Should I consider a prop firm? Or just trade my own funds? ($2 mil)

[SpreadOption]

Hi folks,

Long-time lurker, but I haven't posted much. I need some advice from the board's collective wisdom.

For the past 5-6 years, I've traded a system I developed on an account size in the low six figures. The system works very well (10-15% returns per year with rather minimal drawdowns). However, it won't scale up well. The order books are too thin on the instruments I trade. Frankly, my current system really can't be traded on an account greater than $500,000 or so. That's pretty much why the system works--none of the big players can play in this sandbox and remove the inefficiencies.

I've recently come into an inheritance of $1,500,000 bringing my total liquid assets to around $2 million. I'd like to quit my current office job (which is high paying but I absolutely hate it and it's destroying my soul). I want to become financially independent by leveraging my inheritance money into additional trading income. My family and I need more than 10-15% per year on the $500,000 or so my current system can handle. I need to learn a system that trades more liquid instruments so I can put more of my inheritance to work.

A couple options came to mind first (though I'm sure I'm missing some):

My first thought was to see if I could sign on with a prop firm with a reputation for good training (if there is such a thing?). This would help me learn strategies for larger accounts (whether intraday equities, FX, or whatever). Also, I could put up a small chunk of my personal capital, while keeping the rest in more traditional retirement-like investments for long-term growth. This would help shield my nestegg while I'm learning a new system.

Alternatively, I could forego the prop firm route and just try to learn a new system or two on my own--something that would allow me to trade a bigger account. But I don't even know where to start. And to make a livable income, I might have to risk a significant amount of my personal capital on a system I'm not fully comfortable with--or at least more than I'd have to risk if I landed a prop gig.

Obviously, in either of these cases I can continue trading my current system on an account of around $500,000. That will provide my family some basic (albeit inadequate) income while I'm learning something new.

Any advice?

 

[globalarbtrader]

Hi folks,

Long-time lurker, but I haven't posted much. I need some advice from the board's collective wisdom.

For the past 5-6 years, I've traded a system I developed on an account size in the low six figures. The system works very well (10-15% returns per year with rather minimal drawdowns). However, it won't scale up well. The order books are too thin on the instruments I trade. Frankly, my current system really can't be traded on an account greater than $500,000 or so. That's pretty much why the system works--none of the big players can play in this sandbox and remove the inefficiencies.

I've recently come into an inheritance of $1,500,000 bringing my total liquid assets to around $2 million. I'd like to quit my current office job (which is high paying but I absolutely hate it and it's destroying my soul). I want to become financially independent by leveraging my inheritance money into additional trading income. My family and I need more than 10-15% per year on the $500,000 or so my current system can handle. I need to learn a system that trades more liquid instruments so I can put more of my inheritance to work.

A couple options came to mind first (though I'm sure I'm missing some):

My first thought was to see if I could sign on with a prop firm with a reputation for good training (if there is such a thing?). This would help me learn strategies for larger accounts (whether intraday equities, FX, or whatever). Also, I could put up a small chunk of my personal capital, while keeping the rest in more traditional retirement-like investments for long-term growth. This would help shield my nestegg while I'm learning a new system.

Alternatively, I could forego the prop firm route and just try to learn a new system or two on my own--something that would allow me to trade a bigger account. But I don't even know where to start. And to make a livable income, I might have to risk a significant amount of my personal capital on a system I'm not fully comfortable with--or at least more than I'd have to risk if I landed a prop gig.

Obviously, in either of these cases I can continue trading my current system on an account of around $500,000. That will provide my family some basic (albeit inadequate) income while I'm learning something new.

Any advice?

So lets say you're earning $50K from your trading strategy.

If you put $1.5 million into a diversified portfolio of stocks and bonds you can probably earn 3%. Sure there will be ups and downs, but the flow of dividends and coupons would be reasonably safe. So that's another $45,000. Total of $95K: would that be enough? (there will be taxes of course)

This is pretty much how I organise my own investments. Although my trading strategy is incredibly scalable, its much safer if you aren't relying entirely on your trading strategy. If it doesn't work in one or two years you need something to fall back on.

Personally I don't think you'd learn anything from a prop shop: you're already doing very well. If this all still sounds too risky then can you suck up the high paying office job for a few more years? Maybe by then with trading income and growth in your diversified portfolio you'd have $3 million in your diversified portfolio; $90K plus $50K... would that be enough?

Just one more piece of advice if you're going down this route set your "F... You Money" target and stick to it. If I hadn't done that I'd still be working...

GAT

 

[Tim Smith]

@SpreadOption

With all due respect, your post reads as if you're about to fall into the trap of greed and gluttony like so many before you ... the "I want more" disease.

