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

[luisHK]

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

Good advice there, 3% just seems a little low for the diversified portfolio.

Anyway early thirties, a good job, 2 mil in the bank plus a profitable system for 25% of that money, that's a pretty good place to be, probably several options would work out fine (but sure as mentioned before, if you can avoid it, don't park your savings in a fragile institution)

 

[Tim Smith]

Good advice there, 3% just seems a little low for the diversified portfolio.

The point is that preservation of capital is key !

If you are building a diversified portfolio with preservation of capital at the core, then you seriously cannot expect to get more than 3–5% income. Any more than that and its highly likely you're taking stupid risks and don't really have preservation of capital in mind.

As I said earlier, don't be greedy. $1.5m is a respectable sum, and your number one priority should be preserving it as a comfortable cushion for a rainy-day.... not wasting it on booze, cars, women and risky trading endeavours.

Generate low-risk income off the $1.5m and play with that instead.

 

[H2O]

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.

As a quant I trust you are well aware that your 11 diversified streams of return may turn out to be very highly correlated in adverse market conditions... (not saying a 'standard' stocks / bonds portfolio is a perfect solution btw.).

I just wanted to highlight this risk for less sophisticated investors who, as per the opening post, may be looking to invest a large part (if not all) of their liquid assets.

 

[motif]

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?

With the kind of money you have, you can invest in Silicon Valley tech companies pre-ipo. It's a 20,000 minimum. Investing like this puts you in the hedge fund playing field.

 

[luisHK]

The point is that preservation of capital is key !

If you are building a diversified portfolio with preservation of capital at the core, then you seriously cannot expect to get more than 3–5% income. Any more than that and its highly likely you're taking stupid risks and don't really have preservation of capital in mind.

Yes, fine with your numbers, 4% is often advanced by institutions as the return one can expect on a low risk portfolio, I'm looking for a little more (not significantly more but every half/single percent matters once it's compounded over many years) than that in a long term growth portfolio but with a significant part of the portfolio in volatile emerging markets equities.
If looking for a 3 or 4% return and low volatility, it might be a good bet to invest the money through specialised hedge funds, it would save as well time to OP, as setting up than rebalancing the portfolio can be time (research ) consuming.

 

[wintergasp]

As a quant I trust you are well aware that your 11 diversified streams of return may turn out to be very highly correlated in adverse market conditions... (not saying a 'standard' stocks / bonds portfolio is a perfect solution btw.).

I just wanted to highlight this risk for less sophisticated investors who, as per the opening post, may be looking to invest a large part (if not all) of their liquid assets.

You are right, newcomers usually end up with a concentrated portfolio although it may not seem concentrated until it is.

In my case, I doubt that a trader that holds Live Cattle spreads for 3 months ends up correlated to a HFT fixed-income contrarian fund, regardless of what the SPX / global market does.

At worst, I expect to experience a higher volatility in my daily returns as some managers are trading gold/oil/financials, but most of them adjust their risk profile to the volatility of the market anyway.

 

[luisHK]

Besides OP is 31 according to his profile, he can also opt for a more risky growth portfolio if he is not about to panic during drawdowns.
I'm a little past that age (and that amount of savings) but in his position I would probably hold a riskier portfolio than I do now.

 

[globalarbtrader]

Good advice there, 3% just seems a little low for the diversified portfolio.

Anyway early thirties, a good job, 2 mil in the bank plus a profitable system for 25% of that money, that's a pretty good place to be, probably several options would work out fine (but sure as mentioned before, if you can avoid it, don't park your savings in a fragile institution)

3% is the income (dividend, bond coupons) not the total return. If you're mostly living off this portfolio you shouldn't be touching any capital increase. Yes you can get a slightly higher income than this without harming your diversification, but again it's wise to build in a margin of safety.

Those of use who live almost entirely off trading and investment income have to be a lot more cautious about our return expectations than people who are still working...

GAT

 

[wintergasp]

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?

Usually your broker (e.g. @Robert Morse) has a list of CTAs or funds that offer managed accounts with their brokerage firm and that's a good start.

Another good place is a CTA database such as IASG.com, RCM Alternatives, etc. Most of these database offer you a portfolio construction service ( which I highly DON'T advise ! they charge a lot for it in hidden execution fees, but it costs nothing to register and browse ).

You can have a somewhat diversified portfolio with 1m$ of cash, even maybe 500k - 700k. As Robert mentioned, the minimum is usually around 500k - 1m$, but you can often partially fund it (e.g. a manager with a max drawdown target of 10% on a 500k minimum will trade your account with only 50k of cash) and in most cases you can do a master-allocation account where you have 1 account with your margin and give power of attorney to the traders/managers on a sub-account with no money on it, this way you can cumulate margins easily.

 

[newwurldmn]

Those of use who live almost entirely off trading and investment income have to be a lot more cautious about our return expectations than people who are still working...

GAT

This is why he shouldn't stop working in his high paying soul crushing job. He can turn 2mm into 100mm (pv dollars) by the end of his career if he doesn't spend any of it