position, I have to scale out this "emergency exit".
My usual stop loss is placed between 2 and 3.5 points of my entry price.
On average, the risk taken is 3.1 points per trade ($155 per contract).
The real potential risk is actually unknown and much higher, in case of a flash crash for example.
I trade between 0 and 4 times per day (more opportunities).

For actually less risks, the futures strategy is way more precise and deliver the most: Less loss, more consistency, and even more profits per risk.

Futures are obviously better and even easier to trade. The odds are clearly in favor of the middle man when buying Options with 0 to 3 expiration days.
But, in case of a flash crash or events worse than 9/11 and I get stuck with a future position for few days (market closed), that would not be great. With a call, no problem I already knew at 100% my risks.

We are taking about millions, not about 1 contract per trade.
So, without any other risk consideration and risk ratios, which trading vehicle for this profitable strategy would be considered less risky from an institution perspective?

Thanks!
Fonz

Options, assuming you're only ever long them and they're short-dated, are obviously less risky.

That said, no reasonable large-scale investor would really care much about the instrument used.

 

[wintergasp]

1. I don't have [yet] 500m.
2. I estimate than 1 trader can manage up to 350m with this strategy.

To be more precise with my question: When "large investors" think about diversification, asset allocation, and especially alternative investments, which vehicle used by a hedge fund or CTA would be perceived as the less riskier: Options (simple calls or puts) or futures?

Nobody will ever care about that. They care about your AUM and your risk-adjusted performance.

 

[Mr.Wahdy]

Nobody will ever care about that. They care about your AUM and your risk-adjusted performance.

This. You also need to specify your trading mandate to make it very clear as to what you will trade, when you will trade it, and for what reasons. Do a few backtests (use out of sample data as well) to show your potential and compare it against major benchmarks (S&P, NASDAQ, etc.). Then, calculate your risk metrics (sharpe, standard deviation, max drawdown, etc.).

Then, figure out your fee structure. If the numbers work, pitching to smaller family officers or institutional investors will be easier.

 

[comagnum]

Nobody will ever care about that. They care about your AUM and your risk-adjusted performance.

True - they may also care about your draw downs and would consider any trader or fund with 8 years or less of a track record to have little to no experience in bear markets - a lot of bambi's in the woods that will get eaten alive.

 

[Fonz]

Thank you all for your replies.