On average hedge funds don't outperform. The reason is quite simple. Lets say I'm a big hedge fund and have $10 Billion to invest. And I know a great company thats going to return 30% over the next few years. The company has 300 million shares outstanding and the shares are trading at $10 each. For me to buy 50 million shares (16.6%) I'm going to drive the price way up on myself. And thats only $500 million dollars I still have $9.5 billion to invest. The game gets even harder if you consider that hedge funds have over $1 trillion to invest. They can't on average outperform the market because they along with mutual funds are the market.
Reality check please...JWH, hedge funds and mutual funds
- Thread starter lars22
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Il Principe
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First of all, read the first two Market Wizards books. They contain all you need to know about markets, psychology, success, failure, and expectations of being a trader. Any other book(s) on "how to" or "how I made" are not worth reading at this point of your career. Trading is a game of experience; you have to earn your expertise more than any other profession because any rules that exist slowly mutate and change. And when you read too many trading books, you accumulate rules.
Secondly, there are an unbelievable amount of hedge funds out there and they basically all do the same thing, whether it's long/short, convertible bond arb, reversion to the mean, macro, forex only, or cash/future arb. They've all been created with the simultaneous explosion of liquidity thanks to the central banks of the world. However, the pool of tradeable securities has not kept up with this explosion, save for swaps and the odd batch from the CME, such as weather futures. So, they're all looking at the same thing and trade technical developments, rather than take positions with speculative conviction. The markets are too crowded.
Third, when you say a mutual fund can get you 10%, you are making the false assumption that because you are investing in said fund that it will give you 10%. The extra risk of a stock mutual fund has historically given a few percent above bonds, CD's, cash, etc. You are buying potential; it doesn't mean it will return 10% and frankly given the performance of the last 10 years, I believe they will not give you 10% in the next ten.
Fourth, the best part of a hedge fund is that you are running other people's money. The bad part is you have to put that money to work. You have to. And that can force you to take positions you really don't want. With your own money, you can choose not to trade for whatever reason. That is a big advantage. Plus, market participants won't try (and usually succeed) at guessing your position and push the market against you until you say uncle. That's how the CBOE option pits work. They all have the same information and basically figure out who's the weak hand and try to flush that trader out.
Secondly, there are an unbelievable amount of hedge funds out there and they basically all do the same thing, whether it's long/short, convertible bond arb, reversion to the mean, macro, forex only, or cash/future arb. They've all been created with the simultaneous explosion of liquidity thanks to the central banks of the world. However, the pool of tradeable securities has not kept up with this explosion, save for swaps and the odd batch from the CME, such as weather futures. So, they're all looking at the same thing and trade technical developments, rather than take positions with speculative conviction. The markets are too crowded.
Third, when you say a mutual fund can get you 10%, you are making the false assumption that because you are investing in said fund that it will give you 10%. The extra risk of a stock mutual fund has historically given a few percent above bonds, CD's, cash, etc. You are buying potential; it doesn't mean it will return 10% and frankly given the performance of the last 10 years, I believe they will not give you 10% in the next ten.
Fourth, the best part of a hedge fund is that you are running other people's money. The bad part is you have to put that money to work. You have to. And that can force you to take positions you really don't want. With your own money, you can choose not to trade for whatever reason. That is a big advantage. Plus, market participants won't try (and usually succeed) at guessing your position and push the market against you until you say uncle. That's how the CBOE option pits work. They all have the same information and basically figure out who's the weak hand and try to flush that trader out.
Barton Biggs' book "Hedge Hogging" is an excellent read on the entire subject....
very difficult for them to make money......20% of ZERO is still ZERO
Much easier for small traders.....speed boat compared to super tanker...
PS: What bank has average 15% yield on CD's in last 10 years??
SteveD
very difficult for them to make money......20% of ZERO is still ZERO
Much easier for small traders.....speed boat compared to super tanker...
PS: What bank has average 15% yield on CD's in last 10 years??
SteveD
I agree trading in general is very overcrowded and it does seem like a lot of the movement is just one large player pushing the other around. No one is really looking at the fundamentals. Its Im going to ram this guy for ten ticks in the bonds or minis or whatever. As for the big funds, good luck making 15 percent a year with 6 billion. Citadel has over 700 employees. Talk about expensive.
Gone are the days when a guy can can take a couple of moving averages, register as a CTA. follow a few trends and make a fortune. Futures markets, and by implication the underlying markets, have changed irrevocably over recent years. The denial by JWH, Bill Dunn and others to acknowledge this fact has cost them and their investors dearly. This is known in some cricles as Pollyanna syndrome.
You can believe in trend following 'cause one of our "Trading Elite", Marketsurfer, recommends this book:
"This is an excellent book that I highly recommend...No, there are no secrets in it, but it's extremely well written and contains many nuggets of knowledge from a multitude of top traders. I enjoyed it more than the Market Wizard books. It earned a spot in my 10 all-time favorite trading books."
Dave Goodboy's (a.k.a. Marketsurfer) EliteTrader Review
Dave Goodboy Interview with Michael Covel
"This is an excellent book that I highly recommend...No, there are no secrets in it, but it's extremely well written and contains many nuggets of knowledge from a multitude of top traders. I enjoyed it more than the Market Wizard books. It earned a spot in my 10 all-time favorite trading books."
Dave Goodboy's (a.k.a. Marketsurfer) EliteTrader Review
Dave Goodboy Interview with Michael Covel
Quote from Wayne Gibbous:
You can believe in trend following 'cause one of our "Trading Elite", Marketsurfer, recommends this book:
"This is an excellent book that I highly recommend...No, there are no secrets in it, but it's extremely well written and contains many nuggets of knowledge from a multitude of top traders. I enjoyed it more than the Market Wizard books. It earned a spot in my 10 all-time favorite trading books."
Interview with Michael Covel
i am also name checked in that book.( thanks for the PR, Michael!). the above review was given as a professional courtesy, as is customary in that business.
FYI-- i still agree that the book is well written,enjoyable and a fun beach read.
However, further study clearly showed its premise is fatally flawed.
Remember, i am recommending the book, as a book, not as a trading manual.
surf