A Fund vs. Your Own Money

Smoker, what performance metrics are expected of you,
assuming you are uncorrelated with other managers.
(stuff like MAR, sharpe, return, volatility, max drawdown,
length of drawdown etc.)

 

Hi Guys,

I really can’t give you a reasonable answer since my experience is very specific to a single off shore location.

I can tell you I am in the Gulf because I am not interested in paying income tax. Also because I don’t have any interest in marketing or running a business I am here in the location where I have my one big client that along with making the the allocation they do all the administration for me.

So all I do is sit at my desk and put in trades and cruise the internet for kite surfing, spearfishing, 4x4 dune bashing sites etc.

Also I do a lot of research and read more math and physics papers than a lot of grad students.

I can’t really give you guys a clear, direct, precise & satisfactory answer here since everyone has different goals, roles, profiles etc and I can only be certain of my client and everything between us is completely private. I do see the numbers of guys invited to come in here and pitch for wedge but again that is completely private.

That said I can make some general comments regarding the off professional shore allocators that may be of use to you.

Generally speaking the track record numbers are very similar to most reasonably decent traders having a reasonable year. The difference is that single reasonably decent year is stretched out across multple years with different economic/political conditions etc. From time to time due to circumstance there is a super result in a year like 2008 when a lot of the big dogs shot out the lights.

The biggest thing they are looking for in a trader is some evidence that the historical track record going forward will be able to be replicated.

I keep repeating myself but they are not looking for and are in fact very wary of anything that smells like a one hit wonder. They are looking for robustness over flash every time.

One of the best indications of robustness is the ability to handle size. Many small traders do not agree with this but it is the overwhelming opinion of the professional allocators that if the edge can’t be scaled up and forward and backwards in time then it is not robust enough to warrant an allocation.

They are very effective in shifting through the results of many traders and using their risk algorithms to zeroing in on those guys they believe have robust edge. As I said earlier most FCMs etc do this daily with their customer accounts for risk reasons and if they have an institutional desk they do it to flag anyone that might be of interest to their hedge fund customers, allocators etc.

Thus I think the possibility of a trading savant falling through the cracks and never being “discovered” in this era is close to zero. If a trader has very interesting numbers and can jump all the risk/return algorithm hurdles and it looks like they can handle size and thus pass the robustness test I would be very surprised if such a trader is not approached.

This business is so competitive that a Pele of trading is not going to slip between the cracks and get away.

Anyway I know this answer is kind of vague and wishy washy but it is the best I can do so I do hope it helps.

Cheers Smoker

 

Thanks for the reply Smoker.
No doubt the requirement to handle size makes alpha
harvesting significantly more difficult.

 

Reasonable. Thanks.

 

if you are good at reading the market and can make a good return on your investment, then trade for yourself,if you are good at reading the market,running an office,talking to clients,hiring and firing people,and think the extra headache is worth the extra capital,then run a fund

 

Thanks for the answer, Smoker! I remember you told you're in the Gulf (I assume UAE or like that, pretty comfortable for a living and good place tax wise).

One more question if you don't mind: what scalability is considered as OK "size" in quantitative terms by allocators? Ability to effectively manage what kind of sum?

 

The standard idea is they want a CTA/Hedge Fund that is going to survive and be around and has the infrastructure to pass due diligence so rule of thumb is a minimum of 200 million in AUM. The max is in the tens of billions.

Also they want to be able to get out without sinking the fund so total allocation can’t exceed 50% of the funds total assets under management.

I personally have had issues with them over the years with the above rules of thumb. I would like to see an emerging CTA/Hedge Fund section of the external portfolio where they could drop the allocation size down to 20/30 million but this has always run into resistance since when you are allocating billions and billions you don’t want to waste time and resources on smaller bets where robustness and future replication of the historical track record is more of a wild card.

I also am an advocate for them adding a private equity angle to their allocations by taking equity positions in promising CTAs/Hedge Funds. You are already doing heavy duty due diligence work so just expand that information gathered into also looking at buying into the business.

Leveraging your due diligence work lets you reduce your costs/fees and can lock in future capacity of a small for now but going to be big fund.

BTW no off shore allocators even come close to paying retail management and performance fees. I always find it hilarious that the business media, industry regulators, academics etc think all the CTA/Hedge Fund investors are paying close to some variation of 2 & 20.

The performance chasers pay 2/20 while the pros pay souk prices.

