So you are ready to hand your money over to a "hedge fund"...

[MKTrader]

Quote from the1:

Agree 100%. The biggest question I received from educated people with knowledge of the industry and trading in general was, what is your strategy? They didn't care very much that last year I did 48%. They wanted to know precise details and examined drawdown periods very carefully. You'll run into two types of folks when you try to attract capital -- those who know very little about the industry and who are quick to stroke a check and those who tend to know more about the industry than you do. You need to have two presentations ready. A highly complex and sophisticated presentation and then one that's dumbed down. A Sharpe Ratio and Sortino Ratio doesn't mean anything to the average investor but means everything to the sophisticated investor. You even need to know the weaknesses of each of these ratios and be ready to discuss them and how they apply to your trading/strategy. You need to know what a Black Swan event is and what steps you've taken to ensure you don't run into one. What if that risk avoidance method fails? On that 1000 point intra-day down day many of those risk management methods did fail. There are times a stop is useless.

I've never cared much for the Sharpe Ratio, even though it's widely used. It only seems to make sense for "random walk" buy-and-hope types. I just don't see the point of being "punished" for upside volatility.

The Sortino Ratio makes a lot more sense. I once emailed Dr. Sortino a question about it, not expecting a reply. A few months later he replied, with all the calculations in an attached spreadsheet.

 

[the1]

I agree. October and November 2008 were the best two trading months I've ever had for one reason -- incredible volatility. Since my monthly returns jumped during those months my Sharpe was punished. But as one guy once suggested, a sudden drop in your Shape Ratio indicates that an event occurred that is unlikely to occur again so when looking at that measure at a moment in time it has some use. I suppose that's true to a point. It depends on how you look at it. The industry uses it so I use it. I think the Sortino is much more useful.

Quote from MKTrader:

I've never cared much for the Sharpe Ratio, even though it's widely used. It only seems to make sense for "random walk" buy-and-hope types. I just don't see the point of being "punished" for upside volatility.

The Sortino Ratio makes a lot more sense. I once emailed Dr. Sortino a question about it, not expecting a reply. A few months later he replied, with all the calculations in an attached spreadsheet.

 

[neutrino]

Quote from the1:

Managing money is a whole different world when you never actually touch the money. You actually get your life back.

Hi, what did you mean here - "never actually touch the money"?

 

[the1]

If you run a hedge fund and register as a CPO people mail you a check and you deposit it into a pooled account so you actually take physical possession of the funds. That opens up a load of doors of responsibility. At this point you have to work closely with attorneys, accountants, administrators, regulators, and whoever else that needs to have their eye on the pie.

A number of years ago I shut down that operation and converted to a CTA. To run this type of operation all you need is simple POA over someone's trading account. You log into their account and buy or sell something and that's basically it. The only piece of paper I send this type of client is an invoice. There are still legal and financial considerations but nothing like what you experience if you run as a CPO.

Quote from neutrino:

Hi, what did you mean here - "never actually touch the money"?

 

[retaildaytrader]

Quote from the1:

If you run a hedge fund and register as a CPO people mail you a check and you deposit it into a pooled account so you actually take physical possession of the funds. That opens up a load of doors of responsibility. At this point you have to work closely with attorneys, accountants, administrators, regulators, and whoever else that needs to have their eye on the pie.

Where were the attornies, accountants, regulators and administrators at the Benie Madoff fund? Where were the people who kept their eyes on the pie?

 

[bashatrader]

Quote from the1:

A number of years ago I shut down that operation and converted to a CTA. To run this type of operation all you need is simple POA over someone's trading account. You log into their account and buy or sell something and that's basically it.

How do you get paid? What about of a client refuses to pay your cut of the profits?

Did you register for that? What are the requirements?

Thanks

 

[the1]

LOL. Good question. I guess I didn't get big enough to convince the SEC I was a "good guy" and didn't need any oversight

Quote from retaildaytrader:

Where were the attornies, accountants, regulators and administrators at the Benie Madoff fund? Where were the people who kept their eyes on the pie?

 

[the1]

Send an invoice based on month P/L, subject to high water mark. I've never ran into a situation where a client hasn't paid because there are trading profits sitting in the account so there's no way the client can say, "I don't have the money." If they do then the account sits dormant until the invoice is paid. This is all laid out in the Operating Agreement. A client has 10 business days from receipt of invoice to send a check. I've had a situation where a client was ill and couldn't send a check. In those cases obviously I'm not gonna kick the guy to the curb. Over the years you get to know your clients and you build a level of trust and friendship so there's little chance of that happening. I'm not running a huge operation where the client doesn't even know who I am.

You have to pass the Series 3 exam to register with the NFA as either a CPO or CTA. Once I was a CPO it was a matter of converting to a CTA, which was one form. I'd have to look it up. I converted a while ago. Also, and perhaps even more important than registering with the NFA, you also have to register with each and every state you have a client as a Registered Investment Advisor. There are some exceptions to this rule for startup, exempt funds but in a state such as California, you have to register as an RIA even if you have one client, regardless of whether you are exempt or not. At least that was the case when I got started. I imagine that rule still applies.

Quote from bashatrader:

How do you get paid? What about of a client refuses to pay your cut of the profits?

Did you register for that? What are the requirements?

Thanks

 

[earlyexit]

Quote from the1:

Send an invoice based on month P/L, subject to high water mark. I've never ran into a situation where a client hasn't paid

This thread is a little old. My apologies for resurrecting it.

I'm curious if there are options out there, that will automatically take out the management and incentive fees from client accounts and place it in yours?

I understand that Interactive Brokers has such an account type. Are similar options available elsewhere?