If your max drawdown was 5-to-10 million, why not just risk 1/10th that, and make 1/10th the profits, with 1/10th the risk, and 10 times greater chance to succeed?
Return <10% at bank prop trading arms? Transparency from financial statements
- Thread starter pinetboltz
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If your max drawdown was 5-to-10 million, why not just risk 1/10th that, and make 1/10th the profits, with 1/10th the risk, and 10 times greater chance to succeed?
Given that your bonuses are based on the money you make for the bank and it's not your money the moral hazard effect actually incentivizes the opposite, risk as much as you are allowed to.
yeah i think it falls somewhere in the middle... usually i would run into the concentration limit or var limit first. I like big positions tight stops and many tries. In fact they had raised the var limit for me specifically, it was double what someone else with the same drawdown would normally have. I guess the point is, these things are pretty fluid to allow your style/strategy to do well without blowing up.. Probably best desk I worked on overall. Great guys, lots of independence, only downside is you had to wear a tie in the office.
Indeed, it "incentivizes people to take max risk." That is nuts in my mind. Why not be conservative and do the slow-and-steady-wins-the-race thing, rather than be a race-car driver and risk the crash-and-burn? I suppose my conservative nature is what has killed me this year. The only solace I can take away from it is that I am still in the game.
HOWEVER...
If I had 5-10 mil of OPM, there would be profits, by playing it conservatively.
Well, the fixed cost is your seat cost and salary. The rest is upside for the bank. So its more a matter of the portfolio of traders and their correlation and actual use of regulatory capital (not balance sheet). I think everyone wins if you work within you limits, maybe not at them all the time, but certainly to maximize p&l within the constraints you are given. I think you guys are all overthinking this. We felt like mercenaries, just operate in your sandbox and maximize what you could. You didnt know if the desk was around next year, and/or you would get the right bonus in a given year, so there was no point worrying about it. It was really simple honestly. I never really thought about how to maximize personal payouts over the long run, because the environment was volatile enough (2009-2012), I just thought of how best to allocate my risk.
good stuff...was there a particular 'number' that ppl had in mind, before deciding to pack it in & head off to the bahamas?
it was said that george soros had a target of $500k back in the 1960s, roughly equiv to $4m today
well you can't eat alpha, usually fund managers need a way to spin sub/market-level returns into justification for their 2 & 20 compensation schemes
c'mon, if you can sit back & literally do nothing to get 10% market level returns, as in the case of vanguard that holds hundreds of billions--so don't say the magnitude of money in the fund makes it different somehow, why even bother to show up at work? or spend all that time devising super complex algorithms/strategies that sound good with terms like 'delta', 'vega,' 'positive carry,' that impresses mostly the complete amateurs and types who are easily impressed
bottom line is specific numbers/actual case studies show that these guys are 'salesmen' in pretending to be all savvy and sophisticated in their 'proprietary trading strategies,' when they really net like 6-7% real returns after inflation per year, and hardly outperform the market for any long period of time. (yes, my guess is that even the bank prop guys had to 'sell' their strategies to the higher-ups in the bank, it was said that SocGen's CEO hadn't been too impressed with the asset mgmt arm a few years back, maybe he changed his mind)
just bcuz
they act so secretive doesn't make them bruce kovner
they wear fleece vests doesn't make them steve cohen
they have a whole bunch of trading screens doesn't make them louis bacon
i guess their genius is:
(1) figuring out how to get a contract that enables them to personally make millions off market-level 8-10% annual returns
(2) staying in the position for a reasonable length of time, to realize said payout
(3) coming up with iterations of a method that nets market-level returns, using complex calculations/algorithms/derivatives - kind of like instead of taking the Eurostar directly from London to Paris (£112 one way first class), they take a chopper from London to Frankfurt (£8k), Frankfurt to Geneve by private car, and then Geneve to Paris by TGV -- more £££ for the travel agent, i guess
HF/CTA's are able to intelligently use leverage. ones strategy got a good relation between annual return and annual draw down one can by use to additional leverage to boost returns within ones given risk mandate.
Example if current performance is 10% returns for 3% risk, double the leverage and return 20% for a 6% annualized risk instead. Tailor your annual performance after your risk profile.
well that's the thing, these guys are prob not generating 10% on 1x notional, using only their capital base conservatively like some mutual fund.
if they found a way to really reduce risk - across all dimensions - to so low, while generating mkt-level returns, then they'd have leveraged X times out of it, beat Soros, Simons etc at their games of 40-50% annual compound over a long time window.
but they don't.
explicitly or implicitly, they probably recognize that their strategies have some edge cases / brittleness in certain situations, which force them to proactively limit against the use of leverage beyond whatever they're already using to get 10% annual return.
at some level, these 'traders' are pretty fungible, their sales ability in raising capital base is probably more valuable than their purported trading ability
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