Trader portfolio returns vs. Hedge fund portfolio returns

S

SnoopDogg

Most posters on ET talk about making X $ per day, or week, or month. To me, this amount is not meaningful, because it doesn't take into account the capital actually deployed. (or the risk taken)

The average hedge fund YTD November has returned 5.9%.
http://www.hedgeindex.com/
Let's assume for a second, the average trader on ET is no better or worse than the average hedge fund manager. (I know this will elicit comments on either side, but work with me here for the sake of argument)

To break into low six figures, one would need close to 2 million in capital, assuming they produce the same results as the average hedge fund manager. How does one seriously believe that they can start with 10K or 25K or even 100k and make a living off of trading full-time??? Or does this fact alone explain the oft quoted 80%, 905 or 95% failure rate for traders.

I know many will chime in and say they are at a prop shop, that gives them access to far more capital than they are putting up personally, This is leverage, pure and simple. Hedge funds have access to leverage as well, I would argue a lot more than any individual trader could obtain. Leverage is a double edge sword, not a magic bullet. Remember LTCM.
 
an individual trader and a 'hedge fund' are not nearly as comparable as you're assuming. There are entirely too many different style funds, and different style traders to make it sensible.

As well, you can't compare a 5-10% return on 10 grand to a 5 or 10% return on 50 million.

Just doesn't jive to compare them so generally.
 
Why aren't the returns comparable? Hedge funds exist to maximize returns for their partners, traders are out to maximize their own returns. Sure its somewhat harder to produce a given % return the larger the capital base because of liquidity issues, but I am talking ballpark ranges of returns here.

Of course, there are a multitude of strategies that either an individual trader, or a hedge fund, can employ. Some strategies have performed well this past year, while others haven't. I am taking about the average here, and whether it is realistic to hope to subsist off of trading profits. My tentative answer is that no, unless one is starting with a significant amount of capital.
 
A $50 mil fund has no problem daytrading/swing trading but a $1 bil fund just can't do it due to liquidity constraints. Even $50 mil has to be spread around a bit in order not to be screwed when exiting the position(s). That's difference #1. There are others.

Small traders are riding the wave created by the bigger funds. These bigger funds can't deploy their capital at the rate a little guy does, else they'd be either getting crappy prices on entries/exits or facing substantial risk since they'd practically be announcing their moves with their substantial size.

So, the bigger guys are using strategies that *have* to take their size into account. They have to make sure wherever they go somebody will follow and there will be enough liquidity for them to get out at a profit. This is VERY difficult and something little pikers have no concern with.
 
Trading a $300K and a $300M account are completely different stories. You can make $150K a year scalping on a $300K capital. But making $150M on $300M is very unlikely by the same strategy.

Market inefficiencies are more frequent in short time frames and illiquid markets, but have very limited depth for exploitation. Therefore opportunities to make small bucks are abundant but that doesn’t help the big guys much.
 
Quote from SnoopDogg:

Most posters on ET talk about making X $ per day, or week, or month. To me, this amount is not meaningful, because it doesn't take into account the capital actually deployed. (or the risk taken)

The average hedge fund YTD November has returned 5.9%.
http://www.hedgeindex.com/
Let's assume for a second, the average trader on ET is no better or worse than the average hedge fund manager. (I know this will elicit comments on either side, but work with me here for the sake of argument)

To break into low six figures, one would need close to 2 million in capital, assuming they produce the same results as the average hedge fund manager. How does one seriously believe that they can start with 10K or 25K or even 100k and make a living off of trading full-time??? Or does this fact alone explain the oft quoted 80%, 905 or 95% failure rate for traders.

I know many will chime in and say they are at a prop shop, that gives them access to far more capital than they are putting up personally, This is leverage, pure and simple. Hedge funds have access to leverage as well, I would argue a lot more than any individual trader could obtain. Leverage is a double edge sword, not a magic bullet. Remember LTCM.
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i agree with many of the others...the comparision is not so easy. However, for ths sake of argument, lets say they are comparable. Now that 5.9% is the average of the whole world of (registered) hedge funds. Now lets think of an average for only the profitable ones...i'd guess around 20%. (at least as a good median). Why do I say this, well I would treat those that are losers as the "traders who don't make it". Out of those who do, they avg. 20% per annum.

Next. You are correct, traders don't make a living off of 10k, or 25k, and sometimes not 100k. But they start with those so that they can build it to several hundred thousand so that they LATER can take a nice cut and make a living off of it. My opinion (on the average winning trader) is that to make a living off of trading alone, that he would need to be trading around a 150k account.



RT
 
Quote from NanoTick:

Trading a $300K and a $300M account are completely different stories. You can make $150K a year scalping on a $300K capital. But making $150M on $300M is very unlikely by the same strategy. Market inefficiencies are more frequent in short time frames and illiquid markets, but have very limited depth for exploitation. Therefore opportunities to make small bucks are abundant but that doesn’t help the big guys much.

I think NanoTick is on to something, and many of the other comments made here augment this point of view.

My follow up question is this. From what everyone is saying it appears that "scalping" or other related strategies that are based on reading the tape and trading ahead of large invesors, offer the highest probability of success for a small trader. Am I correct in my assumption here?

This logically follows from what's already been stated/implied here. The advantage of being small is that you can pick off these inefficiencies in the market. On the other hand, a small trader has no advantage over a large hedge fund, mutual fund, other type of institutional investor when it comes to making large "macro" type directional bets. This holds true regardless of whether the rationale is based on fundamentals or technicals. Some traders will make the right calls, others (most) will be wrong, some funds are right, other bet wrong.

You have to pick the direction correctly, and there is not reason to believe that an individual trader can make these directional calls any better than a "professional" money manager.
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Quote from RunTrade:

i agree with many of the others...the comparision is not so easy. However, for ths sake of argument, lets say they are comparable. Now that 5.9% is the average of the whole world of (registered) hedge funds. Now lets think of an average for only the profitable ones...i'd guess around 20%. (at least as a good median). Why do I say this, well I would treat those that are losers as the "traders who don't make it". Out of those who do, they avg. 20% per annum.
RT
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The trouble with what you're saying here is that you're assuming it's the same ones who continue to win and the same guys who continue to lose. That is absolutely INCORRECT! I wish it were that easy. So, the same 5.9% figure has to stay. Well, I'll give it 8-9%!:D
 
Quote from risktaker:

The trouble with what you're saying here is that you're assuming it's the same ones who continue to win and the same guys who continue to lose. That is absolutely INCORRECT! I wish it were that easy. So, the same 5.9% figure has to stay. Well, I'll give it 8-9%!:D
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hmmm. indeed.


well i guess no one's really a winner anymore:p
 
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