Looking for Pro firm

Quote from darkhorse:

Pretty much... though it's not that, say, a directional strategy "won't pass muster" with a portfolio margin system.

Most of the time, a directional strategy will fit within the parameters of a portfolio margin system just fine, because directional traders simply don't need that much excess leverage to make their strategies work.

Every once in a while, though, a directional trader may see an attractive inflection point where the addition of concentrated leverage is a cool option to have.

If you are trading cash, you have this option to "take it up" as much as you need to (within sane reason), whether it be your own (margined) cash or the allocator's cash. If you are relying on portfolio margin to provide a synthetic form of additional leverage, though, such may not be available to you.

You also inadvertently hit on a hidden downside of market neutral type strategies - when embedded leverage is built into the structure of the methodology, the possibility of things going bad can be very bad.

There is a meaningful risk difference between generating 20% returns with a modest or low leveraged strategy, versus generating 20% returns with a highly leveraged strategy, where the assumption of low risk hinges on the relationship between two assets remaining stable. Most of the time that assumption is correct, but when it fails you can wind up like this: http://i.imgur.com/rpzVa.jpg

So the "paradox" here goes into even deeper theoretical waters, re, which strategies are truly "risky" and which are not, e.g., a robust strategy with more drawdowns but a reliable long-term profile and low reliance on stable relationship assumptions, or a low drawdown strategy that relies on levered asset relationships, that looks good 99 months out of 100 but every so often, "oh shit" etc...
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Yes, indeed. Although, this assumes that the "oh shit" moment actually happens with these types of leveraged, market neutral strategies. If it doesn't, then I would certainly prefer the strategy with very small drawdowns and steady returns.

I hear what you are saying about the breakdown in the asset relationship hurting you. This would be mitigated substantially by having several hundred, perhaps thousands of these relationships you are betting on, such that any one of them going against you has a minimal impact.

Of course, one could point out that all the spreads could go against you at the same time. However, if all these spreads are uncorrelated, then the chance of this happening is extremely, extremely low. Now, I can already hear the peanut gallery grumbling about LTCM or the quant meltdown and how correlations all go to extremes under certain distressed market conditions and that you will get taken to the cleaners eventually.

I don't discount this scenario, but I will point out that - provided the portfolio is structured correctly - you can minimize your exposure to this scenario greatly. Certainly, you have a much higher probability of getting blown out on a directional trade that hits you during a freak market scenario (such as the flash crash) then you do on 1000 uncorrelated spreads going against you at the same time.
 
Quote from Jay_Ap:


I don't discount this scenario, but I will point out that - provided the portfolio is structured correctly - you can minimize your exposure to this scenario greatly. Certainly, you have a much higher probability of getting blown out on a directional trade that hits you during a freak market scenario (such as the flash crash) then you do on 1000 uncorrelated spreads going against you at the same time.
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Yep, fair point once again... very little black and white with this stuff, and lots of gray, with much dependence on the skill, care, and quality of the trader, the strategy, and the execution.

Quote from Jay_Ap:

Yes, indeed. Although, this assumes that the "oh shit" moment actually happens with these types of leveraged, market neutral strategies. If it doesn't, then I would certainly prefer the strategy with very small drawdowns and steady returns.
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Also, re, preference: Different strokes for different folks etcetera. My preferred combination (that is realistically achievable in the real world) is:

- higher potential for drawdowns within a predetermined volatility band

- much reduced probability of seeing a drawdown spike outside the band

- significant embedded optionality, re, possibility of achieving far greater returns than the standard targeted return (e.g. setting 20% as benchmark for a good year, then seeing opportunities and exploiting them as such that one delivers 80%).

The above combo fits discretionary go anywhere global macro -- surprise surprise, my particular brand of vodka -- but steady eddie grind 'em out strategies with occasional black swan issues not so much. (And the more the black swan is guarded against, the less optionality you have in terms of upside return outliers.)

But again, lots of ways to skin a cat... and different ways to appeal...
 
Quote from darkhorse:

Yep, fair point once again... very little black and white with this stuff, and lots of gray, with much dependence on the skill, care, and quality of the trader, the strategy, and the execution.



Also, re, preference: Different strokes for different folks etcetera. My preferred combination (that is realistically achievable in the real world) is:

- higher potential for drawdowns within a predetermined volatility band

- much reduced probability of seeing a drawdown spike outside the band

- significant embedded optionality, re, possibility of achieving far greater returns than the standard targeted return (e.g. setting 20% as benchmark for a good year, then seeing opportunities and exploiting them as such that one delivers 80%).

The above combo fits discretionary go anywhere global macro -- surprise surprise, my particular brand of vodka -- but steady eddie grind 'em out strategies with occasional black swan issues not so much. (And the more the black swan is guarded against, the less optionality you have in terms of upside return outliers.)

But again, lots of ways to skin a cat... and different ways to appeal...
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I totally agree...different strokes for different folks. There is certainly more than enough room for both types of trading strategies.

At some point, I'm going to reach out to a few of these first loss providers to get more details.

Any advice on some good ones to talk to?
 
Quote from Jay_Ap:

I totally agree...different strokes for different folks. There is certainly more than enough room for both types of trading strategies.

At some point, I'm going to reach out to a few of these first loss providers to get more details.

Any advice on some good ones to talk to?
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Sure, PM me or Mike and we can get the conversation ball rolling...
 
Hi SgtSlottter:

I need to talk to you about something important.

Can you please PM me thanks.



Quote from SgtSlottter:

This SEC bust is about all the unregistered sub 'prop' groups. Alchemy itself may have had some functioning as more of an allocator type, but the rest of these entities are simply unregistered LLCs. Fredericks is the same guy from Tuco Trading. These are all unregistered, and in these cases, offshore BDs.

So the same goes for allocators, offshore / non-us unregistered prop groups, and of course, official BDs with crappy financials. Most are safe, but there's plenty of public info out there.
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Quote from Mike_McDermott:

We have a contact that might fit the bill.

Their goal is to fund emerging managers (small funds, CTAs etc) with a monthly profit split and monitor them for 12-18 months.

The group partners with a multi-billion dollar institutional allocator as a "farm club" to identify key talent.

After the 12-18 month period, the best managers are eligible to receive a traditional allocation (typically 2% management fee, 20% performance allocation) into their fund or a separately managed account.

The group does require the manager to put up some of their own risk capital - that's just the way their program works. It's a great way to boost assets under management (AUM) and begin working with an institutional-grade investor.

If you want more details, shoot me a direct message and we can chat...
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Any update on this? Anyone from ET take you up on this offer? What's the latest?
 
Quote from Mike_McDermott:

On the surface, I would agree with you. The leverage simply for the sake of leverage isn't worth the risk.

But in this case, the funding partner is backed by a multi-billion dollar allocator who is looking to fund traders from a more traditional standpoint (typically 2% management fee 20% incentive allocation).

The program is really just a "farm club" allowing the institutional allocator to evaluate the manager for a limited time period with minimal risk.

Other benefits to the trader include higher AUM (it's easier to raise additional capital when you already manage a material amount), and the credibility of having an institutional investor that has placed capital with you. Now the trader can go to a small family office and say that this institutional investor has placed $XX million into the strategy.

From a business standpoint, the methodology makes a lot of sense. Sure, it's not right for everyone, but for the manager who can control risk and generate consistent profits, it is a tremendous opportunity.
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How is this different than what Mercenary Trader & RAPA are offering? RAPA guy on another thread said they will share the losses...

ps I am not associated with either.
 
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