[ I've created this new discussion thread since this isn't really for the hedge fund discussion ]
Don,
I'm open to anything that makes sense. But for one thing I don't understand how prop firms work. And from the little bit that I have read, it doesn't sound like a good fit in my case though I am sure it makes perfect sense for other cases.
Some questions / concerns I would have this this route:
- How do prop firms make money? Is it through sharing commissions on trades? Is it through borrowing against the assets of the traders? (ie if I put $50K down then you can borrow 1 million or so and do interest rate swaps or your own investing)? Is it the prop firms have their own seperate large investors or internal capital and they mirror-trade the best performing prop traders? Also I read something about overnight interest charges.
- It seems a lot of the math involved with prop firms involves leverage. Just how much are we talking about and how is that leverage used (both from a prop traders standpoint and the company's standpoint). Ie if I use my own $50K, and you give me $1 million to trade with, first of all am I paying interst on this? If so then I might as well 2nd mortgage my own house for capital. If I lose $1 million do I have to pay back the million or am I limited to a $50K loss.
If I put in $50k and the company gives me $2 million to play with, does the company also invest say $10 million mirror-trading my investments. That would hurt me as far as price impact if the numbers got big enough. (Granted this problem occurs in hedge funds too-- if you have $50 million AUM in certain cases you can impact prices).
- Back to overnight interest, and trading style in general, unfortunetly my system is not a day trading system. My positions are *always* open overnight, and almost always for an average of about 2 weeks. I think I read something about a high charge for having overnight positions. Thus it was my guess that prop firms are mostly useful for experienced day traders as opposed to those who follow longer term strategies.
- I'm not sure I want other people knowing exactly what my positions are since there is a chance they can reverse engineer the system (well I have a few tricks to make that hard but still)
I know that sounds paranoid but intellectual property is a form of property after all and you wouldn't leave a couple gold bars just lying in your driveway, would you? Again I know this problem applies to hedge funds as well to some degree as you need auditors, but when done correctly you can minimize this risk, perhaps even using 4 brokerage firms / accounts and have 4 different auditors then a master auditor to add them all up. I know that is complex and costly but it is probably better than having vultures arb against your own strategy and suck the returns out of it
- My strategy makes use of options on US stocks for various reasons instead of the underlying stocks. I thought most prop firms only let you trade in actual stocks. In addition, once assets are large enough I want to add future options (currencies + commodities).
So as you can see for all these reasons I don't know if the fit is the best for a prop firm. Perhaps if I try fund-raising for 2 years without any results then with some adjustments this might be the way to go, as it probably would be better than letting my own money take its time to grow since I'm starting with such a small base.
-Taric
Don,
I'm open to anything that makes sense. But for one thing I don't understand how prop firms work. And from the little bit that I have read, it doesn't sound like a good fit in my case though I am sure it makes perfect sense for other cases.
Some questions / concerns I would have this this route:
- How do prop firms make money? Is it through sharing commissions on trades? Is it through borrowing against the assets of the traders? (ie if I put $50K down then you can borrow 1 million or so and do interest rate swaps or your own investing)? Is it the prop firms have their own seperate large investors or internal capital and they mirror-trade the best performing prop traders? Also I read something about overnight interest charges.
- It seems a lot of the math involved with prop firms involves leverage. Just how much are we talking about and how is that leverage used (both from a prop traders standpoint and the company's standpoint). Ie if I use my own $50K, and you give me $1 million to trade with, first of all am I paying interst on this? If so then I might as well 2nd mortgage my own house for capital. If I lose $1 million do I have to pay back the million or am I limited to a $50K loss.
If I put in $50k and the company gives me $2 million to play with, does the company also invest say $10 million mirror-trading my investments. That would hurt me as far as price impact if the numbers got big enough. (Granted this problem occurs in hedge funds too-- if you have $50 million AUM in certain cases you can impact prices).
- Back to overnight interest, and trading style in general, unfortunetly my system is not a day trading system. My positions are *always* open overnight, and almost always for an average of about 2 weeks. I think I read something about a high charge for having overnight positions. Thus it was my guess that prop firms are mostly useful for experienced day traders as opposed to those who follow longer term strategies.
- I'm not sure I want other people knowing exactly what my positions are since there is a chance they can reverse engineer the system (well I have a few tricks to make that hard but still)
I know that sounds paranoid but intellectual property is a form of property after all and you wouldn't leave a couple gold bars just lying in your driveway, would you? Again I know this problem applies to hedge funds as well to some degree as you need auditors, but when done correctly you can minimize this risk, perhaps even using 4 brokerage firms / accounts and have 4 different auditors then a master auditor to add them all up. I know that is complex and costly but it is probably better than having vultures arb against your own strategy and suck the returns out of it
- My strategy makes use of options on US stocks for various reasons instead of the underlying stocks. I thought most prop firms only let you trade in actual stocks. In addition, once assets are large enough I want to add future options (currencies + commodities).
So as you can see for all these reasons I don't know if the fit is the best for a prop firm. Perhaps if I try fund-raising for 2 years without any results then with some adjustments this might be the way to go, as it probably would be better than letting my own money take its time to grow since I'm starting with such a small base.
-Taric