Starting/Working for a Hedge Fund

No, that's not necessarily how it has to work. I began trading stocks and by virtue of not having a clue what I was doing I blew up a few accounts. Once I had the experience and a track record in stocks I began trading futures. I entered this market with a lot of experience, and the only reason I didn't blow up here. Had I started trading futures I most certainly would have blown up in this market.

Quote from marketsurfer:

<b>Interesting story pulsescan. I couldn't agree more with you about blowing up. I've never blown up a futures account but I've blown up more stock accounts than I can remember, and you're exactly right, you won't make it until you go through that process.</b>





isn't it highly unusual to have blown up "lots" of stock accounts and never a futures account? seems like the opposite is the normal course of things....\

surf:confused:
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The 680% is not the funds account and the sharpe ratio I provided is from the fund. At the end of 2007, in the account in question (the one stated at 680%), the sharpe ratio was 4.48, which is very consistent with the number in the fund but here's the rub.

When I trade my own account I take on much more risk for two reasons -- it is my money and I'm not as concerned about losing it as I am about the funds of others. This is my comfort level so I trade at this level consistently, hence the reason for the respectable sharpe. When I began approaching investors for the fund the first thing I told them was, "I'm taking a lot less risk and I'm not going anywhere near 680%." I was very clear that in order to do 680% you have to assume 680% worth of risk and that simply isn't an option.

Now, about the DD strategy and trading multiple accounts. I don't know what your trading background is but I suspect you would agree that trading is a simple game of probability, such that, one setup can have a much higher probability of winning than another one and, with enough experience you often find yourself, with a setup that "can't miss." Naturally, that setup doesn't exist but there are certainly setups that have a 90+% chance of winning. When I see a setup like that I will take it with increased size on an account that has been flat, typically my own. So, by virtue of being flat there are no accumulated losses to work off and increased size is offset by that fact and the fact that the probability is very high. I also trade the fund with multiple accounts, partially for this reason, but also for hedging. As time goes by and the fund grows I am trading my account less and less because managing multiple accounts is very difficult.

It really comes down to this. If we sat down and chewed the fat over lunch or you watched me trade you'd come away with the impression that I have a full grasp of the concept of risk and that I have superior strategies to handle it. I don't use stops in the traditional sense. I use money management as my primary risk management tool but unless you saw it in action it's very difficult to appreciate. My method of trading deviates largely from the crowd's but that's how I get my edge. I do lose money but I do it in a methodical, controlled way. I'm all too familiar with the trade-out button because letting an account go into the ground isn't something I'm ready to do.
 
Some thoughts on PTF.. Personally this gentleman
has done nothing but offer his knowledge in starting a small fund. Rags to riches you might say. I don't see him asking people for money on this site, so is it really our concern to see if his sharpe ratio is accurate? who cares. This is a highly regulated industry, why? because guys who know what there doing blow up from time to time, Ltcm,Barrings, Neiderhoffer etc. Are you going to present to investors Better #'s then these guys did? or is it your top tier administrator that will impress them.
I traded on a desk for 12 years, I got the call when Amaranth was liquidating, they needed bids for there illiquid garbage and we had to call every other hot money fund that owned this stuff. Whats there sharpe ratio now?

You really think PTF's double down strategy is going to hurt the industry if he fails? How about Jim Cramer bragging how to move a stock before the opening. How about my phone ringing on the desk 5 minutes to the close by five salesman asking for an offering on some low volume stock and then reading in Barrons the next day about that stock getting FDA approval? they know what there doing right?

Give me some rags to riches guy whose foolish enough to believe in his method, has made money and wants only to make his customers money.
 
More importantly, when you bulldoze someone who is willing to help others like PTF. It only makes it that much more difficult for the next new guy who's got a question. Lets face it if we all knew what we were doing then we would not be on this site..

BTW shapre ratio was created in 1966 as a measure for comparing performance of Mutual Funds. How in gods name could I judge the trading style of double down, intraday overnight flat trader with this.. I get guys asking for my sharpe ratio as well, sometimes I'll ask if they know what it is, most don't.
 
I believe the Sharpe Ratio is an ineffective way of measuring risk for the hedge fund industry but that is the standard so I report it. Instead, hedge funds that use margin, specifically those who trade the futures markets, should track data such as:

1. How much profit, or lack thereof, are you generating per margin used?
2. How much margin are you using, relative to your account size?

These are my two primary measures of risk. I don't shoot for a specific number but rather a consistent area over time. I also want to see consistency in the amount of profit I generate on a day in and day out basis and the equity curve should have mild drawdowns while rising steadily.

Unfortunately, the Sharpe Ratio will decrease due to a down month, and due to an exceptionally good month, relative to past performance. This is very misleading because a manager may run into exceptionally good market conditions during one month, generate high profits on low usage of margin as a result, and get punished for his performance.

