Traders of today...

Good point Marketsurfer. Incidentally, where were you on the Tudor card? I pm'd you before bidding. Didn't hear back from you so I went ahead and won the card. Anyway, it's a difficult question. For hedge funds, we report returns on the amount of capital in the Fund although through the use of leverage, we may trade multiple times that notionally. However, it is certainly not quite as exagerrated as most day-trader leverage or leverage in the futures market. Typically hedge funds will lever themselves from 1-4x equity, depending upon strategies. Anyway, I think it is encombant upon the investor behind these traders to ask that kind of question. The question goes to the heart of risk. In your example, yes, you could argue that the trader made 100%, however, he also has a high probablility of losing that 100%+ in short order.

As for my superstar, he has the ability to lever 10:1 although the most i've ever seen him utilize at any time is 2:1 ($200,000 in capital). I would say that he is legitimately earning his 50% per month return since his leverage is very reasonable as is his risk. All the best as always..Neal.
 
excellent, trade-ya. makes perfect sense, i agree with you.

happy you got the card. frame it for the office, including some famous tudor quotes for effect !

surfer:) :)
 
I also bought, Meg Whitman, Johnny Cochran, Tim Berners-Lee (founder of the internet), Wayne Huizenga, and Paul Tudor Jones. I'm really trying hard to build my rolodex, lol. I also won the Buffett autographed Graham & Dodd book. I went totally nuts! LOL, all the best..Neal.

Incidentally, to get back to the other point, I would say that my superstar utilizes an average capital of less than $100,000 when he is trading. I think that average capital usage needs to be considered coupled with the time invested to truly achieve the risk adjusted return. Clearly a trader trading with 10:1 leverage and a holding period of a few minutes per day (maybe totalling an average holding period of 1 hour by the end of the day), is taking less risk than someone utilizing 10:1 leverage but holding positions continuously. Lots to consider, no easy answer. Best. Neal.
 
Quote from trade-ya1:

I run a small prop firm which hires traders in a 'farm team' format. I offer the worst deal on the street. However, I do afford them the opportunity to make the transition from day-trading firm to legitimate hedge fund (and all the good things that come along with that, such as resume improvement, access to learn from incredible talent, have exposure to strategies that exploit legit edges, be exposed to strategies which have much greater scaleability), we do not offer a training program. We expect the traders to align themselves and make relationships with our current hedge fund traders. Basically, they get to view the inner workings of a hedge fund from the inside. Also, we allow for the possibility that if a trader is truly outstanding and has proven himself/herself to have a legitimate edge and be profitable, we may stake this trader with funds from the hedge fund. We've already had a trader turn down our offer of additional funds. Anyway, don't want to get much into the details here as I don't want to be considered advertising. What I will say is that the trader must back his/her losses with 100% of their own capital. PM me if anyone is seriously interested. I have hired a few people off of these boards. Thanks.
More...
 
trade-ya1,

Are you working on the the same model as Capital Z, Asset Alliance or FrontPoint where you have an equity stake in the "farm team", trading team, or hedge fund in exchange for future capacity rights and a portion of the management and performance fee revenue stream? Or is your business model more along the lines of hedge fund hosting where you provide office space, trading capabilities, and execution in return for commissions?

Would one of your competitors be HedgeCap/ETG?

The last post qouting one of your previous posts should have been here, sorry for any confusion.

InflectionPoint
 
It is an interesting concept ...it is early... with your model in mind, I wonder if it would make sense to construct and market an emerging trader/manager fund of hedge funds (FOHF). In your opinion, is there any disadvantage to a seeding structure whereby the trader, the firm/fund, and an outside investor form a joint venture/LLC to pool trading capital? If so, what are the viable alternatives?

When providing your traders leverage/trading capital is it from personal/private capital? Are you aware whether any of the traditional leverage providers (Bear, SocGen, or Deutsche) extend leverage to prop or active traders?

Appreciate your thoughts
 
As for marketing an FoF of emerging hedge fund managers, I know that a number of people have toyed with this idea. Personally, what is the advantage to the investor of investing in this type of FoF? Why should an investor invest with a bunch of rookie hedge fund managers? Some would argue that the returns of the hedge funds are best in their earliest stages, however, the counter-balancing argument is that the managers are inexperienced and can suffer tremendous losses and many will not make it.

As for the capital in my Fund, it is both personal capital as well as private high-net worth and institutional capital. As for firms (banks) such as RBC, BNPP, etc. loaning money or offering leverage to prop. traders, as with any bank loan, it depends on your balance sheet and the nature of your activity. Hope this helps. Best. Neal.
 
Neal,

This definitely helps. I agree there is inherently more risk in investing with relatively inexperienced hedge fund managers with little or no track record. However, as you point out, academic studies indicate that managers generate more competitive returns in the earlier stages of their management career. Whether this can be attributed to limited capital/nimbleness, the abilility to expoit inefficiencies, or true skill-based investment and risk management? What about capacity constraints as a motivator to invest in emerging managers? Allocators and investors simply cannot place new capital in certain alpha-generating strategies as the existing funds implementing those strategies are closed. It is a supply and demand problem that currently exists. With these capacity constraints, even pension fund sponsors are seeding new managers to secure future capacity and negotiate advantageous fees going forward. All in the name, of findng the next "star" manager able to deliver consistent risk-adjusted returns.

Most FOHFs are nothing more than "fund of fees". Although the emerging managers concept may be worth the fee(s) as there is considerable due diligence involved with identifying and risk management of rookie managers.

Just an idea ... thanks for your feedback.
 
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