Cheers Smoker

 

Very interesting, thanks. I wonder is it different from 2/20 to the higher side mostly?

 

There is something I do not really understabd about this professioanl allocator of billions and billions.
1) why go the sneakey way by "identifying" so called "trading savants"? does it mean the trading "savant" rights to privacy are just flouted by their brokers ? Just out of curiosity, do the brokers get a cut when passing around these traders names? And actually, are these traders informed in the first place or it is not important to ask permission or even inform these traders beforehand?
2) when nowdays, so much money is out there. From TopStep (30k-150k $) to start with, to up to 100millions+ ( mercenaryguys), why hide about this pro allocator? I mean is that linked to some mafia money - I do understand that drug trafficking and human trafficking rakes in 10s of billions profits per year. Or is that link to some dictatorship money? But surely, these type of people have better things to do with their billions than putting them into some trading?
3) why come on a forum to talk about it, instead of doing like TopStep , MercenaryTrading , etc... who create websites, with all the infos, full transparency and who are well regulated ? On top, one can check out the guys who allocate money. Surely, you know for instance that the biggest wealth fund in the world- Norwegian wealth fund-, so we are talking really huge huge huge funds of TRILLION, runs one of the most ethical funds in the world, and do invest this money in very ethical ways, and do not flaunt it for ego things ( never heard of any of them parading a sports car for publicity in western capitals...). For some reasons, they are not hiding sneakily who they are either. One can even phone them to find any info, and receive by post any info if the person on the line can't find the info on the spot. lol.

I just want to understand what is really behind the difference.

 

Hi Smallstops,

It is not to be “sneaky” but rather for practical reasons.

Simply it is mathematically efficient to use algorithms to shift through thousands of track records to see if any of them warrant further investigation rather than thousands and thousands of meetings with anyone banging on your door.

No, this is not a privacy issue since no names on either side would be passed until the allocator indicates a serious interest and the trader confirms his interest. I have never heard of a trader passing on an initial interest from such an asset allocator.



BTW how do you think the academics in finance that study financial markets i.e. trader survivability due to account size, profile etc get the raw data for their studies?

No one passes names until both sides agree and you would need to speak to the brokers to confirm since I don’t want to put words in anyone’s mouth but I speculate the reason is to keep a successful trader as a customer i.e. keep another broker from coxing him away with the promise of possibly scoring a successful trader a large allocation.

I had a quick look but have no experience with the internet sites you refer to i.e. TopStep and Mercenaryguys. At first glance they appeared to be sites that finance themselves from advertizing etc but I have no direct knowledge about them and they are not who I refer to as professional allocators in previous posts.

The professional allocators are the off shore pools that invest in hedge funds/CTAs/private equity etc. They are most likely the largest pools of capital in the world involved in alternative investments verses the on shore regulated markets of government and corporate pensions, foundations, mutual funds, money market etc.

I have no idea what you mean or what point you are trying to make when you refer out of the blue to drug and human trafficking?

Because I am trying to help by answering the original posters question and then some subsequent questions, comments from other posters such as yourself etc.

For my self no interest in retail, advertizing, publicity and regulation are the first couple things that come to mind.

If TopStep, Mecenary etc satisfy your requirements for capital then don’t concern yourself with the off shore professional asset allocators.

Sure I know them very well; they were also created with the same mandate as my current client i.e. invest and manage excess oil revenue.

BTW They manage billions not trillions but even with all that extra capital I still doubt they make use of internet sites like TopStep and Mercenary Trading to find CTAs & hedge funds that they can make an significant capital allocation to.

Like your above statement on drug and human trafficking I have no idea what you mean or what point you are trying to make when you refer to sports cars for publicity in western capitals?

I don’t remember anyone making a reference to drug/human trafficking or sports cars on this thread before your post.

A Norwegian citizen can get extensive information very easily on the Government Pension Fund of Norway as due to an investor in and future beneficiary but the fact is the GPFN is very discreet as are all sovereign wealth funds. Getting such detailed information as a non Norwegian citizen is most likely possible but not even close to as easy as it is for a Norwegian citizen.

Like my client the GPFN have a no unsolicited approaches for allocation policy which is more or less a “don’t call us, we will call you” policy which is similar to my clients policy on hedge funds/CTAs.

In other words you can’t just send them an email, make a quick phone call or walk in off the street and score a meeting to pitch for an allocation but instead you need to be invited into the club.

Hope this post helps your understanding of this issue.

Best of luck.

Cheers Smoker