You've just inherited $1.5m and now you want to squander it on "intraday equities, FX, or whatever" ??? The mind boggles !

Quite frankly, your first thought should be preservation of capital !

As @globalarbtrader says, invest (not trade!) the capital sensibly and mess around (if you must !) with the income you derive from the sensible investments. But the capital itself should be sacrasinct and could well come in valuable in later life.

 

[smallStops]

I'd suggest you take one year to think hard before touching a cent of your inheritance.
That means keeping your job one more year while you reflect.

Now what can help you reflect ?
There are advisors who specialise in people who just come into money "not earned", so they know the traps one can be faced with. Taking one year of doing the round of these people will bring you more viewpoints for a wiser decision in regards to your inheritance.

 

[wintergasp]

Hi folks,

Long-time lurker, but I haven't posted much. I need some advice from the board's collective wisdom.

For the past 5-6 years, I've traded a system I developed on an account size in the low six figures. The system works very well (10-15% returns per year with rather minimal drawdowns). However, it won't scale up well. The order books are too thin on the instruments I trade. Frankly, my current system really can't be traded on an account greater than $500,000 or so. That's pretty much why the system works--none of the big players can play in this sandbox and remove the inefficiencies.

I've recently come into an inheritance of $1,500,000 bringing my total liquid assets to around $2 million. I'd like to quit my current office job (which is high paying but I absolutely hate it and it's destroying my soul). I want to become financially independent by leveraging my inheritance money into additional trading income. My family and I need more than 10-15% per year on the $500,000 or so my current system can handle. I need to learn a system that trades more liquid instruments so I can put more of my inheritance to work.

A couple options came to mind first (though I'm sure I'm missing some):

My first thought was to see if I could sign on with a prop firm with a reputation for good training (if there is such a thing?). This would help me learn strategies for larger accounts (whether intraday equities, FX, or whatever). Also, I could put up a small chunk of my personal capital, while keeping the rest in more traditional retirement-like investments for long-term growth. This would help shield my nestegg while I'm learning a new system.

Alternatively, I could forego the prop firm route and just try to learn a new system or two on my own--something that would allow me to trade a bigger account. But I don't even know where to start. And to make a livable income, I might have to risk a significant amount of my personal capital on a system I'm not fully comfortable with--or at least more than I'd have to risk if I landed a prop gig.

Obviously, in either of these cases I can continue trading my current system on an account of around $500,000. That will provide my family some basic (albeit inadequate) income while I'm learning something new.

Any advice?

Taking some time to think about it as @smallStops says is a good idea.

If you want my two cents, I'm a quant trader in a systematic hedge fund and I invest my bonuses in other (systematic!) hedge funds and small/mid-sized CTAs. So far my portfolio has been positive every quarter, I am allocated to 9 external managers and have two prop systems running so that gives me 11 diversified streams of return, which I consider much better than stocks/bonds portfolio.

I manage to get 20-25% a year on my cash without too much vol and I can sleep at night. On my capital base, that's way enough to live in London / New York city with a wife not working and two kids, so I could leave my job. Although this is not a Job per se, that still involves me flying to Chicago / New York / Miami once a year (so 3 trips of 4-5 days each) to meet new managers and a lot of due-diligence which takes time.

 

[tradrjoe]

Taking some time to think about it as @smallStops says is a good idea.

If you want my two cents, I'm a quant trader in a systematic hedge fund and I invest my bonuses in other (systematic!) hedge funds and small/mid-sized CTAs. So far my portfolio has been positive every quarter, I am allocated to 9 external managers and have two prop systems running so that gives me 11 diversified streams of return, which I consider much better than stocks/bonds portfolio.

I manage to get 20-25% a year on my cash without too much vol and I can sleep at night. On my capital base, that's way enough to live in London / New York city with a wife not working and two kids, so I could leave my job. Although this is not a Job per se, that still involves me flying to Chicago / New York / Miami once a year (so 3 trips of 4-5 days each) to meet new managers and a lot of due-diligence which takes time.

I don't want to derail the topic too much, but I feel others in this topic would be interested in this information too. How do you learn about/get access to the systematic hedge funds your personal portfolio is invested in? Do any exist that have minimums below $1mm each?

 

[Robert Morse]

I don't want to derail the topic too much, but I feel others in this topic would be interested in this information too. How do you learn about/get access to the systematic hedge funds your personal portfolio is invested in? Do any exist that have minimums below $1mm each?

In general, there are two types of hedge funds, from a funding level. Those that require you to be QEP and those that don't. The ones that do, typically ask for $500k or more and the ones that don't have minimums of as low as $100k. We follow a number of hedge funds, fund of funds, RIAs and CTAs.