This happened to me earlier this year. In one month I coughed up a modest 3% because market conditions were dreadful for my strategy and then a few months later I had a stellar month because market condition were wonderful. My margin usage during both months was essentially the same but my Sharpe Ratio declined as a result. Do these two months make my fund more risky? The answer is no but the Sharpe Ratio says yes.



Quote from RockMachine:

More importantly, when you bulldoze someone who is willing to help others like PTF. It only makes it that much more difficult for the next new guy who's got a question. Lets face it if we all knew what we were doing then we would not be on this site..

BTW shapre ratio was created in 1966 as a measure for comparing performance of Mutual Funds. How in gods name could I judge the trading style of double down, intraday overnight flat trader with this.. I get guys asking for my sharpe ratio as well, sometimes I'll ask if they know what it is, most don't.
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Interesting because I'm up 9.19% this month. Surf, there ain't nothing I can say that you are not going to rip on. It just might be the case that I'm one of the best traders out there. God forbid someone like that shows up on ET.
 
I'm going to choose to believe PTF, I have nothing to lose by doing it and nothing he has said so far stands out. In fact he is one of the few people I've ever seen to point out the dangers you might be putting yourself in when your returns run TOO HIGH, he talks much more about risk than anything else, these tend to be the things professionals talk about.

I do think that the name of the thread should have been Starting/Working for a CTA/CPO since more technically thats what he is doing, but thats kinda nit picking. I also don't see a 3% monthly return as unreasonable given the relatively small AUM he is working with, if he said he had $50million and was doing 3% I'd have more questions. The only thing that I have questioned is how he's done 9.2% this month with an antitrend system when the breakouts have been pretty strong, but this could stem more from my not understanding exactly what he is doing then from anything else, so it doesnt make me worry too much. In any event, I'm not going to be giving him any of my money, and hopefully no one else does based upon what they find on an internet thread without a lot of DD.

So its off to the doctor for me, thanks for a rare breath of fresh air on ET, this is what we all wish it would be.

Brandon
 
PTF, a few questions

First, like you i will be setting a hedge fund with mainly family/friend money. I know if your posts that you are allowed to have 35 unaccreddited investors in a hedge fund. Now, is this as long as the total is less than $400k, or will the 35 person rule also hold out if you have a bigger fund than that (but still only 35 people you know). Secondly, would I be allowed to charge a performance fee for these 35 people. Whould that change if I structured it as an incubator fund instead? If I keep it to under 35 people that I know, it seems like the legal fees, etc. can be very low depending on the amount of effort I'm willing to put in.

A few more: How complicated is the accounting/tax. I'm looking to do this myself and have little experience on this (obviously I'll pay someone for the legal fees when it comes to that). Any books to recommend. Thanks again for all your input.
 
Disclaimer: I'm not an attorney or an accountant so all information provided below needs to verified independently.
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You can manage funds of up to $400k and for up to 15 non-related people so your family members do not count toward the total of 15, assuming you don't have a license. If you do have one then there is no limit on $'s and investors.

You can have up to 35 non-accredited investors and they can represent 100% of the funds investors if you need to stay below 15.

In certain states, and depending on what section of the SEC code your fund falls into, you cannot charge a non-accredited investor a performance fee.

http://www.moneyscience.com/Hedge_Fund_Tutorials/Hedge_Fund_Management_and_Performance_Fees.html

Accounting and tax.....I do my own accounting because everything I touch is M2M, which makes bookkeeping much easier. I wouldn't dare touch the taxes but I feel reasonably sure I could do them correctly. You have to prepare a 1065 and a K-1 for each partner/investor in the fund and file the appropriate documents with the IRS. It's not a job I want to do so I pay an expert. The 1065 can be fairly complex.

I've never seen/read any books on the topic but you can find most of what you need on the internet.

One thing you have to be careful about....each state has its own securities laws so even though you may be exempt from registering with the SEC/CFTC you may still need to register with a state you have an investor in, or a number of investors in. This is where an attorney becomes very helpful. Oddly enough, if you are exempt from registering with the Feds you still have to register your exemption. Funny how that works.

Good luck with the fund. It's a lot of fun when you are making money and hell when you are not.

Quote from jb2985:

PTF, a few questions

First, like you i will be setting a hedge fund with mainly family/friend money. I know if your posts that you are allowed to have 35 unaccreddited investors in a hedge fund. Now, is this as long as the total is less than $400k, or will the 35 person rule also hold out if you have a bigger fund than that (but still only 35 people you know). Secondly, would I be allowed to charge a performance fee for these 35 people. Whould that change if I structured it as an incubator fund instead? If I keep it to under 35 people that I know, it seems like the legal fees, etc. can be very low depending on the amount of effort I'm willing to put in.

A few more: How complicated is the accounting/tax. I'm looking to do this myself and have little experience on this (obviously I'll pay someone for the legal fees when it comes to that). Any books to recommend. Thanks again for all your input.
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Oh, and when you are dealing with non-accredited investors be sure to read Rule 506. The manager is still required to ensure these investors possess the sophistication and knowledge of the risk involved in their investment.
 
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