Most traders have somebody they have to answer to, whether it's a boss, a board, or clients. I am currently managing my own money, but I still need returns to cover my expenses. Most traders need decent returns at some point or their sense of security begins to slip away. I suspect trader's style plays an important part in instilling confidence in the allocator. That's human nature and part of alleviating headline risk. But I also think there is a place for substance. No?
now NFP done, back to reading. as one pointed out managing billions has much much more contraints. And 100% returns are much more unlikely than accounts in the million. I was actually shocked when digging into BHF index. It really reinforces that trading skills is really not a given. And I am now understanding why more all these firms like patak, mercenary funding &cie are showing up.
I'm not really sure what allocators are looking for, but I suspect it varies somewhat. If you're showing 100% returns, some people's eyes light up, whereas others figure you are taking excessive risk or maybe doing something illegal. Some allocators want to see a smooth-running organization. They want to know that, if the key trader has a piano fall on his head, the money is okay. That makes it very hard for a one-person home office to gain acceptance. Running an organization costs money and takes management skill. Sometimes the trader can talk to prospects in their own language. I met a trader who works with Texas oilmen and talks in terms of "dry hole" costs. It's all part of making the allocator think the trader is "one of us". I think running big money is a skill in itself, apart from finding good trades. I suspect it starts to get a lot harder at around $10 million.
hmm..surely it's best to manage $1billion+. 7% p.a. but at what 2.5% MNGT fees? Think..what's the "easiest" way to make $500K+ p.a.? http://finance.yahoo.com/news/top-5-zacks-1-ranked-180044018.html But no, a $25k a year day tader gambling away have a better life...?
Ditto. It isn't just coincidence that Heech and I run into the same stories and the same problems in raising capital. You would think that every manager has a different perspective and therefor each will be valuing different things. That really isn't the case for the most part. Sometimes it actually feels like family office and institutional managers send off for a guide on how to allocate capital. Most of them ask the same questions and use the same selection criteria. For example, why is it magically easier to raise money once you pass the three year performance hurdle? Talk to managers and it becomes clear in a hurry. The vast majority of them more or less value the same things and target the same things. As Heech suggests, headline risk is HUGE, and cannot be understated. Most of these guys are making a flat 50-150 bips on the capital they manage. The goal isn't to get 100% returns. The goal is to at least match market performance during the good years and not lose during the bad. The bottom line is that these managers are all about client/capital retention. Any type of wild fluctuation must be explained away, and if the story includes an unproven manager, that explanation becomes much more difficult. We aren't just guessing on this. They will pretty much tell you this straight up.
Less sophisticated HNWs are pretty much the only ones lighting up at 100% returns. Professional managers almost see it as a disqualification. There are many things like that in fundraising. For example, you'd think that a very high Sharpe ratio would be a good thing. I've been told several times that a Sharpe over 3 raises red flags and over 4 is pretty much automatic disqualification. To the professional managers, the best Sharpe they want to see is right around 2.0-2.5 because it is solid and plausible long term. Show them the following and you'll be closing sales left and right; at least 3 year live history 2.5 Sharpe 20-40% CAGR <10% max drawdown >$3MM AUM (around $500K internal capital) If any one of those is missing, the job gets much harder. Add in the following and things get really easy. Good pedigree (or take on partner who has it) Transparency (via manged accounts) Robust organization ------Business continuity plan ------Well defined compliance ------Legit office (not your mom's basement)
I will clarify right away that I am talking about return on capital, not absolute P&L. From the absolute P&L perspective, the best bet is to be running the most capital you can get your hands on - it maximizes your traders option. If you running a few yards under 2/20 model, you don't need alpha at all, you just keep punting and hope for a good year. As long as you can ensure no massive redemption flows, you are going to make out just fine - just look at some of the "creme de la creme" of the hedge fund industry. The real reason why big funds got bigger (and will continue to get bigger until some sort of de-crowding event happends) has very little to do with alpha, as defined by risk-adjusted excess returns. For almost every fund, the risk-adjusted metrics decline significantly with the AUM and their absolute level of correlation with the market increases. Simply comparing the risk-adjusted returns of any broad HF index to a mixed basket of assets ("portable beta" style) shows that most hedge fund returns can be explained by a few market factors. So, no, on average there is very little alpha there. While most managers probably were alpha producers at some point in their lives, the sheer size of capital forces them to become more and more of a macro/beta players. The growth of large funds has mainly to do with their attractiveness to allocators (size breeds size) and the ability of the fund to retain AUM. Now, to your NBA analogy. A basketball player has massive amounts of quantitative data that allows people to asses his skills. We both know that even in 20 years of performance of an average PM, the statistical significance for results is pretty low. Managing money is not a sport with a lot of repetitive actions, it's an activity where the noise from randomness and the overall market "drift" overshadows the actual skill in the majority of cases. Someone who's been continuously long bonds over the past 20 years has done handsomely and probably attributed it to his own skill, even though in basketball terms this would be equivalent to getting on the court and lying down for the duration of the game. There are plenty of other type of examples where supreme salesmanship has enabled the "player" to take large punts at the right time and subsequently raise tons of AUM. All this said, there are good reasons for institutional investors to concentrate on large funds only. DD and monitoring capacity is limited, so you can't write too many small tickets. There is reputation considerations as well as established "lateral" information sources about the fund. However, I can't imagine that any FoF is still under illusion that they are investing into funds like Paulson or Citadel for their alpha. My definition of a "large beta bet" would be a set of positions/strategies that mainly show profit given a particular market direction. For example, long-short equity funds (despite having the short component) in general are long-beta bets, while fixed income funds are (or at least used to be) more of a short beta bet. To contrast, an "alpha bet" would be a set of positions/strategies that is mainly driven by non-directional factors, so it is able to produce a P&L decorrelated from the broad market performance.
Bingo. That's all i wanted to hear. My goal is to make lots of money and be happy/relaxed about it. Forget trying to beocme the "best trader" in the world and simply create a real money management biz! ---------------------------------------------------------------------------------------- I will clarify right away that I am talking about return on capital, not absolute P&L. From the absolute P&L perspective, the best bet is to be running the most capital you can get your hands on - it maximizes your traders option. If you running a few yards under 2/20 model, you don't need alpha at all, you just keep punting and hope for a good year. As long as you can ensure no massive redemption flows, you are going to make out just fine - just look at some of the "creme de la creme" of the hedge fund industry.
It should be pretty self evident that managing $1B is more lucrative than $1M, regardless of percent returns. Not sure why that requires discussion. Putting that aside, I think there is an interesting trade-off for the trader/manager who has personal capital as a *significant* part of the portfolio. For instance, if a manager had $10M personal capital and believed that they could return 50% on it, or could take $90M and return 10% on the $100M (extreme for sake of argument), then there's a real decision to make. Option 1 would lead the manager to have $5M Option 2 would generate 4.6M (1M return on their personal capital, 1.8M @2% AUM, 1.8M @20% performance fee) Granted this is an extreme example and I'd strongly suspect that % return wouldn't fall that sharply going from 10M to 100M but I think does illustrate that it matters how much skin in the game the manager has.