 

[Robert Morse]

Hi folks,

Long-time lurker, but I haven't posted much. I need some advice from the board's collective wisdom.

For the past 5-6 years, I've traded a system I developed on an account size in the low six figures. The system works very well (10-15% returns per year with rather minimal drawdowns). However, it won't scale up well. The order books are too thin on the instruments I trade. Frankly, my current system really can't be traded on an account greater than $500,000 or so. That's pretty much why the system works--none of the big players can play in this sandbox and remove the inefficiencies.

I've recently come into an inheritance of $1,500,000 bringing my total liquid assets to around $2 million. I'd like to quit my current office job (which is high paying but I absolutely hate it and it's destroying my soul). I want to become financially independent by leveraging my inheritance money into additional trading income. My family and I need more than 10-15% per year on the $500,000 or so my current system can handle. I need to learn a system that trades more liquid instruments so I can put more of my inheritance to work.

A couple options came to mind first (though I'm sure I'm missing some):

My first thought was to see if I could sign on with a prop firm with a reputation for good training (if there is such a thing?). This would help me learn strategies for larger accounts (whether intraday equities, FX, or whatever). Also, I could put up a small chunk of my personal capital, while keeping the rest in more traditional retirement-like investments for long-term growth. This would help shield my nestegg while I'm learning a new system.

Alternatively, I could forego the prop firm route and just try to learn a new system or two on my own--something that would allow me to trade a bigger account. But I don't even know where to start. And to make a livable income, I might have to risk a significant amount of my personal capital on a system I'm not fully comfortable with--or at least more than I'd have to risk if I landed a prop gig.

Obviously, in either of these cases I can continue trading my current system on an account of around $500,000. That will provide my family some basic (albeit inadequate) income while I'm learning something new.

Any advice?

IMO, placing more than $50k in a commingled prop firm "concerns" me. I joined one in 2010 with $150k and left after the mandatory 12 months and just missed the firm having financial problems. They closed down shortly after. No one had their cash taken, but some traders we made to liquidate their positions to make firm margin calls, even though they were making money. That quick liquidation cost 6 figures, according to that trader that had $1mm with them. He was trading LEAPs that are generally less liquid.

 

[Xela]

IMO, placing more than $50k in a commingled prop firm "concerns" me.

It would concern me, too - very much so: I wouldn't dream of it, myself!

 

[R1234]

Hi folks,

Long-time lurker, but I haven't posted much. I need some advice from the board's collective wisdom.

For the past 5-6 years, I've traded a system I developed on an account size in the low six figures. The system works very well (10-15% returns per year with rather minimal drawdowns). However, it won't scale up well. The order books are too thin on the instruments I trade. Frankly, my current system really can't be traded on an account greater than $500,000 or so. That's pretty much why the system works--none of the big players can play in this sandbox and remove the inefficiencies.

I've recently come into an inheritance of $1,500,000 bringing my total liquid assets to around $2 million. I'd like to quit my current office job (which is high paying but I absolutely hate it and it's destroying my soul). I want to become financially independent by leveraging my inheritance money into additional trading income. My family and I need more than 10-15% per year on the $500,000 or so my current system can handle. I need to learn a system that trades more liquid instruments so I can put more of my inheritance to work.

A couple options came to mind first (though I'm sure I'm missing some):

My first thought was to see if I could sign on with a prop firm with a reputation for good training (if there is such a thing?). This would help me learn strategies for larger accounts (whether intraday equities, FX, or whatever). Also, I could put up a small chunk of my personal capital, while keeping the rest in more traditional retirement-like investments for long-term growth. This would help shield my nestegg while I'm learning a new system.

Alternatively, I could forego the prop firm route and just try to learn a new system or two on my own--something that would allow me to trade a bigger account. But I don't even know where to start. And to make a livable income, I might have to risk a significant amount of my personal capital on a system I'm not fully comfortable with--or at least more than I'd have to risk if I landed a prop gig.

Obviously, in either of these cases I can continue trading my current system on an account of around $500,000. That will provide my family some basic (albeit inadequate) income while I'm learning something new.

Any advice?

When you invest large amounts of personal capital you have to start looking at it as a business with extreme focus on drawdown control and straightness of equity growth.

If you have the ability to develop alternative versions of your base strategy (or new strategies altogether) then that would be the way to go - when you cannot go deeper in terms of allocation to a single strat then increase your breadth of strategies. An obvious thing is to aim for low/no correlations.

This is the way I do it for my personal capital. At this point I have more than 20 different strategies running at multiple brokers on different types of instruments where the end result is a very smooth + low volatility return profile.